A number of factors have kept investors on their toes — thanks to elevated U.S-China trade war tensions, possibilities of three or more rate hikes by the Fed this year, and tech stock related concerns amid stringent regulations related to data privacy and antitrust risks. Without doubt, these issues have spooked the Wall Street. However, market pundits have been shrugging off such gyrations as April has traditionally been a favorable month for investors.
Why the Retail Sector?
Among the 16 Zacks sectors, we are focusing on the Retail-Wholesale sector, which has advanced roughly 8% in the past six months and has comfortably outperformed the S&P 500’s gain of 1.3%.
With unemployment rate still at 17-year low, initial jobless claims plunging to 45-year low, consumer spending being favorable and government expenditure increasing, things appear to be fairly rosy for the U.S. economy. Notably, a strengthening labor market may lead to gradual wage acceleration, and in turn boost consumer confidence. All these sound constructive for retailers.
Per the University of Michigan’s report, consumer sentiment in March reached the highest level in almost 13 years. We expect this positive sentiment to translate into higher consumer spending, which accounts for more than two-thirds of U.S. economic activity. We note that consumer spending ticked up 0.2% in February, following an equal rise in January. Meanwhile, personal income surged $67.3 billion or 0.4% in February, marking the third straight month of a similar percentage increase.
All these factors paint a bright picture for retailers, who are also benefitting from the corporate tax rate cut. Analysts believe that a lower tax burden is likely to allow the retailers to channelize the surplus money to best possible options. They may go for a dividend hike, or reduce debt load, or create a corpus to fund acquisitions, or invest in enhancing omni-channel capabilities, new product launches and any other innovations.