"The American consumer's back and ready to spend, spend, spend!" You've probably noticed this joyful sentiment bubbling up around many retail stocks -- and their euphorically rising prices.
But even if recovering American shopaholics have busted out of rehab for now, their celebration could be short-lived. Now more than ever, prudent retail investors should proceed with caution.
Hurray, the consumer's back!
Throughout April, I spotted headlines crowing about resurgent American consumers, who appear to be loading up on new clothes, jewelry, and cars.
Consumers are indeed spending more now than they were this time last year. March same-store sales were impressive, with overall comps surging 9.1%. First-quarter earnings reports from companies like Starbucks
A few days ago, The Wall Street Journal reported that many restaurants are also seeing customers return, citing data from companies like Brinker International
With the coast apparently clear, luxury retailers have even begun to raise prices again. Saks
I can see why resurgent spending can seem exciting after such a long period of Puritanical penny-pinching. After all, consumer spending represents a whopping 70% of the U.S. economy. However, many investors should still prepare themselves for the possibility of a reality check.
... But for how long?
While it was exciting to see March's same-store sales surge, the month included Easter this year, and it faces very easy prior-year comparisons. A year ago, the sky was falling, and consumers maintained a death grip on their wallets.
Despite our recent euphoria, dark sentiments still lurk beneath retail's surface. According to a Reuters/University of Michigan index, consumer confidence unexpectedly fell to 69.5 in April, from 73.6 in March.
High unemployment and the ailing housing market continue to constrain consumers' ability to spend. Meanwhile, American consumers' efforts to reduce their indebtedness are proceeding slowly. Total household debt remained at 94% of gross domestic product in the fourth quarter, a measly improvement from 96% when the recession began. Egad!
In the short term, consumers reloading their credit cards would certainly provide a remedy to the "paradox of thrift" that punishes the economy for shoppers' frugality. However, it's dangerous to rely entirely on spending-happy consumers for an economic recovery -- a lesson we should have already learned.
More troubling twists ahead?
Investors need to navigate the retail landscape carefully. Beyond unemployment and shoppers' personal debt, the recently passed health-care reform law now raises a big question mark for retailers.
The National Retail Federation has already warned that the law will result in retail job losses. The industry's reliance on part-time workers, and its high employee turnover, will make conforming to the new law difficult, at least at first. That promises yet another challenge for long-term retail stock investors.
Foolish investors will reduce risk in uncertain times by sticking with quality. Seek retailers with the most solid brands, the strongest balance sheets, and the smartest management teams. The across-the-board retail rally implies that many investors are loading up for the here and now. Their high-priced, low-quality stocks could soon plummet back down to earth.
Are overly euphoric investors about to get creamed from an unsustainable retail stock rally? Are consumers really resurgent, or is the recent positive data simply a short-lived anomaly?
Leave your two cents on consumer confidence and the retail industry in the comment box below.
Chipotle is a Motley Fool Rule Breakers pick and a Motley Fool Hidden Gems recommendation. Coach and Starbucks are Stock Advisor choices. The Fool owns shares of Chipotle. Try any of our Foolish newsletters free for 30 days.