Will Holiday Sales be Better Than Expected?

We’re about to find out how healthy the average U.S. consumer truly is. If retail sales are up this season (November and December), it may well be the strongest sign yet the recession is over.

Heart of the Matter: For the first time in at least over a decade, holiday shopping sank last year, falling by 2.8%.

The Perfect Storm: The severity of the recession coupled with miserable timing is the most complete explanation. Between a housing crisis crushing home values, a mortgage crisis sending the stock market tumbling, American taxpayers being informed they would ultimately be funding a massive government bailout effort, and unemployment nearly twice as high as it was two years earlier, the deck was stacked against brisk spending.

Consumer Confidence: In other words, holiday shopping last year was stifled by a complete lack of consumer confidence. Given that 2/3 of the U.S. economy is fueled by consumer spending, restoring confidence is the key to restoring the economy.

Conflicted Estimates: This year’s holiday sales outlooks are mixed. ShopperTrak expects a 1.6% improvement, while the National Retail Federation is forecasting a 1.1% decline.

Outlook, Near and Far: Take the National Retail Federation forecast with a grain of salt. The group may be low-balling, or simply fearful of underestimating any weakness. Odds are good that this year’s numbers will be better than expected just because the bar is set so low. Longer-term, a strong consumer showing this holiday season should point to better overall consumer confidence … the key to any recovery’s longevity.

Ways to Invest: Though it’s fun to pick stocks, it may be easiest and less volatile to tap into undervalued retailers through exchange-traded funds. The SPDR Retail Fund (XRT), the PowerShares Dynamic Retail Fund (PMR), and the Retail HOLDRS Trust (RTH) could all offer palatable retail exposure.

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