Consumers are leading the charge

Personal spending is likely to continue riding a rising economic tide throughout the year, boosting stocks.
APR 14, 2013
After suffering mightily during the Great Recession, American consumers may no longer be the battered players of the past. In fact, they appear to be leading a resurgence of the U.S. economy. The trends behind this rising consumer tide are likely to continue throughout the year, offering financial advisers a clear road map on how to invest prudently and profitably. The markets are benefiting from a significant tail wind that offers ample investment opportunities. Housing is perking up, gasoline prices are dipping, stock prices are rising and employment is gaining, albeit at a snail's pace. Advisers would be wise to watch consumer sentiment numbers.

WOMEN DRIVING RECOVERY

Drilling down, there is one surprising demographic that shows particular signs of fiscal promise, with her late-but-not-trifling return to the marketplace: the American woman. A study by The Boston Consulting Group found that women control 73% of household spending — about $4.3 trillion in the United States alone. The study cited a significant void in the marketplace, where many retailers are simply failing to meet the needs of this important cohort. Two of the more important faux pas that they make are poor product design and a lack of customized options for women. Retailers who have fallen short of satisfying the American female shopper have begun to re-strategize in a way that is making sense. For proof, we need look no further than two familiar retailers, Chico's FAS Inc. (CHS) and Macy's Inc. (M), which have made their services more attractive to that key shopper in the household. Chico's, the national specialty retailer of private branded women's apparel, has appealed to women through improvements in designs and color palette. This has led to a same-store-sales growth rate of almost 8% over the past two years, making it a ripe opportunity for late-stage-restructuring. Growth also is evident in the major diversified department stores. Macy's, a company where women buy not only for themselves but for their families, began customizing merchandise by region, a change that has resonated with consumers. With ample room still left for improving margins, Macy's has shown an almost 5% increase in same-store-sales trends over the past two years and, in our opinion, has become an attractive investment. Housing-related companies and well-capitalized banks that help finance housing are other key sectors for advisers to watch. For example, The Home Depot Inc. (HD) has shown continued improvement in operating fundamentals, driven by internal-supply-chain and merchandising initiatives. Meanwhile, the management at Redwood Trust Inc. (RWT) has focused on expanding the company's commercial platform and reopening the market for residential-mortgage-backed securities. And M.D.C. Holdings Inc. (MDC) has seen its profitability increase as the housing market has turned up. Similarly, Bank of the Ozarks Inc. (OZRK) has consistently increased earnings and dividends over the long term. Further earnings growth is expected as the economy continues to improve. With the exception of Mexico, the United States was the best equity market to invest in over the trailing-three- and five-year periods, as measured by the S&P 500 through March 31. When we dig deeper, we see that the consumer discretionary sector has done much of the heavy lifting for the broader market and has provided the best returns of any sector over those time periods. Impressively, the sector is up 13.2% annually over the past five-year period and 18.9% annually over the past three-year period, as measured by The Vanguard Group Inc.'s Consumer Discretionary exchange-traded fund. By comparison, the S&P 500 has returned 3.5% and 10.3% over the past five years and three years, respectively. It might be wise to take cues from the likes of Chico's, Macy's and other promising companies, and ride the consumer wave. Philip D. Tasho is chief executive and chief investment officer of Tamro Capital Partners LLC.

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