As signs emerge that holiday sales this year grew at the weakest pace since 2008, investors are dumping retail stocks. Analysts are crowing about the missing "consumer engine" without which the economy may stagnate.
Many fear that the season's weakness will reverberate throughout the economy: Stores will be saddled with excess merchandise, forcing them to slash prices and accept razor-thin profit margins. Demand will soften for goods up and down the supply chain, leading eventually to a decline in orders for factory goods and weaker manufacturing. Growth will slow.
Yet there are plenty of reasons to believe that these fears are overblown, some market-watchers argue. Auto sales are strong, as are some measures of consumer sentiment. Home values are rising, leaving fewer Americans on the brink of foreclosure and helping many feel more financially secure.
Above all, they point out, there is nothing permanent about the "fiscal cliff," a set of tax hikes and spending cuts that will automatically take effect at the beginning of 2013 if lawmakers are unable to reach a deal to avert it.
When the fiscal issue is addressed and demand bounces back, these contrarians argue, beaten-down retail stocks may turn out to be this year's best after-Christmas bargain.
"There may be some caution ahead of the fiscal cliff" because of uncertainty about tax rates, "but it's more of a road bump than any fundamental weakness," says David Kelly, chief global strategist for JP Morgan Funds.
He notes that a daily tracker of consumer sentiment, the Rasmussen Consumer Index, rose Friday to 98.9, the highest level measured since January 2008. Other measures of consumer sentiment appear weaker, but Kelly believes the Rasmussen data is more reliable because it is updated daily. Most other indices rely on monthly surveys.
The fiscal cliff isn't the only reason consumers slowed down in November and December. Americans were buffeted by a series of events that made them more likely to stay home.
Superstorm Sandy caused steep holiday sales declines in the Northeast and mid-Atlantic that made the national picture appear far weaker. The presidential election distracted people in November, the Newtown massacre in December. And the rising din about Washington's current budget impasse left many people unsure what their 2013 household budgets will look like.
The outcome: Holiday sales of electronics, clothing, jewelry and home goods in the two months before Christmas increased just 0.7 percent compared with last year, according to preliminary data released Tuesday by MasterCard Advisors SpendingPulse, which tracks holiday spending across all payment methods. That's the weakest holiday performance since 2008, when sales dropped several percent as the cresting financial crisis pushed the economy into a deep recession.
For many, the early results were a worrisome sign of things to come. Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J., called the retail sales result "onerous" and "a negative overhang on the market."
Still, the nation's largest retail trade group, the National Retail Federation, is sticking to its forecast that total sales for November and December will be up 4.1 percent from last year. A clearer picture will emerge next week as retailers like Macy's and Target report monthly sales.
That didn't keep investors from reacting hastily to the grim early data. Retail stocks in the Standard & Poor's 500 index fell 5.4 percent this month, while the broader index declined only 1 percent. Computer and electronics retailers fared the worst, sinking 10.3 percent.
Not so fast, says Karyn Cavanaugh, market strategist with ING Investment Management in New York. She favors the consumer discretionary sector, represented in the S&P 500 by Home Depot, Amazon.com Inc., Target Corp. and Ford Motor Co., among others.
"The consumer has shown surprising resilience throughout this tepid recovery and we believe will continue to do so," Cavanaugh says. The housing turnaround "will further aid consumer and consumer confidence," she says.
Sales of new homes rose in November to the fastest pace in two and a half years, the government said Thursday. The National Association of Realtors' pending home sales index also rose last month to its highest level in two and a half years, the group said Friday.
Consumer spending, to be sure, is a critical indicator of economic activity. It accounts for about 70 percent of the economy, so a true slowdown could have a painful ripple effect. That's especially true in the final two months of the year, which contribute as much as 40 percent of annual sales for many retailers.
Some analysts are warning that the pain for retailers has only just begun. Brian Sozzi, chief equities analyst at NBG Productions, says revenue results and fourth-quarter earnings forecasts, due out early next month, pose another threat to retail stocks. Sozzi recommends betting against some weaker brands, including teen apparel chain Aeropostale.
Assuming stocks continue to sink because of weak guidance and "general market angst," Sozzi said in a note to clients Friday, "the moment to potentially entertain this sector from a long perspective will be sometime before earnings season begins in mid-February."
According to Kelly and other market bulls, consumers haven't meaningfully slowed their spending. They're merely holding off as they wait for lawmakers to craft a deal that would prevent some of the scheduled tax increases.
"There's a difference between confidence and spending attitudes," Kelly says. "People are generally feeling more confident because home prices are going up."
Kelly and others believe that a deal on the fiscal cliff is all but inevitable — eventually. He acknowledges that the waiting could be painful for consumers, retailers and most other businesses, but says, "If we don't get a fiscal cliff deal, then we'll wait and get a fiscal cliff deal."
Analysts who doubt that spending will bounce back quite so quickly argue that consumers are still paying down debt and have less interest in shopping sprees, in part because median incomes are falling.
Despite the stronger housing market and other positive signs, "they're going to take the opportunity to retrench, rather than buy stuff," says Derrick Irwin, portfolio manager for Wells Fargo Advantage Funds.
Peter Tchir, manager of the hedge fund TF Market Advisors, says consumers may be shopping less because economic turbulence has helped people reassess the value of what they consume.
"We've overconsumed for so long ... how much do you really need to add?" he says. "To some extent, it's healthy for Americans to live within their means. But clearly, this week, it's not great for retail stocks."
AP Business Writer Christina Rexrode and AP Retail Writer Anne D'Innocenzio in New York contributed to this report.
Daniel Wagner can be reached at www.twitter.com/wagnerreports