Retail Therapy, Courtesy of Fisher Investments

Recently, Fisher Investments found data speaking to a frequently made point: US retail sales were up 6.5% in June, ahead of expectations, while these same shoppers sent consumer sentiment readings reeling. If you believe confidence and sentiment surveys, sales weren't supposed to be so robust.

A long-held view at Fisher Investments is actions speak louder than words. Both the Conference Board and University of Michigan consumer gauges fell in June, as folks said they'd spend less, citing fears of stagnant wages and weak jobs growth. And yet, they shopped--and not just for budget items. Sure, big box retailers saw healthy growth. But so did luxury outfits--demand was healthy for designer shoes, jewelry and other big ticket items. Investors may not have felt confident when surveyed, but they behaved otherwise.

Why do people shop when they say they won't? For one, it's normal for people to say (or feel) one thing and do another. Maybe gloomy shoppers just needed a little retail therapy to feel better--nothing lifts one's spirits like a new pair of kicks. Or maybe they suddenly felt better, and July's sentiment will be higher.

Then again, there are plenty of rational reasons for June's sales surprise. The US economy has continued growing (even slower growth is still growth and not at all unusual at this point in the business cycle) and personal incomes are rising. Incomes are a better predictor of spending than sentiment surveys. After all, folks can be as cheerful as bluebirds and lemonade, but if they don't have money to spend, they won't shop. Retailers' behavior probably helped too, as stores offered hefty promotions to move spring inventory and get ready for the back-to-school season--this seems to fit with the surveys, since folks worried about the economy try to make their dollars stretch as far as possible. And analysts think warm weather and a late Memorial Day played a role, too.

Still, since sentiment was so low in June, some have set their expectations for July retrenchment. Sales might indeed taper in July--economic readings never move in a straight line, and spikes in both directions are normal even as data trends upward over time. A gangbusters June doesn't mean July sales will be hot--they're independent events, and July's sales will be determined by everything else that happens in July. Will incomes keep rising? Will prices remain attractive? Will vacationing folks do some shopping tourism? Will a warm summer prompt people to hit the mall for summer clothes and a good beach read?

Whatever the case, Fisher Investments research shows July sentiment readings are not likely to be predictive for stocks. Consumer sentiment is a lagging--or at best coincident --indicator. These surveys don't say much about what's going to happen, especially for the stock market--they reflect how people feel about the recent past, which is already reflected in today's share prices. Markets discount future events, and these surveys do a poor job predicting how people will act in the weeks and months ahead. When it comes to consumers, watch what they do, not what they say.

Sources:
Stephanie Clifford, "June Sales Reports Show Shoppers Opened Wallets," The New York Times
Daniel Indiviglio, "Consumer Confidence Falls Again in June," The Atlantic
Bloomberg, "U.S. Michigan Consumer Sentiment Index Fell to 71.5 in June," SFGate
Bureau of Economic Analysis, "Personal Income and Outlays, May 2011," U.S. Department of Commerce
Fisher Investments Editorial Staff, "The Baby-Talk Indicator," MarketMinder

Founded in 1979, Fisher Investments is a Woodside, CA based money management firm serving institutional and individual investors. This article constitutes the general views of Fisher Investments as of July 2011 and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.