The 2013 Holiday Season Will Be a Tale of Two Sectors
		<p>If you’re decorating for Christmas in Texas, be prepared to fork over a bundle in taxes. Christmas pictures meant to be placed in windows are subjected to a special tax. And if you’re hiring someone to decorate your Christmas tree, you’re going to ha
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The Fiscal Times
November 21, 2013

Two pieces of new economic data give us some eagerly awaited insight into the health not only of the U.S. economy as a whole, but two of the sectors that are most important to investor portfolios. The problem is that the clues they give about the wellbeing of the housing and retail sectors vary significantly enough to leave investors just as perplexed as they were before.

Let’s take the good news first. Consumer spending makes up about 70 percent of economic activity in the United States, so Wednesday's report that retail sales climbed 0.4 percent last month in spite of the high-level anxiety surrounding the federal government shut down for 16 days is an encouraging sign. Moreover, so-called core retail sales grew more than economists had expected, meaning that once sales of gasoline and big-ticket items like cars were removed from the equation, Americans seemed even more willing to spend at the mall.

Related: Cautious Consumers May Make for Ho-Ho-Hum Holiday Sales

There’s more good news ahead for retail, at least if you believe the National Retail Federation. It’s predicting that holiday sales during the period that kicks off with next week’s Black Friday spending spree will be 3.9 percent higher than they were in 2012, better than the 3.3 percent average gain recorded over the last decade and ahead of the 3.5 percent increase reported in 2012 over 2011.

What is interesting is what lies behind those numbers: one of those fun phenomena that students of behavioral finance love to talk about known as the “wealth effect.” The basic truth behind it is that when we feel rich, we tend to spend more.

Sometimes this is perfectly logical, as when we get a new job or a raise, or if we’re using a bonus to buy a car or make some other big purchase. Sometimes it’s a little less logical – when our increased wealth isn’t actually in our bank accounts but only on paper, in the form of investment returns or an increase in the value of assets such as our homes or other real estate.

There are some real reasons to feel more affluent this holiday season. For instance, gasoline prices are lower – as much as 10 percent below the levels they were at this time last year. Food price inflation isn’t as big a concern, and inflation as a whole remains a non-issue for most Americans (except those having to pay hefty college tuition fees). But the real reasons we might feel wealthier and spend more come back to paper gains.

As we approach the holiday season, the stock market has already given, and given, and given. With the Dow Jones industrial average bumping its way higher over the course of the year, and the S&P 500 index sitting atop a 25 percent gain, most with investment portfolios are feeling richer even if – as also is likely to be the case – their incomes have flatlined. Investors in Priceline.com (NASDAQ: PCLN) and Google (NASDAQ: GOOG) are likely to feel richer than most, given that the share price of these two companies has gone where no index stock ever has before – north of $1,000 apiece.

These are paper gains, though – and volatile, at that. History suggests that a reasonable annual rate of return from stocks has been somewhere between 9 percent and 11 percent. Please note, that’s an average return, so the odds that we’ll have a string of 20 percent-plus returns (while not impossible – it happened in the 1990s) are pretty low. That history probably suggests, in fact, that this year’s 25 percent will be matched by a couple of years over the coming decade in which returns are subpar or even negative.

Which brings me to the other element of the wealth effect: the housing market. After a big recovery in the last two years, the housing market isn’t continuing to expand at the same pace as it has – and housing, according to some studies, can have a significantly greater impact on our willingness to spend. Indeed, Capital Economics suggests that while every dollar of new stock market wealth generates 2 cents in consumer spending, every additional dollar of housing-related wealth boosts spending by a dime.

Here’s where there is additional room for anxiety. Data released Wednesday suggest that while housing prices have continued to climb – they’re up 12.8 percent from a year ago –  the rate of sales of existing homes fell once more in October. Worrywarts, or just those wanting to be prudent, might want to think twice before using recent gains as a reason to feel better about spending lavishly this holiday season.

There’s reason to be optimistic that Americans are likely to respond more rationally to the current wealth effect than they have to previous such waves. For one, the financial crisis and the brutal Great Recession are still stuck in all our memories. Lenders remain more restrictive than they have been in previous booms (you’ve got less chance of getting a bank to sign off on a line of credit reflecting the recent increase in the value of your home). Credit card debt levels and delinquency rates both fell during the third quarter of 2013.

The takeaway? Whether it’s because of the possibly short-lived nature of some these new and very welcome gains in our net worth, or because we’re going to behave more prudently, there seems little reason to react to the October uptick in retail sales by rushing out to load up on stocks of retailers like Wal-Mart Stores (NYSE: WMT) and Gap (NYSE: GPS). If anything, there are plenty of reasons to be wary of the sector as it struggles to reinforce brand loyalty and balance consumer demands for bargains with already-tight profit margins.

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Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.