Consumer confidence bounced back in February on a healthy labor market and an end to the U.S. government’s longest shutdown in history. Consumers’ assessment of current conditions improved and expectations about the future strengthened, indicating sturdy economic growth.
On more confident Americans, things have been looking up for consumer stocks. Stocks of consumer discretionary companies are poised to grow on signs of renewed consumer spending.
Consumer Confidence Bounces Back in February
According to the Conference Board, the consumer confidence index climbed to 131.4 this month from a revised 121.7 in January. The key economic indicator that measures attitudes on future economic prospects exceeded analysts’ expectations of a 124.7 reading and has rebounded after three straight months of declines.
People’s confidence in the present situations improved from 170.2 last month to 173.5 this month, which is an 18-year high. The future expectations index also increased from 89.4 to 103.4, the largest monthly gain since 2011.
What Drove Confidence?
Consumers’ optimism was largely driven by strength in the labor market. The U.S. economy continues to be one of the world’s most powerful employment generating machines. According to the Bureau of Labor Statistics, the economy added 304,000 new jobs in January, exceeding analysts’ estimates of around 172,000.
December’s job additions, in the meanwhile, were revised down from 312,000 jobs to 222,000, while November’s rose from 176,000 to 196,000. Nonetheless, the average for the last three months is now 241,000 jobs, marking one of the best stretches during an economic expansion dating back nine-and-a-half years ago. By the way, employment gains in 2018 turned out to be the strongest in the last three years.
(Source: Bureau of Labor Statistics)
An end to a partial federal government shutdown also helped Americans regain optimism and diminished concerns about recession. Lynn Franco, director of economic indicators at the Conference Board, added that “consumer expectations, which had been negatively impacted in recent months by financial market volatility and the government shutdown, recovered.”
Why Does Consumer Confidence Matter?
Such a record consumer confidence number is a significant reading since it has been, historically, good at predicting consumer spending over the next three to six months. The more 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 and so do appliance manufacturers, retailers, consumer discretionary manufacturers, big-ticket entertainment providers, jewelry sellers and cruise line operators, to name a few.
5 Top Winners
Since the aforementioned sector is positioned to benefit from this promising reading on confidence 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). Such stocks also boast of a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Shoe Carnival, Inc. SCVL operates as a family footwear retailer in the United States. The company has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 1.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 62.4%, higher than the Retail - Apparel and Shoes industry’s projected growth of 10.6%.
RH RH operates as a retailer in the home furnishings. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 1.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 175.4%, higher than the Retail - Home Furnishings industry’s projected growth of 11.4%.
Darden Restaurants, Inc. DRI owns and operates full-service restaurants in the United States and Canada. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 0.4% over the past 60 days. The company’s expected earnings growth rate for the current year is 18.3%, higher than the Retail - Restaurants industry’s projected growth of 3.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Royal Caribbean Cruises Ltd. RCL operates as a cruise company. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 1.2% over the past 60 days. The company’s expected earnings growth rate for the current year is 12.3%, higher than the Leisure and Recreation Services industry’s projected growth of 9.2%.
Malibu Boats, Inc. MBUU designs, manufactures, distributes, markets, and sells recreational powerboats. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 2.6% over the past 60 days. The company’s expected earnings growth rate for the current year is 34.2%, higher than the Leisure and Recreation Products industry’s estimated growth of 6.4%.
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