Dumping the Retail Stocks

When we look at the stock market today, we see two sectors getting hard hit: Housing stocks (companies like Toll Brothers) and mortgage stocks (companies like Countrywide Financial). Reports keep coming in about the softening U.S. housing market, and companies that either make houses or lend money to consumers to buy houses, are seeing their stock prices fall rapidly.

What group of stocks are next to fall in light of the softening U.S. housing market?

The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stores are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.

As consumers continue to feel the effects of soft property prices, they will first react by cutting spending on big ticket items like houses, cars, and appliances. Their next step will be to cut back on their retail purchases.

It’s really just common sense. A typical consumer bought a house (or two) in the past couple of years and put little money down, financing most of the purchase. Interest rates moved up and now that consumer is facing higher monthly mortgage interest payments. Higher payments might be okay (if you can afford them comfortably) when housing prices are rising, but when you are faced with higher mortgage payments and you see more for sale signs popping up on your street, houses taking longer to sell and prices moving lower, it can’t feel good.

You start to worry, you cut back on spending. New home builder stocks moved lower first because demand for new homes dropped. Naturally, mortgage stocks fell next because if homes are not selling, consumers are cutting down on their borrowing. The next piece in the puzzle I see is a drop-off in retail sales as consumer confidence begins to plunge. The retail stocks will be the next to soften. If you are an aggressive investor, shorting stocks in the retail sector might prove to be quite fruitful.

NEWSFLASH–The U.S. Conference Board index of consumer confidence dropped to a nine month low in July. the biggest monthly drop since Hurricane Katrina hit the Gulf Coast last September. For months I’ve been warning about the effects of negative consumer confidence and the economy. This is only our first glimpse of just how negative consumers will get as the housing market softens.