A curious thing is happening to America's struggling retailers: Shares in department stores and specialty retailers have bubbled up since Election Day, outperforming even the broader market, which keeps hitting all-time highs.
This marks a drastic change from the past year, in which plunging store traffic and the ongoing consumer flight to e-commerce weighed down shares of the country's worst-performing store operators.
It's not like those secular trends have reversed. Nor have retailers reported a rash of stellar results, unveiled super-secret plans to topple Amazon, or come up with new businesses or product lines that would suddenly make Americans leap off their couches and head into stores again.
Nevertheless, the S&P Retail Select Industry Index, comprised of 96 U.S. retail stocks in the S&P 500, has jumped 8.5 percent since Election Day, compared to a 2 percent rise in the broader S&P 500.
Some individual stocks have soared even higher than that: Ascena Retail Group, which had been down 50 percent on the year, has rebounded 24 percent since Election Day. At Kohl's, shares were down 8 percent before Election Day but are up 24 percent since.
1. People will spend more on stuff because:
- There's no more uncertainty about the election outcome;
- Trump voters are happy their guy won;
- Trump will keep gas prices low by encouraging natural gas production; and
- Trump will lower personal taxes and boost infrastructure spending, leading to higher incomes and more jobs.
2. Retailers will incur fewer costs because:
- Trump will lower corporate tax rates, boosting profits; and
- Trump won't raise the federal minimum wage.
Those are all perfectly nice projections of what President-elect Trump might do.
But even if the uncertainty that reigned before the election is gone, a new flavor of uncertainty has replaced it: Predictions about how Trump might govern, how the economy will react, and how consumers will feel should be taken with a grain of salt, as no one actually knows.
Could this new kind of uncertainty even lead consumers to pull back spending? In the days after the election, confidence in the U.S. economy surged, rising 13 percentage points, according to Gallup -- but the polling firm's three-day rolling average of daily consumer spending fell 10 percent, from $104 to $94.
Meanwhile, new data from YouGov Brand Index show that all but four of 23 national retail chains have seen their advertising awareness drop from a year ago, as consumers have been distracted by the election -- not a good sign heading into the holiday season.
Could any extra money spent by happy Trump voters be more than canceled out by a pullback from higher-income consumers on the coasts who didn't vote for Trump?
As for gas prices, those would have to move lower than they already are to spur additional retail spending -- merely keeping gas prices steady at a low level won't do the trick. And gas savings tend to have a bigger impact on lower-income consumers, who make up a smaller portion of overall retail spending.
And even if lower taxes and infrastructure jobs do eventually put more cash in the pockets of consumers, that cash won't necessarily be spread evenly among retailers.
As I've argued here and here, overall retail sales are healthy and growing. American consumers have the money and will to spend -- just not at the same department stores and specialty mall shops they once favored.
As for the retailer side of the equation, lowering corporate tax rates to 15 percent from 35 percent could boost earnings. On average, specialty retailers' EPS would have been 23 percent higher under the lower tax rate last year, according to estimates by Instinet analyst Simeon Siegel.
But that will only offer a shot of earnings firepower. The extra cash will be helpful for some of the stronger retailers, which can plunge the money back into their businesses. But for retailers struggling to keep the doors open, it will only extend their lives temporarily as top-line losses accelerate.
The larger structural issues -- including shoppers buying more stuff online and at off-price retailers, as well as continued deflation in an apparel and electronics market that isn't growing -- aren't going to change. And without change, hope isn't enough to keep this retail rally going.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
There's also a third explanation here around short-sellers closing up their positions on highly shorted stocks, but we'll save that for another article.
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