With the exception of healthcare, retail sales and wider consumer spending aren’t pulling their weight this year. Indeed, the latest data suggest they’ll be a headwind for retail stocks for some time.
Retail sales, which account for about a third of all consumer spending, faceplanted in April. Sales ticked up just 0.1%, well below economists’ forecast for a gain of 0.4%.
Even worse, core sales, which strip out sales of automobiles, gas, building materials and food, fell 0.1%.
This doesn’t bode well for stocks in the consumer discretionary sector. The S&P 500 and Dow Jones Industrial Average might be making record highs, but a host of consumer discretionary names are limping this year. No wonder the Consumer Discretionary SPDR (XLY) is down more than 3% for the year-to-date.
True, there’s always hope in preliminary data like this, which is subject to revision, hopefully upward. Just look at core retail sales for March, which were revised up to 1.3% from an initial reading of 0.8%.
Retail Sales: Consumer Spending Weighs on Stocks
But unless we get a big revision, the case for a second-half acceleration in consumer spending just took another hit. If anything, there should be some pent-up demand by now. (Healthcare spending is the exception to the general trend; it’s growing thanks to the Affordable Care Act.)
A nasty winter hurt sales early in the year. There’s no doubt the weather was at least partially responsible for the economic slowdown and the concurrent damage done to corporate sales and profits we’re seeing this earnings season.
Unfortunately, there appears to be other factors restraining retail spending, and that could ripple through everything from the housing to labor markets.
Among areas of weakness, retail sales were led lower last month by furniture, electronic and appliance stores, and restaurants and bars.
A drop in consumer spending on furniture and appliances makes sense. Sales are off because rising mortgage rates have cooled the housing market, and the refinancing boom is over. The latest figures sure don’t help Home Depot (HD) stock, for example, which is off more than 6% so far this year.
More puzzling is the drop in restaurants and bars. (Didn’t March Madness do anything?) In any case, restaurants and bars had better pick up — or get an upward revision — because that has been a consistently good area for new jobs.
Retail Sales: Savings, Not Credit
Then again, bartenders, waiters and waitresses aren’t know for having gushers of discretionary cash. Indeed, it seems most people have neither the cash nor access or inclination to use credit to fuel retail sales and consumer spending. Personal spending rose last month, but credit card debt actually declined.
So where does money for consumer spending come from? Savings, which declined month-to-month.
On the one hand, that’s good for the economy. Cash squirreled away in the bank doesn’t go into retail sales and consumer spending, which in turn stimulates demand, eventually leading to job creation. The darker side is that personal income isn’t rising fast enough to make personal savings a sustainable source of funds for retail sales and wider consumer spending.
The bottom line is that disappointing retail sales and wider consumer spending look to weigh on retail stocks for some time. And it’s not just hurting discretionary stocks like Amazon (AMZN) — down 24% year-to-date — or Nike (NKE), which is off 5%. Family Dollar (FDO) and Coca-Cola (KO) are just a couple of the consumer staples stocks having a bad year.
Although some individual retail stocks are doing well, broad bets on consumer discretionary names have been losers in 2014. Until the labor market and personal income shows signs of acceleration, that’s likely to continue.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
