Consumers Still Focused on ‘Needs’ More Than ‘Wants’

Though it’s safe to say grocery stores and gas stations have survived the recession - now that we’re coming out of it - it may be a little soon to expect a crowd clamoring for the newest big-screen TVs down at the local electronics store. As such, consumer discretionary stocks aren’t likely to be an investor’s best bets for the near future… consumers are still a little light on what they view as discretionary income.

As evidence of the idea, one doesn’t have to look any further than a comparison of low-priced retailers and higher-end retailers. 99C Only Stores (NDN), Big Lots Inc. (BIG), and Dollar Tree Inc, (DLTR) were not only profitable last quarter, but all posted positive earnings surprises last quarter. Best Buy Inc. (BBY) was profitable last quarter, but fell short of expected earnings. Though Talbot’s (TLB) beat its earning forecast, it still took its third quarterly loss in a row.

To be fair, most retailers beat expectations in their most-recently reported quarter. The bar was set low though … it’s pretty clear that fashion is still a casualty of the recession.

Going a little further up the price scale doesn’t help any either. Yes, the ‘Cash For Clunkers’ was considered a sweeping success, acting as a revenue shot in the arm for Ford (F) and Toyota (TM) – the manufacturers of the program’s most-purchased vehicles. As soon as the stimulus spigot was turned off though, dealers said car lots became desolate again.

How long will the lull last? That’s partly a function of joblessness, and partly a function of confidence.

A broad economic recovery will help boost confidence, but investors should realize this recession was painful beyond compare; it could take years before consumers start spending as they did prior to 2007’s implosion.

Simultaneously, a willingness to spend may be irrelevant if consumers have no money to spend, which will be the case if unemployment continues to linger at multi-decade high levels.

The dire outlook isn’t a permanent one; employment and confidence will certainly improve eventually. However – and despite chatter that such an improvement is around the corner - a full recovery could be measured in months of not years. There are stronger sectors to focus on in the meantime.