As Stocks May Lag Consumers Save Less to Fuel U.S. Sales

The retails stocks may underperform the market because consumers are trying to finance spending partially by saving less, which might be unsustainable as unemployment remains stalled somewhere around 9 percent.

According to data from the Census Bureau, retail sales rose 0.5 percent in October from the prior month, beating the estimate for a 0.3 percent increase in a Bloomberg News survey. Based on the Bureau of Economic Analysis data, Americans saved 3.6 percent of their disposable personal income in September, the lowest its been in almost four years.

”While this could help boost the holiday-sales season, it’s a new stress point for consumers that raises doubts about the sustainability of spending in 2012,” says David Strasser, who is a New York-based analyst at Janney Montgomery Scott LLC. He maintains ”neutral” ratings on Target Corp. (TGT) and PetSmart Inc. (PETM)
Investors might ”look past” the better-than-forecast results because recent declines in the saving rate and in real disposable income are ”warning signs that consumer fundamentals are weakening,” says Samer Nsouli, who is the chief investment officer of Lyford Group International in New York, which overseas about $80 million in assets.

”Retail stocks could be setting up for a repeat of last year, as these weakening drivers of spending suggest recent gains may be temporary,” he said.

Nsouli also said that the investors were concerned in 2010 that retailers’ margins might fall because of raising costs for materials. The SPDR Standard & Poor’s Retail Exchange-Traded Fund peaked on a relative basis Nov. 26, 2010 — Black Friday, which is the day after Thanksgiving and one of the year’s biggest shopping days — and then underperformed the S&P 500 ETF by 10 percent through Jan. 31, 2011.

Since Jan. 31, the retail ETF — which includes Wal-Mart Stores Inc. (WMT) and Macy’s Inc. (M) — had risen 12 percent, compared with a 4 percent loss for the S&P 500 ETF.

Robert Dye, who is the chief economist at Comerica Inc. in Dallas, said that consumer spending may be limited in 2012 by ”longer-term fundamental constraints,” such as weak disposable income. The Bureau of Economic Analysis data showed that the money left over after taxes, adjusted for inflation, has fallen 0.3 percent this year to the lowest since September 2010.

Dan Binder, who is an analyst at Jefferies & Co. in New York, says that the prospect of tighter bank credit also suggests a slowdown in retail-sales growth by March of 2012. According to a Federal Reserve senior loan-officer survey released this month, the net percentage of banks reporting increased willingness to make consumer-installment loans, which includes credit cards, dropped to 18.8 percent in October after reaching a 17-year high of 28.8 percent in April.

There is a ”trickle-down effect,” because of banks’ willingness to make these loans is a leading indicator of retail-sales growth, says Binder, who maintains ”hold” ratings on Costco Wholesale Corp. (COST) and Kohl’s Corp. (KSS). According to Binder’s calculations, the correlation between these data is 0.88. A correlation of 1 would show they move in lockstep, while a value of zero signals no relationship whatsoever.