U.S. household sentiment hit its highest level in 15 years in early May, buoyed by robust job outlook, rising wages and steady economic expansion. Consumers continue to feel confident about their personal finances amid risks emanating from growing U.S.-China trade tensions.
And with more optimistic Americans, things are looking up for consumer stocks. Stocks of consumer discretionary companies in particular are well poised to grow on signs of renewed strength in consumer spending.
Consumer Sentiment Jumps to Highest Level Since 2004
The University of Michigan said that its consumer sentiment index jumped to a reading of 102.4 in May, up from 97.2 in April and well ahead of analysts’ expectations of 97.5. The U.S. household sentiment index, in fact, registered its highest level in a decade and half.
Most of the gain was in the expectations index and the gauge of current conditions ticked up as well. The index of consumer expectations edged up to 96 from 87.4 in April — the highest jump since December 2011. The gauge of current economic situation went up a tenth of a point to 112.4. Richard Curtin, director of the University of Michigan consumer survey, in the meantime, said that “consumers viewed prospects for the overall economy much more favorably.”
Consumer confidence, by the way, had already bounced back in April. According to the Conference Board, the consumer confidence index climbed to 129.2 in April from 124.2 in March. The key economic indicator that measures attitudes on economic prospects exceeded analysts’ expectations of a 126.9 reading and has rebounded in April after a drop in March.
The future expectations index also moved up to 103 from 98.3. And people’s confidence in present situations improved from 163 in March to 168.3 in April. Both indexes are now close to their highest level in a decade.
What Drove the Sentiment?
There are good reasons why consumer sentiment has improved significantly in recent times. Consumers’ optimism was mostly driven by strength in the domestic economy. Payrolls had jumped a solid 263,000 in April, per the Labor Department, and exceeded all expectations. Unemployment rate fell to 3.6%, a 49-year low, and average hourly earnings growth was unchanged at a healthy 3.2%.
The Commerce Department further added that the U.S. economy expanded at a 3.2% annual pace in the January-March period, the best first-quarter growth since 2015. The gain was well above analysts’ expectations of a 2.3% increase in gross domestic product. But most importantly, such growth overcame headwinds including government shutdown in January and uncertainty about tax refunds, indicating that the economy is well poised to gain in the long run.
Why Does Consumer Sentiment Matter?
Such an encouraging consumer sentiment number is a significant reading since it has been, historically, good at predicting consumer spending for the next three to six months. More the confidence households generate the more will they spend. Notably, consumer spending accounts for roughly 70% of the U.S. economy, which isn’t a petty number.
These numbers influence companies’ production schedule, particularly big-ticket items like cars and appliances. In fact, the consumer discretionary sector is mostly affected as spending plays a major role in determining revenues. Automobile stocks often track these numbers, as do appliance manufacturers, retailers, consumer discretionary manufacturers, big-ticket entertainment providers, jewellery retailers and cruise line operators, to name a few.
Top 5 Gainers
Since the aforesaid sector is poised to gain from this encouraging reading on sentiment level, picking stocks from the same will be a smart move. We have, thus, selected five consumer discretionary stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Lululemon Athletica Inc. LULU designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 6.4% over the past 60 days. The company’s expected earnings growth rate for the current year is 21.6% compared with the Textile - Apparel industry’s estimated rally of 11.2%.
Malibu Boats, Inc. MBUU designs, manufactures, distributes, markets, and sells recreational powerboats. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 4.6% over the past 60 days. The company’s expected earnings growth rate for the current year is 40% compared with the Leisure and Recreation Products industry’s projected rise of 12.1%.
SeaWorld Entertainment, Inc. SEAS operates as a theme park and entertainment company in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 14.8% over the past 60 days. The company’s expected earnings growth rate for the current year is 169.2% compared with the Leisure and Recreation Products industry’s estimated rally of 9.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rent-A-Center, Inc. RCII leases household durable goods to customers on a rent-to-own basis. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 12.8% over the past 60 days. The company’s expected earnings growth rate for the current year is 100% compared with the Consumer Services - Miscellaneous industry’s estimated rally of 8.5%.
G-III Apparel Group, Ltd. GIII designs, sources, and markets women's and men's apparel in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 4.5% over the past 90 days. The company’s expected earnings growth rate for the current year is 14.5% compared with the Textile - Apparel industry’s estimated rally of 11.2%.
In fact, Lululemon Athletica, Malibu Boats, SeaWorld Entertainment, Rent-A-Center and G-III Apparel have gained more than 14% so far this year.
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