By Anna-Louise Jackson and Anthony Feld Bloomberg News
NEW YORK - Investors are skeptical that U.S. retail spending will exceed forecasts this year, as some consumer-discretionary stock indexes have yet to reach new multi-year highs relative to their defensive counterparts.
The Standard & Poor’s 500 GICS Consumer Discretionary Sector Index traded at the highest level since August 2007 on Jan. 25 compared with the S&P 500 Consumer Staples Index. Equivalent small-cap and equal-weight indexes haven’t reached a similar peak.
Investors look for confirmations of new highs because “groups that share common fundamentals should respond to news in a similar fashion,” said John Manley, who helps oversee about $212 billion as chief equity strategist for Wells Fargo Advantage Funds in New York. The lack of corroboration is a “red flag,” particularly for investors who are bullish about these stocks.
The discretionary index comprises 82 stocks of large-cap companies such as Nike Inc. and Macy’s Inc. that provide nonessential goods and services and are more sensitive to economic cycles. The staples group includes Procter & Gamble Co., CVS Caremark Corp. and 40 other members.
Investors aren’t necessarily bracing for disappointment from American consumers, though shares of “early-cycle” discretionary companies could lag behind defensive stocks even if spending meets forecasts, Manley said. That’s because “investors are always looking for a positive surprise,” and there may be “other areas of the market that can exceed their expectations.”
Consumer sentiment, as measured by the Bloomberg Consumer Comfort Index, improved to minus 33.4 in the week ended Feb. 17 after averaging minus 38.3 last year. Household purchases rose 0.2 percent last month, based on the median estimate of economists surveyed by Bloomberg, matching December’s gain, according to data from the Commerce Department. January figures are scheduled to be released on March 1.
The Russell 2000 Consumer Discretionary Index still is below its 2011 peak, compared with the Russell 2000 Consumer Staples Index. Similarly, the S&P 500 Equal-Weight Consumer Discretionary Index has failed to surpass a “significant resistance level” of prior highs relative to the S&P 500 Equal- Weight Consumer Staples Index, according to Jim Stellakis, founder and director of research at Greenwich, Conn.-based research company Technical Alpha Inc.
Since Jan. 25, the large-cap discretionary stocks have “given up” their gains from early this year -- lagging behind staples by 5.3 percentage points -- and trading below a “big support level” on Feb. 19, Stellakis said. This signals that investor sentiment has become incrementally more bearish, he added, noting that these types of companies aren’t attracting the investment they did in 2009 and 2010 as their “relative outperformance has just stalled.”
These consumer cyclical stocks could receive a boost as the market enters a period that’s historically been favorable to them, said John Canally, investment strategist at Boston-based LPL Financial Corp., which has $373 billion in advisory and brokerage assets. Since 2001, the discretionary index has outperformed the S&P 500 about 75 percent of the time in March and 52 percent in April, he said.
Underperformance during the next two months would signal that investors are more focused on downside risks from issues such as payroll-tax increases that “could take a bite out of consumer spending,” Canally said.