“It’s not denial. I’m just selective about the reality I accept.” – Bill Watterson
I remain amazed at the resilience and strength of all things consumer-related as retailers continue to surprise on the upside. While the U.S. economy has been going through a deleveraging following the financial crisis, somehow retailers have continued to perform much better than the broader S&P 500 — and rumors of the death of consumer spending appear to be highly exaggerated. As MarketWatch noted this morning, “U.S. retail sales rose in January by the most in four months as Americans increased spending at department stores, general stores and bars and restaurants.”
Click to EnlargeTake a look (right) at the price ratio of the SPDR S&P Retail Index ETF (NYSE:XRT) relative to the iShares S&P 500 Index ETF (NYSE:IVV). As a reminder, a rising price ratio means the numerator (XRT) is outperforming (up more/down less) the denominator (IVV).
There is some academic research that supports the idea that when retailers outperform, it means the stock market itself may move higher a few months later. In other words, retailers lead and move first when things are improving, after which the stock market directionally follows, with a lag.
The relative ratio of retailers to the S&P 500 bottomed out in late November 2008, months before the March 2009 low as the group began to perform comparatively better. On average, the industry has been a star performer over the past three years.
However, the ratio is now hitting up against a relative resistance point and could begin to stage a reversal. The reason for the group’s inability to continue to outperform could simply be because retailers have performed extraordinarily well for three years at this point, resulting in much positive news already priced in. By the same token, though, if I am right about 2012 being a year of reflation similar to 2003 and 2009, retail leadership could continue and make new all-time relative highs.
In a recent MarketWatch segment I did that can be heard here, I addressed the possibility that job growth may pick up at a faster clip than most observers think. If it does, there would be more spending power around due to higher employment, which would directly benefit retailers.
Perhaps the best way to play retailers now is simply to be more selective. Stocks such as J.C. Penney (NYSE:JCP) have company-specific initiatives designed to bring more consumers through their doors as more and more focus is turned toward giving individuals a true shopping “experience” and ambiance rather than just low prices.
And keep in mind that being selective in an environment of reflation is not a bad thing since correlations tend to rise in deflation/recessionary condition. The relative strength of retailers tells you that is likely no longer the environment we are operating in.