Watch Out: Rising Stocks, Retail Gloom

The holiday shopping season officially kicks off in just hours, and already retailers have done much to dampen the Christmas cheer. Consumers, they warn, will be very protective of their cash, demanding discounts that stores will fight each other to offer. Profit margins could shrink with every Thanksgiving Day employee paid and every 70%-off item sold. Traffic could be lower with fewer shopping days this year.

But Wall Street is simply not interested in doom and gloom right now. The S&P 500 has climbed for seven straight weeks, even as Target (TGT), Wal-Mart Stores (WMT) and Dollar Tree (DLTR) lowered sales forecasts ahead of a worrisome holiday shopping season. The broad market continued to climb after Best Buy (BBY) warned of a probable profit margin squeeze from holiday discounting. Since a particularly bleak forecast published early November by mall icon Abercrombie & Fitch (ANF) the SPDR S&P Retail ETF (XRT) is up another 2.5%, bringing its 2013 gains to 40% so far.

XRT Chart

XRT data by YCharts

How long can U.S. investors enjoy a strong stock market while retailing is weak? We could find out very soon. To keep the optimism flowing in this bull market, retailers need to deliver better results from this holiday shopping season than they’re currently promising.

At the moment, investors are simply scoffing at retail sales concerns. For many stores, even pessimistic ones, forward valuations on the shares are still significantly higher than they were at the beginning of the year. In investors’ minds, things aren’t as bad as the Wal-Marts and Targets of the sector contend.

WMT PE Ratio (Forward) Chart

WMT PE Ratio (Forward) data by YCharts

A couple of data points released this month lend credence to that attitude. A Goldman Sachs (GS) index designed to track chain stores found that business has been “very strong” at department stores, apparel stores and discounters leading up to Black Friday. And officially, overall retail sales rose an encouraging 0.4% in September despite a government shutdown that surely put some pressure on the growth.

US Retail Sales Chart

US Retail Sales data by YCharts

Also, more upbeat reports from a few retailers have helped investors downplay the disturbing ones. TJX Cos (TJX), owners of T.J. Maxx and Marshalls stores, reported that higher traffic and wider profit margins were leading it to raise its full-year earnings estimates. Urban Outfitters (URBN), like several retailers catering to bigger pocketbooks, says it is “cautious” about the holiday shopping season although it reported strong pre-season earnings. (We're looking at the big picture here, but before buying or unloading a particular retail stock, one would want to employ equity research tools.)

Investors should be keenly interested in this season’s sales and profit reports regardless of whether they own retail stocks. The S&P 500 is up 27% so far this year and has set record after record in recent weeks. Almost no one believes investors will get this kind of performance from stocks next year. The possibility of a market correction has become a hotly debated topic.

A disappointing shopping season is a perfectly plausible trigger. Retailing is a huge piece of the U.S. economy, which means the health of the entire economy depends greatly on this sector’s strength or weakness. Many investors seem to believe the economy is stronger than the stores are telling us. It’s likely that the stores will have to do more than just meet their targets to prevent disappointment throughout the market.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Economic Watch  economy   retail stocks   stock market   

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