Americans love to shop. So much so that consumer spending makes up around 70% of the country’s GDP — that is the value of all goods and services produced in the US each year.
During the recent holiday shopping season, sales grew at the fastest pace in a decade. And all signs point to this trend continuing.
US consumer sentiment continues to improve — it’s just now back to pre-GFC levels — and is encouraging consumers to get back to the shops. The measure is based on consumers’ perceptions of their situation, as well as their perceptions of the US economy in both the short and long term.
The improved sentiment is due to a number of factors benefiting consumers:
Lower oil prices mean cheaper petrol, leaving more cash in the pockets of shoppers. In fact, in terms of wages and fuel economy, petrol is near record lows.
The job market is improving — the US unemployment rate is at the lowest level since 2008.
Interest rates are at record lows, which equal lower personal loan and mortgage interest charges.
Increasing home values add to personal wealth.
And that’s great news for retail stocks.
US stock markets had an impressive year overall, but the retail sector was particularly strong. Just look at the annual and six month returns from America’s largest retailers:
And, as an Australian, if you were to invest in these stocks, your returns would be even higher. Thanks to the appreciating US dollar, you can add another 15% in foreign exchange gains to your return if you were invested over the past six months.
Sure, you could hope for returns like these from speculative small cap stocks. But these are nothing of the sort. They’re the United States’ largest retailers and five of the world’s top ten largest retail stocks.
Additionally, the following smaller US retailers recently hit 52-week highs — Macy’s, Bed Bath & Beyond, Lowe’s, and Advance Auto Parts; restaurant chains Domino’s Pizza and Cheesecake Factory; and cruise lines Carnival and Royal Caribbean.
The retail stock I recommended just two months ago to Albert Park Investors Guild subscribers is already up 28%. That includes a 15% capital gain, a 5.5% dividend, and a 7.5% foreign exchange gain for Aussie investors.
With gains like that, you might assume the business is a risky operator. Not so. It’s performed so consistently, in fact, that for the past seven straight years the company has been in such a comfortable position that it could distribute bonus ‘special dividends’ to shareholders. This took its average annual dividend to 9.3%. You can read more here.
Another way to get in on some of these gains is to invest more broadly across the US retail sector. This can be done with a retail focussed ETF.
The SPDR Consumer Discretionary Fund [NYSE:XL] is an excellent choice. The diversified exchange-traded fund is made up of a basket of companies including Home Depot, Walt Disney, McDonald’s, Nike, and Starbucks. While the ETF doesn’t have the steep recent gains of some of the US’ largest retailers, it has steadily crept higher year after year since its March 2009 low. It gained 8.5% in the past year and is up 330% since March 2009.
These stocks and US retail ETFs trade on the NYSE. If you haven’t done so already, I strongly urge you to open an international trading account. It’s not as hard as you might imagine and can be done through many of the online broking platforms available in Australia. Of course, if you’re already a Guild member, you have access to our special report ‘The Simple Way to Invest and Profit with International Stocks ’.
The return to spending by the American consumer is still in early stages. Consumers are shopping again, and it’s a trend that I don’t see suddenly reversing. Despite the good returns of the past year, the US retail sector still has much to offer.
for The Daily Reckoning Australia