The Consumer Comeback

By Aaron Levitt | February 07, 2012 AAA

As one of the main drivers of the United States economy, consumer spending remains a hot button issue for many market pundits and analysts. As a variety of households continue to worry about the slow progress in the job and housing markets, debt levels and stagnant personal earnings growth, improvement in spending habits has been sluggish at best. However, the New Year has brought some good news and analysts predict that 2012 could be a great time for consumer based stocks. For investors, now could be the time to bet on these firms as the consumer comeback could be at hand. (For related reading, see Consumer Spending As A Market Indicator.)
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Rising Confidence

For investors, 2012 could finally be the year the average consumer makes its comeback. A recent survey by Bloomberg showed that consumer confidence rose for the second week in a row, as more Americans became less pessimistic about the economy. Bloomberg's Consumer Comfort index gained to minus 44.8 for the week ending January 29, from minus 46.4 the previous week. This is the highest the index has been since June. Analysts estimate that aggressive post-holiday discounting has helped create a better buying environment for consumers. In addition, the jobs market continues to show some signs of improving. The Labor Department's latest weekly report showed that applications for jobless claims decreased by 12,000 to 367,000 last week, and January payrolls rose by 145,000. Personal earnings growth, while still slow, has begun to pick up as well.

This added boost in consumer confidence comes on the back of a very good holiday shopping season. The National Retail Federation reported that total spending over the critical four-day Black Friday weekend reached a record $52.4 billion, up 16% from $45 billion last year. The average consumer spent $398.62 that weekend. Overall, consumer spending rose 4.1% during the holiday shopping season and 4.7% throughout the entire year. (To learn more, read Economic Indicators: Consumer Confidence Index.)

Ultimately, the National Retail Federation estimates that retail sales will total around $2.53 trillion this year. Already, some discretionary names like Harley-Davidson (NYSE:HOG) and 1-800-Flowers.com (Nasdaq:FLWS) have seen an increase in consumer purchases of their products.

Playing the Consumer Comeback
For investors, the increasing bullish confidence news may mean it's finally time to bet on consumer related stocks. While consumer staples based funds, like the Consumer Staples Select Sector SPDR (ARCA:XLP) have been popular during these uncertain times, it may be prudent to move towards more discretionary names. The biggest in the sector is the Consumer Discretionary Select Sector SPDR (ARCA:XLY). The fund tracks 82 of the biggest "wants" firms in the S&P 500 including Nike (NYSE:NKE) and Home Depot (NYSE:HD). After crashing during the credit crisis, the SPDR has managed to claw its way back, and could make a good buy as consumers finally feel comfortable enough to spend. Similarly, the Vanguard Consumer Discretionary ETF (ARCA:VCR) offers another low cost option.

Perhaps some of the best gains can be had in the mid-tier retailers. Investor money has either flowed to the very high-end, like Nordstrom's (NYSE:JWN) or low-end dollar store firms like Dollar Tree (Nasdaq:DLTR), leaving middle firms faltering. By providing more than just basic needs, these middle-tiers are still able to compete on price and could be a great play on improving conditions. Analysts suggest department store Kohl's (NYSE:KSS) as one such retailer that will benefit. The company's brand partnerships will help drive earnings over the next five years at about 12% annually. However, shares of Kohl's only trade for dirt cheap forward P/E of roughly 9.8.

The Bottom Line
With consumer spending such a major part of U.S. economic growth, it's encouraging to see that confidence numbers are beginning to rise. This growth plus recent improvements in employment numbers and wage growth are bullish signs for the consumer discretionary sector. For investors, now could be the time to add some consumer names to a portfolio. (For additional reading, see Consumer Confidence: A Killer Statistic.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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