Why Retail Stocks Are Booming in Weak US Economy
Even as the labor market languishes and fears of a double-dip recession cause the market to swoon, retail stocks have outpeformed.
Retail stocks tend to outpace the S&P 500 Index coming out of a recession, but last week the S&P Retail Index hit 559.79, its highest level since the index was created in 2007.
The move followed a batch of stronger-than-expected retail sales reports for June, but there are structural changes in the retail industry that may be supporting the move higher.
Global Hunter Securities analyst Richard Hastings said even if one goes back as far as February 2003, there has never been a comparable period, especially since the crash of 2008, when the momentum in consumer/retail stocks has repeatedly exceeded the broader market outside of ordinary cyclical recovery rallies.
Even with Friday's pullback, the ratio of the retail index to the S&P 500 Index is still pretty close to its all-time high of 2.40 from November 2010, according to Hastings.
What's interesting is that Hastings still believes there is a case to be made that there is a new level of intrinsic value emerging from the sector. Why?
The retail industry was one of the first sectors to be hurt by the recession, and the sector developed many new skills to cope with the downturn. One of them was the ability to make better use of technology in order to manage inventory more skillfully. The last thing retailers want to do is to get caught with excess merchandise they have to unload at a loss, as they did in 2008.
Hastings suspects the market has recognized the impact the industry's technological innovation has made, and that is the primary driver of the sector's outperformance relative to the market.
"I call it the data cake," Hastings said. "There are layers and layers of information" that retailers are using to react to swings in consumer spending and attitudes.
This is the kind of intelligence that enables Macy's to customize its inventory based on the needs of the local market. Making sure, for example, that stores still have warmer clothing when a cold spell lasts longer than it should, or bring in more shorts if the temperatures heat up.
And it is this type of technology that helps protect profit margins when consumer spending turns sluggish.
That's not to say there won't be corrections. In fact, Hastings suspects there is a chance there could be one in September if back-to-school spending doesn't measure up in some areas.