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On the Hunt for U.S. Consumer Spending? Shop Around

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February 18, 2015
Shopping bags and feet

Hey, big American spender: Come out, come out, wherever you are …

That may sum up the collective mindset of many market watchers suffering a bit of whiplash from a recent stream of conflicting signals on the U.S. economy. We created 3 million jobs in 2014, the most in 15 years? Boom. This economy is rockin’. Then we see retail sales and durable goods reports for January, and … bleh. Not so hot.

So what gives? Since consumer spending is estimated to account for more than two-thirds of U.S. economic activity, the disappointing retail sales numbers are an obvious source of concern. A mixed economic bag also complicates matters for anyone mapping out an investing or trading strategy for the months ahead.

It’s a “conundrum,” said JJ Kinahan, chief strategist at TD Ameritrade. “It doesn’t seem to add up.” Given the strong employment numbers, “you’d expect [retail sales] to be better. There’s no better consumer confidence number than what people are spending their money on.”

Market professionals “are having problems putting together what’s going on here,” he added.

Broad consumer spending gauges tracked by the government can be influenced over the short term by many different factors, including gasoline prices and weather. Investors and traders might be wise to drill down further to the store-front level for a clearer picture of what’s happening.

For example, take Wal-Mart® Stores, Inc., which reports quarterly earnings February 19. Financial results from the world’s biggest retailer are worth eyeballing, Kinahan said, considering the company’s wide reach (more than 11,000 stores in 27 countries, including some 5,044 in the U.S., and global revenue of $473 billion in 2014).

WalMart “offers a picture not only of the worldwide economy, but also the U.S. consumer, who theoretically is in a better position” than consumers in other regions of the globe, Kinahan said.

Based on the consensus of third-party analysts’ estimates, WalMart earned about $1.53 a share during its most recent quarter, down from $1.60 for the same period a year earlier. Earnings and other corporate information are available under company profiles on tdameritrade.com and other platforms (see figure 1).

FIGURE 1: ATTENTION SHOPPERS. Per-share profit estimates and corporate news releases for individual companies are available under the Earnings and Calendar tabs (yellow arrows) on tdameritrade.com. Source: TD Ameritrade. For illustrative purposes only. Not a recommendation from TD Ameritrade to buy, sell or hold.

If you’re considering a trade in a retailer stock or any other sector that has quarterly earnings or other potentially price-moving news on the calendar, the Market Maker Move function on thinkorswim® is also worth checking, Kinahan said.

Market Maker Move estimates the expected magnitude of price movement based on implied volatility differentials between front- and back-month options contracts. Look at it as a way to “reverse-engineer” an estimate for how much a stock price may move up or down, in dollar terms rather than percentages.*

Remember, whether you’re trading for the shorter-term or investing for the long haul, principles of smart shopping apply. When it comes to the retail sector—and the rest of the economy for that matter—this means keeping your eyes open and digging below the headlines.

If you’ve got your eye on a particular retail stock, you don’t have to wait three months to get a sense of whether its products are flying off the shelves or gathering dust. Most publicly traded retailers report comparable-store sales, a widely followed industry benchmark, every month (check the “News” tab under the company profile).

It’s long been said the consumer is king. We’ll see how shiny that crown looks as the year unfolds.