In fact, retail sales are struggling, with February being the third consecutive month in which U.S. retail sales fell. Even after stripping out volatile factors, retail sales were still flat. Bad weather probably played a part, which helps explain why online sales were up over 2% as shoppers bought at the keyboard, but tepid income growth shares a large part of the blame. With U.S. consumer discretionary companies outperforming year-to-date, this sector may be vulnerable if sales do not start to accelerate, particularly as the sector sports the second highest valuation of any of the 10 economic sectors.
We upgraded our view on U.S. consumer discretionary stocks last fall and still believe that households are in a better position than they were just a few years ago: Consumer debt is down while household wealth is up, gasoline prices are much lower than a year ago and the U.S. is creating jobs at the fastest pace since the 1990s. However, U.S. consumers are not yet playing to script. While household consumption was strong in the fourth quarter of 2014, it is off to a weak start in 2015. At the same time, consumer stocks have rallied on hopes for a spending rebound. If it does not materialize soon, it may once again be time to pull back from this sector.
Source: Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.