Consumers reopened their wallets last month after two months of tepid spending. Total retail sales rose 0.6% in September, a rebound from the 0.2% decline in August and 0.1% increase in July. The macro environment remains generally supportive for the consumer and that means retailers are already forecasting a healthy holiday shopping season.
The U.S. economy is expected to churn out GDP growth in the neighborhood of 1.5% on the year, while consumer spending is forecast to rise 2.7% overall, says Sam Stovall, chief investment strategist at CFRA.
"Our belief is the consumer is relatively healthy. A lot of things are going well for the consumer, which should translate into healthy end-of-year holiday season buying. Because wage growth continues to outpace inflation, the consumer still has more money at the end of the month," Stovall says.
Wind at the Consumer's Back
There are a number of factors that should help support a healthy holiday shopping season, Stovall says. These include:
1. Consumer confidence continues to rise, which supports consumption.
2. Interest rates remain very low, even with a potential rate hike in December.
3. Gas prices remain low around $2.23 per gallon, compared to 2011-2014 where the average price had a $3.00 handle, according to Gasbuddy.com.
The National Retail Federation expects sales in November and December, excluding autos, gas and restaurant sales, to increase a solid 3.6 percent to $655.8 billion - significantly higher than the 10-year average of 2.5 percent and above the seven-year average of 3.4 percent since recovery began in 2009.
For investors looking to scoop up retailing stocks this season the bifurcation between online shopping and brick and mortar stores will be an important theme to consider, says JJ Kinahan, chief market strategist at TD Ameritrade.
"We continue to see online retailers do well, while brick and mortar stores continue to struggle. The brick and mortar stores have to find a way to not just be the place where consumers come to check prices so they can go buy online," Kinahan says.
"If you are a long-term investor buying a retailer, consider whether they are making the proper adjustments or if their business model is stale." Kinahan says. TD Ameritrade clients can use the thinkorswim® platform to monitor the company profile of certain retailers. "Look to see what percentage of their sales are online versus brick and mortar," he says. Figure 1 shows an example with big box retailer Target (TGT).
The retailing stocks, along with Fed Ex and UPS, deliverers of the lion’s share of holiday gifts, may see an extra jolt of trading volume and volatility around Black Monday and into the holiday shopping season. "Expect some volatility in these names," Kinahan says.
The consumer discretionary sector, which includes housing, auto and retail stocks, has underperformed the broader stock market thus far in 2016. While the S&P 500 posted a 4.4% gain through Oct. 14, the consumer discretionary sector eked out a marginal 0.9% increase.
Stovall remains upbeat on the prospects for this sector going forward. His firm ranks the consumer discretionary sector an "overweight." This sector is expected to post double digit earnings growth this year and next and its P/E ratio is currently trading at a discount to its average P/E of the last 20 years, Stovall explains.
What's on your list this holiday shopping season?