(Bloomberg) -- Investors are having a change of heart about U.S. consumer stocks, a sign their optimism about Americans discretionary spending remains intact even after a January selloff.
The Consumer Discretionary Select Sector SPDR Fund -- made up of Amazon.com, Walt Disney and 82 other companies -- has outpaced the SPDR S&P 500 ETF by 2.3 percentage points since Feb. 3. That follows four weeks when this exchange-traded fund lagged behind the broader market by 3.3 percentage points.
The rebound has been swift, showing that some investors overreacted to bad winter weather, sluggish holiday sales and negative earnings pre-announcements from several fund members, said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York, which manages about $1.5 billion in assets. The shift has been driven by some nice, positive surprises on quarterly results from companies -- including Gap and Macys -- and a recognition that income growth and hiring, the drivers of U.S. consumption, havent deteriorated, he said.
Underlying consumer trends, while not wildly positive, still are constructive, Ghriskey said, adding they probably will improve this year, along with the weather.
The harsh winter could slow U.S. growth during the first quarter, though it wont harm the economy enough to prompt a fundamental change in the outlook for the Federal Reserves reduction in bond purchases, William C. Dudley, president of the New York Fed, said at an event in New York yesterday. The threshold is pretty high to change it.
RISING PAYROLLS
U.S. employers added 175,000 workers to payrolls last month, more than projected and up from a revised 129,000 in January, based on figures released today by the Labor Department. Hiring expanded by an average of about 194,000 employees a month in 2013, the highest since 2005.
Disposable personal income, the money left over after taxes and adjusted for inflation, rose 0.3% in January from the prior month. That follows average monthly gains of 0.1% in the second half of 2013, according to Commerce Department data. February figures are slated to be released March 28.
Retail sales rebounded 0.2% last month, following declines of 0.4% in January and 0.1% in December, based on the median estimate of economists surveyed by Bloomberg ahead of a report scheduled for released March 13.
BUYING OPPORTUNITY
With no widespread signs that U.S. consumers are pulling back, companies selling nonessential goods and services present a good buying opportunity for investors who think spending will resume at a moderate pace after the severe weather disrupted normal seasonal patterns, Ghriskey said. Its not too late to take advantage of this thesis, either by investing in the consumer ETF or on an individual basis.
Investors have rushed back into the fund after Januarys 8% drop broke a long-term uptrend relative to the broader market, said Jim Stellakis, founder and director of research at Greenwich, Conn.-based research company Technical Alpha. The swiftness of the reversal shows theres no lasting follow-through for a bearish bet on this ETF.
The fund has risen 10% since early February. Average net fund flows for consumer-discretionary ETFs in the past 20 days were $72.6 million, according to data compiled by Bloomberg.
PESSIMISM SUBSIDING
Pessimism has subsided in the past month after the violent decline, said Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore. Some of that sentiment shift was triggered by company earnings that were no worse than what investors were bracing for, he said, adding that comments from Macys executives underscored a pick-up in consumer spending.
Sales started to recover around Valentines Day for the second-largest U.S. department-store company, Chief Financial Officer Karen Hoguet said on a Feb. 25 conference call.
All boats are rising, and so were feeling very good about the trend, she said.
The Cincinnati-based retailer reported fiscal fourth- quarter earnings of $2.31 a share that day, beating the $2.17 average of analysts estimates compiled by Bloomberg. Macys shares have risen 8% since Feb. 24.
'WELL-PUBLICIZED PROBLEMS'
This stock is a relatively new position for ClearArc Capital Inc., which oversees $6.6 billion. Amid some well- publicized problems for many of Macys competitors, the retailer is capturing market share and had a decent holiday selling season, said Dan Popowics, a portfolio manager at the Cincinnati-based investment adviser.
Popowics predicts consumer spending will get somewhat better this year, so he favors large-cap companies as a bet on the improvement. His firm also holds Home Depot Inc., T.J. Maxx store owner TJX Cos. and apparel retailer VF Corp., which are well-positioned to benefit from increased discretionary spending, he said.
VF -- with the North Face, Nautica and Wrangler brands -- has been a solid, long-term holding, Ghriskey said, adding that his firm also has a position in Tractor Supply Co. based on a similar premise. In the past three weeks, VFs stock has erased all of a 5.1% drop on Feb. 14, when the Greensboro, North Carolina-based retailer reported fiscal fourth-quarter earnings that missed analyst expectations.
SNAPPED BACK
Tractor Supply, based in Brentwood, Tennessee, also has snapped back after a pretty severe breakdown that began about a month before it reported fiscal fourth-quarter results on Jan. 29, Stellakis said, adding that much of the negative sentiment about this stock seems to be behind it for now.
Even so, economic growth has been uneven, which means consumers still face some challenges, Popowics said. Hiring in January and December trailed economists estimates, with Decembers 75,000 increase the slowest in almost three years.
In addition, fuel costs have been somewhat volatile, Lutz said. The average price of a gallon of regular unleaded gasoline -- at $3.47 on March 5 -- is up 4.5% this year.
Ghriskey still is optimistic consumers will unleash some pent-up demand for discretionary purchases as the weather improves, he said, noting that consumer confidence hasnt fallen off a cliff.
Sentiment, as measured by the Bloomberg Consumer Comfort Index, rose to minus 28.5 in the week ended March 2, 5 points below an almost six-year high of minus 23.5 in August.
I dont think the U.S. consumer has gone away, Ghriskey said. These discretionary stocks should continue to rebound as the year progresses.
