CHICAGO This holiday season may prove to be a bell-ringer for stores and producers of consumer goods and services, despite disappointing recent retail sales reports.
The 0.3 percent drop in October sales the Commerce Department reported after a three-month increase was likely due to the impact of Superstorm Sandy. Sales should pick up in coming months. In fact, there are enough positive converging trends that stocks in this sector -- especially for retailers and manufacturers of consumer durable and discretionary goods -- will rise well into next year.
A continued economic recovery will amplify retail spending in 2013 -- what economists call a multiplier effect. Increased discretionary spending flows throughout the economy, creating even more jobs and buying more goods and services.
The market anticipates this rebound already: The S&P's consumer discretionary sub-sector has recovered smartly this year, showing nearly a 16 percent gain year-to-date through November 16. That's the second-best component of the larger S&P 500 index, which rose 10 percent. Only financial stocks have done better.
Buoyed by a broad-based recovery in jobs, the home market and general economy, consumers will boost their purchases due to a "wealth effect". This combination of rising confidence, employment and discretionary cash is behind the animal spirits that will finance everything from remodeling projects to new-vehicle sales. Here's how all of this comes together to brighten the overall picture:
1. A rising tide lifts all retail boats
Confident consumers buy more vehicles, furniture and appliances. As the recent BMO Private Bank outlook observes, "cars and light trucks are being sold at a 14.9 million unit annual clip, the best since March 2008 and more impressive is furniture sales expanded 8.1 percent."
This upsurge will spill over into fourth-quarter sales.
The National Retail Federation predicted that holiday sales will rise 4.1 percent to $586 billion this year, "the most optimistic forecast NRF has released since the recession". Online sales alone are expected to jump 12 percent over last year, according to Shop.org.
The tide behind all of this good will on the retail front is a growing economy, which may beat estimates in the fourth quarter. JPMorgan Chase & Co. recently revised its third quarter national growth rate to 2.8 percent, up from a previously reported 2 percent increase.
The fourth quarter and 2013 may be even stronger if the recovery continues. You can own the lion's share of major U.S. retailers through the Market Vectors Retail ETF, which owns retail giants like Walmart, Costco and Target.
2. Pent-up demand in housing-related spending
Those homeowners who are now shifting their attitude from "house poor" to "house rich" are funding a number of home-improvement projects. Home-remodeling contractors in my area (Chicago) are working seven days a week to keep up with the demand. Aided by a slowdown in foreclosures and a pick-up in prices, homeowners are remodeling, replacing appliances and furniture.
Annual homeowner improvement spending is expected to "reach double-digit growth in the first half of 2013", according to the Joint Center for Housing Studies of Harvard University. That bodes well for retailers like Home Depot and Lowe's and sales of durable goods like furnaces and large appliances. Lowe's, reflecting rosier numbers for home-improvement retailing in general, reported today third-quarter sales rose 1.8 percent, which was better than expected.
In housing alone, which seems to have bottomed out, home starts and improvements "have made a positive contribution to GDP in four out of five quarters" since the beginning of 2011, the Harvard Center notes. Homebuilding stocks will continue to benefit. Consider the SPDR S&P Homebuilders ETF, which holds major building companies like PulteGroup Inc and related construction suppliers like USG Corp and appliance makers like Whirpool Corp.
3. Discretionary purchases also coming back
When consumers feel the tingle of the wealth effect and extra cash in their pockets, they make more non-essential purchases like going to movies, upgrading their cable service and shopping online. This favors companies like Disney, eBay Comcast and Amazon.
These kinds of companies are best sampled through exchange-traded funds like the Consumer Discretionary Select Sector SPDR or the Vanguard Consumer Discretionary Index fund.
The fly buzzing in this rosy ointment is whether economic growth can be sustained in the United States. Barring any global calamity or the inability of Congress to resolve pending fiscal cliff issues, most pundits are predicting at least 2 percent GDP growth next year. While that's meager in comparison to past years, if it's sustainable, it's still a harbinger of better things to come.
(The author is a Reuters columnist and the opinions expressed are his own)
(Follow us @ReutersMoney or here Editing by Beth Pinsker Gladstone and Andrew Hay)