Four Ways to Profit from Declining Consumer Confidence

By John Whitefoot

It’s a simple scientific principle: what goes up must come down. Well, the same principle applies to the stock market. As we know, the stockmarkets have kept near their record highs for most of this fiscal year. However, the Conference Board announced on Tuesday that itsconsumer confidence index slipped to 79.7 in September, down from a revised 81.8 in August and below the 80.0 estimate. Tuesday’sconsumer confidence numbers also represent the weakest reading since May.

The consumer confidence numbers shouldn’t be a total surprise to anyone who has been paying attention to U.S economic data. Even though the U.S. unemployment rate dropped to 7.3% in August from 7.4% in July, most of thosejobs were in low-paying industries. Also, more and more Americans left the workforce because they were tired of looking for work.

Stubbornly high unemployment means consumers are increasingly pessimistic about finding work. Coupled with stagnant wages, weaker consumer confidence means Americans will probably cut back on spending as we head into the all-important holiday season. It’s not the best fuel for the world’s largest economy, especially one in which consumer spending makes up about 70% of all gross domestic product (GDP).

But again, this can’t be a surprise to Wall Street, either. Thanks to weakening consumer confidence numbers, S&P 500 companies have been warning investors all year long that they can’t meet projections. During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance, while 81% issued negative guidance during the second quarter.

Ahead of the third quarter, 88 companies (82%) have issued negative EPS guidance. This worsening trend is well above the five-year average of 62%, but eight of the 10 sectors that make up the S&P 500 still expect to report a year-over-year increase in the third quarter. Financials are projected to increase 10.4% and the consumer discretionary spending is forecast to climb 6.2%, but those forecasts could change quickly if consumer confidence continues to lag and GDP numbers fall below the forecast.(Source: “New components will result in lower expected earnings growth for the DJIA,” FactSet web site, September 20, 2013.)

Even so, a 6.2% increase in consumer discretionary spending seems quite optimistic in light of weak sales at Abercrombie & Fitch Co. ANF, Aeropostale, Inc. ARO, and American Eagle Outfitters, Inc. AEO. And the remainder of the year doesn’t look promising, in part because the jobless rate for people aged 16 to 19 was 22.7% in August—teenage spending accounts for the largest part of overall spending in the U.S. (Source: “Teen Spending Statistics in the U.S. [Infographic],” NewFashionFantasy.com, January 4, 2013.)

When it comes to adults, aside from automobiles, we’ve been cutting back on nonessential, discretionary purchases. Even stalwarts like Macy’s, Inc. (NYSE/M) and Wal-Mart Stores, Inc. WMT have revised their third-quarter forecasts after missing their second-quarter targets.

Because a small minority of U.S. households have benefited from rising home prices and stock values; their consumer confidence levels are all well and good. On the other hand, a large majority of Americans will be looking for ways to rein in spending.

In light of weak economic indicators and this split in consumer confidence, investors may want to decrease their risk by looking at consumer discretionary stocks at both ends of the spectrum.

That could mean looking at discount variety stores like Dollar Tree, Inc. DLTR and Fred’s, Inc. FRED. It could also mean considering stocks like Michael Kors Holdings Limited KORS and Tiffany & Co. TIF in the luxury retail sector.

This article Four Ways to Profit from Declining Consumer Confidence was originally published at Daily Gains Letter