WE USED to build civilisations. Now we build shopping malls”. So said Bill Bryson about his native land. For the last two years, however, America has not been building shopping malls. American retailers have been at the bottom of a deep pit and struggling to get out. They may well have just found a ladder, however. According to a report from the Census Bureau released yesterday, American retail sales jumped by 1.2 per cent in October – the biggest increase this year – while US consumer confidence is at its highest level in five months. This holiday season may see the shopping malls thronged again. Is it time for CFD traders to go shopping?
Certainly, things are looking a lot better than they have been. For the last two years, American consumers have been deleveraging, choosing to pay down debts rather than to keep spending on shiny consumables. But with the recession receding, that era may now be at an end. Low interest rates, falling unemployment and speculation that the government will extend the Bush-era tax cuts are all helping to encourage Americans to start spending again. That in turn is driving a recovery in retail that few expected.
As Kully Samra, of Charles Schwab, remarks, it has been “pretty amazing really”. After being caught with excessive inventories in 2008, when demand collapsed quite suddenly, retailers have learnt that “you can’t just cut prices”, as Samra puts it. Instead, they aggressively cut costs, kept inventories lean and improved their profit margins. With demand recovering, retailers are now expecting to do very well indeed. CFD traders would seem well advised to join in.
Indeed, share prices have already increased quite a lot. Whereas the S&P 500 index has risen 7.9 per cent on the year to date, the retail sector part is up by a remarkable 18.51 per cent. Few think the rally is exhausted, however. According to analysts at Citibank, 5 per cent more consumers plan to shop this black Friday – the day immediately after Thanksgiving, famed for its sales – than did last year. Anticipating higher demand, several retailers are running extended sales, while firms plan to hire 600,000 temporary workers this year – nearly 150,000 more than last year. When shoppers start flooding through the doors, and mere confidence turns into actual profit, then share prices should increase even further.
Traders can trade directly on the retail sector of the S&P 500, but they might also want to make some specific picks. According to Citi, a particularly appealing target might be Target, a large discount retailer. A new store model branded “PFresh”, together with an expansion of retail space and higher profit margins, are all expected to increase earnings and drive up the share price. Citi estimates that the price could increase by a third over the next year, to about $72.
As ever, it is important to be careful. Despite the return to growth, there is still a lot of uncertainty in the American economy. Unemployment has been falling, but it is still stubbornly high. The last time consumer confidence was this high, it was knocked down by the sovereign debt crisis in Europe. That may well happen again. Eventually, too, America will have to build something other than more shopping centres. In the meantime, however, CFD traders would be advised to enjoy the rally while they can.