Michael Conroy
The U.S. Conference Board's consumer confidence data scheduled for release Tuesday are expected to show there is still a long way to go before personal spending gets back to anywhere near normal.
"Faced with massive debts and high unemployment, consumers continue to feel lousy about their financial situation," said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.
What are the expectations? The index is expected to indicate a setback in confidence to a reading of 55 in February, compared with 55.9 in January, according to a survey of economists by Bloomberg.
Depressed house prices are also not doing anything to help restore consumer confidence. The S&P/Case-Shiller data for December and the fourth quarter of 2009 are also scheduled for release today and are expected to show the housing recovery remains in a fragile state as a result of the bleak jobs picture and high foreclosure rates.
It is all problematic for the continuing economic recovery. At the current level, consumer confidence implies a growth rate for the economy of between 1 per cent and 2 per cent, which is not enough to drive the recovery, said economists with Capital Economics in a report to clients.
"I tend to think most forecasters are probably underestimating how the economy will perform and the markets have it right," said Bill Cheney, chief economist with MFC Global Investment Management, an arm of Manulife Financial Corp. "I tend to think things are turning around, but the jobs market is still awful."
How will the market react? All of that is well known to investors, said Carmine Grigoli, chief investment strategist with Mizuho Securities USA Inc. "The numbers are consistent with a sluggish recovery," he said. "Investors aren't necessarily anticipating anything better."
Historically, severe problems in the financial sector, which triggered the recession, are generally associated with a sluggish and lacklustre recovery. But that doesn't mean the recent rise in the stock market resulted in overvalued share prices, he said. "The valuations are pretty cheap."
About three-quarters of the companies in the consumer discretionary sector have reported results and profitability has soared 153 per cent as earnings in the fourth-quarter 2009 surged to about $18.5-billion (U.S.), compared with $7.3-billion a year ago, according to Thomson Reuters. Remove Ford Motor Co. and profits would be up only 44 per cent. Still, 25 of the 33 industries in the sector reported earnings growth, Thomson Reuters said.
While it looks like a slow recovery, there is still improvement. "The consumer keeps stepping closer to the plate," said UBS Financial Services Inc. analysts in a recent report on the U.S. consumer discretionary sector.
Consumer debt levels and the employment outlook along with the strong performance of the sector during 2009 make this group of stocks less compelling in 2010 than it was last year, said UBS's U.S. equity strategist Jeremy Zirin. He recommends a moderate underweight in the sector, but still sees a few opportunities in the space.
UBS has "outperform" ratings on companies including Bed Bath & Beyond Inc., auto parts maker BorgWarner Inc., Cablevision Systems Corp., cruise line operator Carnival Corp., Choice Hotels International, luxury handbags and luggage retailer Coach Inc., Darden Restaurants Inc., Home Depot Inc., Nike Inc., Time Warner Inc., Walt Disney Co. and Yum Brands Inc.