Consumer discretionary sector is blowing the doors off today, and among the S&P 500′s sector leaders.
Some major components seeing gains near 15%, including Nordstrom’s (JWN), JC Penney (JCP) and Macy’s (M). Some might attribute it to better-than-expected personal income data today, which rose 0.5% in April. But the same report showed savings increased to the highest level in 50 years of records (money that isn’t being spent on a new purse at Coach (COH) or a bracelet at Tiffany’s (TIF), which are both up 8% today.)
Oil prices are also rising and unemployment continues to grow (though at a slower pace), which you might think are negative for discretionary stocks.
Whether the markets have a rational reason to believe consumers are about stop squirreling away cash and start flinging it out of wallets again, with today’s rally consumer discretionary has made up more than a third of the distance it lost between the highs in summer 2007 and the lows of early March.
Even Wall Street strategists who are bullish on the sector expect at least a temporary pullback in the market and in the cyclicals, like consumer discretionary, that are leading this rally.
“We continue to believe that the equity advance overshot the economic and earnings outlook,” Barclays strategist Barry Knapp writes in a note today, predicting that a correction will come later this summer. Knapp has a positive rating on consumer discretionary, however, arguing markets are set to move higher after a temporary correction as the economy stabilizes.
Oppenheimer’s Brian Belski, however, thinks the sector’s gone too far on those hopes.
“Investors are placing too much emphasis on signs of a stabilizing economic environment and its potential impact on the sector,” he writes today. Belski expects U.S. economic growth to continue later this year, but said gains in the consumer discretionary sector appeared premature and “deviated starkly from historical trends.”
In the past five bear markets, the consumer discretionary sector typically underperformed the S&P 500 by a wide margin in the months prior to and immediately after the bear market trough, Belski said. However, during this bear market, it has outperformed the S&P 500 since mid-2008 and has outperformed the S&P 500 by more than eight percentage points since the March market lows.
Even if there is a recovery in spending, it may not bring consumers back to their prior levels of excess. Gluskin Sheff economist David Rosenberg today also expressed reservations about the likelihood of a recovery in consumer spending Monday, saying there’s a “frugal future” for consumers following the binge of debt-financed consumption earlier this decade.
Rosenberg foresees “a significant shift in consumer attitudes towards credit, homeownership and discretionary spending.” About $500 billion in consumption was funded from home equity during the bubble, he said, with about $1 trillion used to buy even more real estate and stocks. “It was all totally illusory, but now we are paying the piper as spending patterns reverts to the mean.”