For a year, consumer discretionary stocks have been Wall Street pariahs. In the face of a slowing economy, an awful housing market, and spiking energy prices, few investors wanted exposure to the sector, which sells products and services—from clothing to airline tickets—that Americans want but don't necessarily need.
But now suddenly consumer stocks have bounced back in a big way. Overall, the Standard & Poor's 500-stock index's consumer discretionary sector is up 17% in the past month and almost 10% in the five trading sessions ended Aug. 11.
The main reason is oil. Crude oil peaked at $147.72 per barrel on July 3, but it has fallen to below $114 per barrel more recently. Prices at U.S. gas pumps have fallen 26 days in a row, according to the American Automobile Assn. That's down 7% from a record high of $4.114 per gallon on July 16.
Double-Digit Percentage Gains
Lower energy bills for American consumers have helped the whole sector, but the effect has been striking for many retailers beaten down by the stock market.
J.C. Penney (JCP) may be down 42% from a year ago, but more recently its stock has jumped 19% in one week. Home Depot (HD) and Lowe's (LOW) have been punished by the weak housing market, but their stocks are up 22% and 18%, respectively, since oil's peak. As crude has fallen from its record, Macy's (M) shares rose 17%, Amazon.com (AMZN) jumped 22%, and Sears Holdings (SHLD), owner of the Sears and Kmart chains, gained 24%.
Consumer discretionary stocks pared some of those gains Aug. 13 after retail sales figures were slightly weaker than expected.
For investors looking ahead, the key question is whether consumer discretionary stocks, and big retailers in particular, can continue their run of good luck.
Good News from Key Companies
Optimists can point to the fact that, despite all the economic pressure on the U.S. consumer, retail spending hasn't fallen off a cliff. Retail spending excluding autos has risen between 0.8% and 1.2% each month since March. In July, retail sales excluding autos rose 0.4%, short of economists' expectations for a 0.5% increase. "Even when oil was at $140 a barrel, consumer spending was slowing, but not stopping," says Michael Yoshikami, president and chief investment strategist at YCMNET Advisors.
Another positive factor has been recent news from some key companies. Many investors were fearing the worst from consumer discretionary outfits' earnings reports, and what they got was hardly good: With most results in, Thomson Reuters (TRI) estimates second-quarter earnings of S&P 500 consumer discretionary companies will fall 57% from a year ago.
However, David Cumberland, senior research analyst at R.W. Baird, says many firms are doing a surprisingly good job controlling inventories and protecting profit margins. For example, Kohl's (KSS) said Aug. 7 that sales fell 2.4% in July, but the stock rose in the following days after the retailer stated it should still be able to hit profit expectations. Kohl's shares are up more than 25% in the past month.