Retail Stocks Giving Us One Big Message

Retail stocks are telling two stories right now… but giving one underlying message for investors.

The big low-end retail stocks like Wal-Mart (NYSE/WMT) and Costco (NASDAQ/COST) are definitely holding their own. In fact, the stocks of both these huge American retailers are up 12% since the beginning of September 2007.

It is the high-end retail stocks that are getting hit the hardest. Below is a list of high-end retailers and how their stocks have fared since early September 2007:

Coach (NYSE/COH; largest U.S. luxury leather handbag retailer), down 32% Starbucks (NASDAQ/SBUX; biggest high-end coffee shop), down 29% Whole Foods (NASDAQ/WFMI; high-end organic food store), down 15% Tiffany & Co. (NYSE/TIF; high-end jewelry retailer), down 28% What the stock charts of the retail stocks are telling us is that consumers are moving away from high-end retails store purchases, either curtailing their spending all together or moving to the low- end retail stores. This is all quite typical: At the beginning of any economic contraction, consumers first reduce their non-essential and frivolous purchases.

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For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like “drunkards” during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted.

As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.

NEWSFLASH — The National Association of Realtors has released its official numbers for last year’s housing market. For 2007, existing home sales in the U.S. fell 12.8% to 5.652 million homes. The median price of a home in December 2007 fell six percent to $208,400 from $221,600 in December 2006. The trend is in play for housing for 2008 — expect even lower prices ahead. History shows that most housing booms have been followed by “dry” property markets that have lasted at least eight to 10 years.