The chapter of 2013 is about to conclude, and it narrates about high political and economic drama. It was a journey full of events that witnessed several highs and lows starting with government’s austerity measures, higher payroll taxes and stagnant wages to the 16-day partial government shutdown and political impasse. These hurdles did keep the economy at bay but not for a long time as it gradually pushed its way out of the woods.
To boost economic growth and keep interest rates low, the Federal Reserve initiated monthly stimulus program of $85 billion. This bond buying campaign had a role to play in the favorable outcomes in the shape of housing market recovery, surging stock portfolios, strengthening manufacturing sector and improving labor market condition, which provided strength to the economy. Third quarter gross domestic product (GDP) grew at an annualized rate of 4.1% according to the "third" estimate from the Bureau of Economic Analysis.
Fed Decides to Taper in New Year
Now with the economy showing more constructive and convincing signs, the Fed at the FOMC meeting on Dec 17 & 18 decided to taper its monetary stimulus package by $10 billion commencing Jan 2014. The Fed indicated that it would lower its purchases of mortgage-backed securities by $5 billion to $35 billion a month and its purchases of Treasury securities by another $5 billion to $40 billion per month.
Fed Chairman Ben Bernanke had earlier indicated that easing of monetary stimulus will happen only after taking into account the job conditions, inflation and economic growth. But one thing officials have been trying to convince investors that even if the tapering is initiated, they would try to keep the interest rates near zero until unemployment rate drops below 6.5%.
What Prompted the Decision?
Now let’s look at the favorable economic numbers that led the Fed to take this brazen step even when the inflation rate is well below its target of 2%. The data released by University of Michigan and Thomson Reuters showed that consumer-sentiment index jumped to 82.5 in December from November’s reading of 75.1 buoyed by improving fundamentals. Consumer confidence is a key determinant for the economy’s health with consumer spending accounting for over two-third of the U.S. economic activity.
Consumer spending climbed 0.5% in November as against 0.4% in October and the most since Jun 2013, further hinting that the derailed economy is gaining traction. However, what could limit the growth is the tepid increase of 0.2% in personal income.
What is inspiring consumer spending is the improving job prospects, with unemployment rate declining to a five-year low of 7% in November. The latest report from Labor Department indicated that initial claims for jobless aid has fallen 42,000 to 338,000. Further boosting sentiment was the total non-farm payroll data that said employment grew 203,000 in November, higher than the consensus estimate of 182,000.
Earlier this month, the U.S. Department of Commerce came out with retail sales data that also highlighted renewed consumer confidence, leading to a 0.7% jump in November retail sales. The gain, which is the most since Jun 2013, followed a 0.6% rise witnessed in October; thus removing the cloud of obscurity about economic growth.
The latest to add in the streak of encouraging economic indicators is the holiday season sales data from Nov 1 to Dec 24, 2013, giving a fresh evidence of an increase in consumer spending. According to MasterCard SpendingPulse, sales during the period jumped 2.3% compared with 0.7% rise in the prior-year period that battled with Superstorm Sandy and fiscal cliff.
Early-hour store openings, huge discounts, promotional activities and free shipping on online purchases drove in cautious, budget-constrained consumers to the shop this holiday season, which however saw only 25 days between Black Friday and Christmas as against 31 days last year.
Is the Economy Ready for 2014 Tapering Effect?
With improving economic prospects, the outcome was almost certain – the Fed at last decided to reduce its monthly bond purchases at a modest pace starting in January. Now the big question: Is the Economy Ready for 2014 Tapering Effect? Well for now the economy seems to be well settled on its growth trajectory and the economic indicators also validate the same.
Analysts believe that consumer spending would remain strong in 2014 and could play a vital role in sustaining the economic growth going forward. Consumer spending is a primary component of the economy, and the way consumers behave give a rough idea about the health of the U.S. economy.
So far this year, the broader markets have showcased signs of a better pace of recovery and have thus infused hopes of a better economic scenario going forward. Though this statement is debatable, the significant recovery in the stock market is reflected through strong gains for the broader market indices. S&P 500 has clocked gains of roughly 26%, while Dow Jones Industrial Average has advanced approximately 22.9% so far this year. The Nasdaq Composite Index has increased 33.9% year-to-date.
Retail Still a Lucrative Investment Opportunity
Banking on its wide spectrum, the Retail/Wholesale sector still remains a lucrative investment opportunity for investors. A reflection of that is evident from the SPDR S&P Retail ETF (XRT) and Market Vectors Retail ETF (RTH) surging roughly 41.3% and 38.6% year-to-date, respectively, outperforming the S&P 500.
Thus, identifying the future winners from the sector would be a prudent idea to make an investment decision. Now we focus on 3 retail stocks that look strong going into 2014 and that you can capitalize on and enrich your portfolio.
Three Retail Stocks to Roar in 2014:
We suggest investing in Hanesbrands Inc. (HBI), a designer and manufacturer of basic apparel in the United States. Shares of this Zacks Rank #1 (Strong Buy) trades at a forward P/E (price-to-earnings) of 18.11x, a discount of 2.8% to the peer group average of 18.64x, and have amassed a year-to-date return of 96.6%. This Winston-Salem, North Carolina based company had registered an average positive earnings surprise of 10.2% over the trailing four quarters, and has a long-term earnings expectation of 15.6% that makes it look attractive.
G-III Apparel Group, Ltd. (GIII), a manufacturer and marketer of women’s and men’s apparel, is another stock to bet your bucks on. This Zacks Rank #1 (Strong buy) stock has amassed a year-to-date return of 116.5% and is expected to witness earnings growth of 15.9% in fiscal 2013 and 80% in fiscal 2014.
The company’s long-term estimated EPS growth rate is 16.5%, higher than the peer group average of 13.8%. Shares of this New York based company trades at a forward P/E of 20.36x, a discount of 13.8% to the peer group average of 23.62x. The company had registered an average positive earnings surprise of 96.6% over the trailing four quarters.
Another stock that investors may look forward to is Macy’s, Inc. (M), one of the leading department store retailers. This Zacks Rank #2 (Buy) stock has amassed a year-to-date return of roughly 40.7%, and is expected to witness earnings growth of 6% in fiscal 2013 and 10.9% in fiscal 2014.
Though the stock looks a bit pricey with a P/E multiple of 13.65x when compared with peers, however, it should not disappoint investors given the company’s long-term expected earnings growth of 11%. The Cincinnati-based company had registered an average positive earnings surprise of 5.8% over the trailing four quarters.
We believe that the above stocks that boast strong fundamentals and growth prospects are capable of quenching investors’ search for market winners. With the economy regaining its lost momentum and looking promising for 2014, a sneak peek into the space for some possible outperformers backed by a favorable Zacks Rank could be handy for investors.
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