Published December 29. 2012 4:00AM
Washington - As signs emerge that holiday retail sales this year grew at the weakest pace since 2008, investors are dumping retail stocks. Analysts are crowing about the missing "consumer engine" without which the economy may stagnate.
Many fear that the season's weakness will reverberate throughout the economy: Stores will be saddled with excess merchandise, forcing them to slash prices and accept razor-thin profit margins. Demand will soften for goods up and down the supply chain, leading eventually to a decline in orders for factory goods and weaker manufacturing. Growth will slow.
Yet there are plenty of reasons to believe that these fears are overblown, some market-watchers argue. Auto sales are strong, as are some measures of consumer sentiment. Home values are rising, leaving fewer Americans on the brink of foreclosure and helping many feel more financially secure.
Above all, they point out, there is nothing permanent about the "fiscal cliff," a set of tax hikes and spending cuts that will automatically take effect at the beginning of 2013 if lawmakers are unable to reach a deal to avert it.
When the fiscal issue is addressed and demand bounces back, these contrarians argue, beaten-down retail stocks may turn out to be this year's best after-Christmas bargain.
"There may be some caution ahead of the fiscal cliff" because of uncertainty about tax rates, "but it's more of a road bump than any fundamental weakness," says David Kelly, chief global strategist for JP Morgan Funds.
He notes that a daily tracker of consumer sentiment, the Rasmussen Consumer Index, stands at 97.6, up three points from a week ago and within a point of its 2012 high. Other measures of consumer sentiment have weakened, but Kelly sees the Rasmussen data as more reliable because it is updated daily. Most other indices rely on monthly surveys.
The fiscal cliff isn't the only reason consumers slowed down in November and December. Americans were buffeted by a series of events, mostly temporary, that made them more likely to stay home.
Superstorm Sandy caused steep holiday sales declines in the Northeast and mid-Atlantic that made the national picture appear far weaker. The presidential election distracted people in November, the Newtown massacre in December. And the rising din about Washington's current budget impasse left many people unsure what their 2013 household budgets will look like.
By Christmas Day, the results were in: Spending in key retail categories increased only 0.7 percent, just a fraction of the 3 percent to 4 percent that many analysts had expected, according to MasterCard Advisors Spendingpulse, a market data provider. It was the worst year since 2008, when the cresting financial crisis had dragged the economy into a deep recession.
Some analysts saw that as a worrying sign of things to come. Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J., called the retail sales result "onerous" and "a negative overhang on the market."
Investors didn't wait for the results from specific stores, which will add detail to the picture when they are released in early January. They pushed down retailers in the Standard & Poor's 500 index by 2.6 percent in a weeklong period when the broader index declined only 1.8 percent. Computer and electronics retailers fared the worst, sinking 4.7 percent.
Not so fast, says Karyn Cavanaugh, market strategist with ING Investment Management in New York. The consumer discretionary sector is among her favorites.
"The consumer has shown surprising resilience throughout this tepid recovery and we believe will continue to do so," Cavanaugh says. The housing turnaround "will further aid consumer and consumer confidence," she said.