Why is retail up when confidence is down?

This is a guest post by Michael A. Gayed, CFA, Chief Investment Strategist for Pension Partners LLC.

There is a curious disconnect between consumer confidence and retailers.

An under-appreciated phenomenon is happening in terms of economic news and equity performance. For a moment, let’s forget about the wild swings we’ve experienced so far this year in equity markets. Forget about record low Treasury yields. Forget about debt in Europe. Let’s focus on the consumer, which the media continues to stress has no more spending power.

The Consumer Confidence Index is designed to get a sense of consumer confidence, i.e. how people feel about spending and saving. Issued by the Conference Board, the data is calculated based on household surveys which seek opinions on current and future economic conditions. Below is a chart of the index since September 2007:

As can be seen, Consumer Confidence has been lacking despite the recovery in the equity markets, primarily because of a grim outlook on employment.

Yet since March of 2009, retail sales have been increasing on a year-over-year basis at a modest pace. It doesn’t appear like anything tied to consumer spending should perform that well right?

Take a look at the S&P Retail Index ETF (Symbol: XRT) relative to the performance of the S&P 500 ETF (Symbol: SPY):

A rising ratio indicates that retailers are outperforming (up more, down less) the market overall. We can see that in the middle of November, 2008, retailers began to outperform (all while broader market averages were still roiling post-Lehman). In 2010, Retailers have been a star performer, up roughly 17% while the S&P is up over the same period roughly 2.4%.

Since November, 2008, Retailers are up roughly 80%, while the S&P 500 is up 18%. If the consumer can’t spend, and Consumer Confidence remains at low levels, someone needs to tell the consumer discretionary sector…

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Please Note: This article expresses the views of the author and such views are subject to change without notice. Pension Partners LLC has no duty or obligation to update the information contained herein. Further, Pension Partners LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Pension Partners LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This article, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Pension Partners LLC.

One thought on “Why is retail up when confidence is down?

  1. Nanette Byrnes Post author

    The Wall Street Journal’s lead story this morning is about consumer spending rising slightly in August for the second month in a row. (Link: http://online.wsj.com/article/SB10001424052748703859204575525670398183674.html?mod=WSJ_hps_LEFTWhatsNews). Curious what people think might be behind this trend? In effect, we’re saying one thing and doing another. Could it be connected to a longer term shift, such as the fact that women are now a majority in the workforce and that’s influencing spending?

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