Retail spending and consumer confidence go hand in hand, but that doesn’t necessarily mean it’s time to buy retailers’ stocks.
Jack Ablin, chief investment officer at BMO Private Bank, said, “The Fed has zeroed in on that relationship. I think if you look at the chain of events that the Fed has tried to engineer with the quantitative easing, they wanted to stir up asset values, knowing that higher asset values would raise consumer confidence, and higher consumer confidence would lead to more spending.”
Perhaps the Fed’s plan is starting to work, because according to Ablin, the gap is finally starting to close, although confidence is still only three-quarters of where it was before the market downturn.
That doesn’t mean it’s necessarily time to put money in the consumer discretionary space, however. Ablin said the consumer discretionary sector has done very well, outpacing the market dramatically over the last five years or so.
“Now, when we see the gap finally start to narrow between confidence and retail, that could be a harbinger for worse things to come, some underperformance in discretionary shares,” Ablin said.
He recommends investors look at finance and healthcare instead.
“Finance has been an under-loved and under-valued sector at least for last couple of years,” Ablin said, adding that “finance overall is a cheap sector. It’s moving in the right direction and finance looks like a pretty good place to be right now.”
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