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Consumer Confidence Skyrockets in May: 5 Stocks to Buy

Nalak Das

On May 28, the Conference Board released U.S. consumer confidence data for the month of May. Despite stock market mayhem in this month owing to an abrupt breakdown of the U.S.-China trade negotiations, U.S. consumers are highly confident about future growth, much to the surprise of economists.

A robust job market, higher consumer spending, low inflation rate and a stable interest rate are likely to push up consumer confidence in the months to come. At this stage, investment in consumer discretionary stocks with a favorable Zacks Rank will be a prudent move.

Strong Consumer Confidence in May

For May 2019, the Conference Board's measure of consumer confidence index stands at 134.1 compared with 129.2 in April. May’s reading is near the 18-year high recorded in November 2018 and above the consensus estimate of 129.5. The Present Situation Index, which gauges consumers’ views about current market conditions, climbed from 169 to 175.2.

More importantly, the Expectations Index, which is a measure of the consumers’ short-term (for next six months) outlook for income, business and labor market conditions, surged to 106.6 from 102.7. Both Present Situation and Expectation indexes currently stand at close to the highest levels in a decade. Individuals stating business conditions as “good” increased from 37.6% to 38.3%, while people saying business conditions are “bad” decreased from 11.3% to 10.2%.

Notably, on May 17, University of Michigan reported that its preliminary findings of consumer sentiment for May rose to 102.4 from 97.2 in April, the highest in 15 years.

Robust Labor Market

On May 3, the Department of Labor reported that the U.S. economy added 263,000 jobs in April, significantly higher than the consensus estimate of 189,000. Year to date, job gains came in at an impressive 205,000 an average per month.  

Unemployment fell to 3.6% compared with the consensus estimate of 3.8%. This marks the lowest level of unemployment since December 1969. The real unemployment rate, which includes those who have quit looking for better jobs as well as the underemployed, remained unchanged at 7.3% since February.

Muted Inflation, Growth in Wage Rate and Stable Interest rate

Average hourly wage rate in April, increased 0.2%. Year over year, average hourly wage gains remained flat at 3.2%. Despite growth in wage rate, PCE price inflation grew by 0.2% in March (latest available data). Year over year, PCE price inflation grew 1.5%, below the Fed’s target 2% level.

Wage growth and muted inflation have prompted the central bank to stick to its March decision of keeping the benchmark interest rate fixed within its existing range of 2.25-2.5%. Despite a strong U.S. economy, the Fed is not going to raise rate due to concerns about global economic slowdown. Meanwhile, the central bank denied any rate cut as it thinks the recent benign inflation is transitory. Inflation will likely catch up with the Fed's 2% target rate in the rest of 2019.

Our Top Picks

Strong consumer confidence data indicates that consumer spending is likely to witness robust growth in the coming months. Consequently, adding consumer discretionary stocks to your portfolio makes sense at this point.

We narrowed down our search to five such stocks, each carrying a Zacks Rank #1 (Strong Buy) and having a VGM Score of either A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks in the last three months.

Rent-A-Center Inc. RCII leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico and Franchising. The stock carries a VGM Score of A. The company has expected earnings growth of 100.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 11% over the last 30 days.

Malibu Boats Inc. MBUU operates as a designer, manufacturer and marketer of sport boats primarily in the United States. The stock carries a VGM Score of A. The company has expected earnings growth of 40.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.1% over the last 30 days.

Strategic Education Inc. STRA provides a range of post-secondary education and non-degree programs in the United States. The stock carries a VGM Score of B. The company has expected earnings growth of 36.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 30 days.

Salem Media Group Inc. SALM is a radio broadcaster, Internet content provider and magazine and book publisher specializing in Christian and Conservative content. The stock carries a VGM Score of B. The company has expected earnings growth of 50% for the current year. The Zacks Consensus Estimate for the current year has improved by 55.6% over the last 30 days.

Johnson Outdoors Inc. JOUT designs, manufactures, and markets camping, diving, watercraft, and marine electronics products worldwide. The stock carries a VGM Score of B. The company has expected earnings growth of 1.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.2% over the last 30 days.

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Salem Media Group, Inc. (SALM) : Free Stock Analysis Report
 
Rent-A-Center, Inc. (RCII) : Free Stock Analysis Report
 
Malibu Boats, Inc. (MBUU) : Free Stock Analysis Report
 
Johnson Outdoors Inc. (JOUT) : Free Stock Analysis Report
 
Strategic Education Inc. (STRA) : Free Stock Analysis Report
 
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