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Markets : Will Consumers Sink the Market?
New York: July 06, 2004
By John R. Stephenson

There's been a lot to cheer about lately as companies have seemingly dodged a bullet and have started to get earnings back on track. Last year, the stock market took notice and surged in an appropriate fashion. But the true unsung heroes that have been really carrying the economic ball are the consumers. Let's just hope they hang in there until we fully round the economic corner.

But can they? With gasoline prices surging, interest rates on the rise and their tax refunds all but spent, are consumers finally running out of ammunition to prop up the economy and the stock market in turn? Perhaps. One of the strongest sectors over the last year has been the retailing sector. Over the past year, the Standard & Poor's (S&P) retailing index soared an impressive 70 percent — driven by strong home sales. The fortunes of retailers are closely tied to that of housing — another strong sector. The reason that retailers tend to benefit from strong home demand is that typically new home purchases and mortgage refinancings lead to an upswing in spending for big ticket items. But, over the last week, the retail index is starting to slide — down some 4 percent.

The alarm bells of slower retail sales are starting to sound. WalMart, the world's largest retailer, announced last week that its June sales were worse than expected because of slower Father's Day sales and cool weather. The bad news wasn't limited to WalMart as Target Stores also warned of a slowdown in sales which sent its stock spiraling down 11 percent since the warning. Not only are things slowing down in the discount aisle, but bigger ticket items such as cars are starting to get pinched a little as well. According to auto industry reports, car sales slid to the lowest level in six years and the stock of General Motors was the single biggest loser in the Dow this past week.

But the news isn't all bad as employment numbers seem to be trending up. For consumers to keep spending, they need to be employed and feel confident about the prospects for the future. With the jobs picture improving, people have a reason to feel more confident but that isn't the whole story. Consumers are also counting the dollars that they have in their pockets and discovering that with interest rates starting to creep back up, gasoline prices sharply higher and the refunds spent, they have less money to spend. Even though the effect of interest rates is modest at the present time, there is no doubt that it is starting to take a little froth out of the market.

With it being a little unclear as to whether consumers will continue to hang in and continue to spend at the pace that they have for the last few years, it might be wise to start to lighten up on your equity holdings. Particularly those stocks that have the most exposure to higher interest rates. Retailers, homebuilders and utilities should be under performers if interest rates continue to rise and consumers decide to take a break.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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