Retail Sales Indicate a Happy New (Stock Market) Year in 2011

Thursday, December 16, 2010

Shopping mallDo you have lingering doubts about the US economy? Is that worry keeping you out of the stock market?

It’s understandable-

We’ve been bombarded for months with warnings about impending crises and collapses.

But it’s time to exit the past-

The proof of recovery is here. Accepting that fact is the key to successful investing in 2011 and beyond.

The prime example is what consumers are up to: “Retail Sales Hit Pre-Recession Level in November” (The Atlantic, by Daniel Indiviglio, December 14)

“… sales are now the highest they’ve been since before the recession began. And if the trend continues, they’ll easily set a new all-time high in December.”

All-time highs are key

There is nothing like “all-time high” to build enthusiasm and shake off old worries. It is the accepted indicator of a new trend.

All-time high retail sales dispel so many of those frights thrown at us:

  • Economic double dip drags spending back to previous lows
  • Consumers permanently scrimp and save instead of spend
  • Deflation’s downward spending spiral as consumers wait for lower prices
  • High unemployment an on-going drag on consumer spending
  • Lack of consumer credit thwarts spending growth
  • Companies cannot maintain earnings growth because spending isn’t increasing

The new fundamental highs can also propel stocks higher. Here is the graph of an ETF (exchange traded fund) that tracks retail stocks:

With risks diminished (gone?), how should we invest?

The two-part answer is straightforward:

  1. Buy US stocks – The way to make money from growth is to be an owner and share in the earnings. That means owning common stocks. As I wrote in “The 2011 US Stock Market Outlook Looks Bright”, stocks may be up, but they still offer good value.
  2. Avoid bonds – Inflation is rearing its head in earnest. At today’s abnormally low yields, bonds are not worth the risk of possible price and purchasing value loss.

So… Take those retail sales to heart. They are only one part of a steadily improving picture, but their robustness is irrefutable proof that good things are afoot.

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