5/12/2011
By Brian Sozzi, Research Analyst

We often read about certain economic phenomenon but tend to get lost in the moment as they unfold.  Some common stock market adages:

* It takes six months for a slice to the Fed funds rate to positively influence businesses through a lower cost of capital (in theory, though, the risk free rate drops and companies are able to borrow cheaper, while banks benefit from lending at a higher long-term rate).
* Don't fight the Fed, if the monetary policy body goes accommodative then snap up risk.
* Sell stocks in May and go away (hmmm..)

Then there is the notorious "don't bet against the U.S. consumer."  That old adage was tucked away in the memory banks in 2008 and 2009, but has begun to resurface as the consumer has spent more freely.  Is there sufficient data to support a bearish bet on the consumer during the summer months?  I think the April retail sales report showcases the stress on the average U.S. household from mounting cost of living increases, and therefore stock selectivity where companies have outsized consumer exposure remains key to success.

Gas prices entered 2011 on a fairly benign glide path, providing fuel to the consumer psyche which was continuing to improve amid a new pay raise, a new job, and of course the return of the wealth effect compliments of the Fed.  Retail sales in very discretionary categories, say sporting goods, health and personal care, furniture, and electronics have started to transition from solid recovery in 2010 to mixed or weakening trends.  The lag effect is obvious when drilling into the data.  To me, the retail sales reads YTD depict a consumer that is cognizant of the factors nipping away at wages and the payroll tax credit funds, as well as being mindful of the downside of spending with reckless abandon circa 2007. 

So while we have received impressive 1Q earnings beats and fiscal year guidance raises from retailers this season, it's imperative to remember that not only are retail sales moderating off a recovery base from 2010, but are doing so with a different consumer mindset than during other economic recoveries.  That fact, in my view, is why it's vital to carefully select stocks in consumer discretionary and consumer staples as all names will not win in a choppy month to month sales environment.  Dollars tend to be allocated to brands that offer best in class value equations (say an Abercrombie pair of jeans instead of an American Eagle pair of jeans) or the lowest possible price (dollar stores as opposed to Wal-Mart/Target).

Brian Sozzi
Wall Street Strategies

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