Retail sales are falling, consumer confidence is sagging and financial analysts are cutting profit forecasts for clothing chains, department stores and restaurants. Stocks of these companies seem vulnerable to a pullback after more than tripling in the last four years. That's because they sell "discretionary" goods that people can delay buying.
"The consumer looks a lot more precarious than he did a few weeks ago," said Mark Vitner, senior economist at Wells Fargo Securities. "And it's going to get a little worse." Vitner thinks Americans are too poor, and too scared, to buy a lot more.
Bulls counter that the slowdowns were blips caused by chilly weather. Some economists also argue that people who have delayed replacing big-ticket items like air conditioners and dishwashers aren't likely to hold out much longer and could soon start buying.
"At some point, 'It's nice to have a new one,' becomes 'I need to buy one,'" said Scott Hoyt, an economist at Moody's Analytics, a research firm. "That pent-up demand gets released."
At stake in the debate rides more than the fate of some stock market darlings. Consumer spending drives the bulk of the U.S. economy.
So far, stocks of "consumer discretionary" companies have mostly shrugged off the bad news. But some are beginning to cool.
Darden Restaurants Inc., owner of Red Lobster, among other chains, has fallen 5.4 percent in April as it fights rivals for tightfisted diners. Harley-Davidson Inc. is down 6.5 percent from a four-year high last month. Even the mighty Amazon.com Inc. is slipping, off 8.3 percent from its all-time high in January.
Financial analysts who follow consumer discretionary companies expect first-quarter earnings to rise 7.1 percent. While that figure is much higher than the 2 percent forecast for all companies in the Standard & Poor's 500 index, it's down from 12.2 percent at the start of the year, according S&P Capital IQ.
The bad news began late last year. Christmas sales were disappointing. And while spending picked up in the new year, much of the increase came from higher gasoline prices and utility bills, not more shopping at the mall. Then, on April 12, the government reported that retail sales slipped a seasonally adjusted 0.4 percent last month, instead of rising as expected.
Sales fell across many categories — food and drinks, health-care products, general merchandise, sporting goods, books and music. Electronics sales fell 1.6 percent, the fourth drop in as many months. Sales at department stores fell 1.2 percent.
The same day a key measure of consumer confidence dropped to recessionary levels. The University of Michigan consumer survey fell to 72.3, the lowest since July. The average for recessions is 76, according to David Rosenberg, chief economist at money manager Gluskin Sheff.
But consumer discretionary stocks have kept chugging. Since the market hit a 12-year low in March 2009, they have jumped 235 percent, the biggest gain by far among the 10 sectors in the S&P 500. By comparison, the much celebrated rise of the index — up 130 percent — looks like it's been marking time.
"It so flies in the face of what everyone believes," said Jim Paulsen, chief investment strategist at Wells Capital Management. "People say, 'Oh, (the consumer) debt burden is so high. There are no savings.' Yet these stocks just keep going up."
The problem is they can fall dramatically, too, and on just a whiff of an economic slowdown. They began dropping in June 2007, four months before most other stocks began to fall that year. Six months later, the Great Recession began.
But nearly four years after the recession ended, the U.S. economy has a stronger foundation. Increased hiring, rising home prices and record-level stock prices could help consumers feel wealthier and spur them to spend. Some investors say, if anything, consumer stocks could zoom from here.
"Americans' pastime is shopping," said Ivan Feinseth, director of research at money manager Tigress Financial Partners, and a big consumer bull. "And when you go shopping, you go eating."
One of Feinseth's favorite stocks is Deckers Outdoor Corp., the maker of pricey Uggs boots. He issued a report on Nov. 5 recommending that clients buy the stock. The price was $30.29. It's now at $57.68. "I think it goes into the $80s," he said Thursday, as Deckers slipped 2 percent along with the broader market.
Should investors be more worried?
Bulls says the March fall in sales was an anomaly, the result of an unseasonable cold weather that kept shoppers in much of the country from buying spring clothes and seasonal merchandise. Once the weather warms up, sales will pick up. And they think the hike in Social Security payroll taxes that took effect in January won't dampen spending for long, either.
Perhaps the biggest argument in the bull's camp is that it would be an odd time for a sustained pullback in spending. Consumers, if anything, seem in the best shape in five years.
Americans have almost fully recovered the $16 trillion in wealth that they lost in the Great Recession, according to the latest tally from the Federal Reserve.
"The sheer pent-up demand ... is about to take hold," President Charles Evans of the Federal Reserve Bank of Chicago was quoted as saying in a speech Tuesday.
Vitner, the Wells Fargo economist, is not convinced.
He notes that the snapback in household wealth has come mostly from soaring stocks, and that means most gains have gone to a small number of people — the wealthy. Eighty percent of stocks are held by the richest 10 percent of households.
"The cold reality is that for the vast majority of households, (a rising stock market) has not increased their wealth much," Vitner said. He added, "If anything, they've pulled back" from spending.