Investing May 7, 2009, 9:35PM EST

Consumer Stocks: Can the Rally Last?

The consumer discretionary sector has had an impressive uptick, but the easy gains may have already been made

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The stock market's recent rally has had an unlikely leader: consumer discretionary stocks.

The economically sensitive sector has shrugged off gloomy economic conditions as investors look to better times ahead. In the past 13 weeks, the Standard & Poor's 500-stock index consumer discretionary sector is up 23%, more than any other sector. Year-to-date through May 6, the sector had risen 10.5%, putting it in the top three of 2009 performers, along with the materials and information technology sectors.

That's quite a shift in fortune for a sector that relies on consumer purchases, whether for apparel, autos, homes, or other goods that aren't categorized as necessary staples.

Upscale Retail Stocks Up

During the downturn, discount chains such as Wal-Mart (WMT) and Family Dollar Stores (FDO) held their own. But discretionary stocks, especially higher-end retailers, were pummeled. In 2008, for example, Nordstrom (JWN) shares dropped 64%, Macy's (M) fell 59%, JC Penney (JCP) lost 55%, and shares of Internet retailer Amazon.com (AMZN) fell 46%.

All four have bounced back strongly since early March. Nick Kalivas of MF Global (MF) cites some reasons for the rally in consumer discretionary stocks: Despite job losses, a drop in gas prices has given consumers more spending money. Investors have been reluctant to bet against the federal government's stimulus plan, which could "have a positive effect on spending at the margin." Moreover, Kalivas says, retailers and other companies have done a good job of cutting costs and managing inventories.

Unlike the financial sector, "where management seemed to be caught off-guard [by the downturn], it seems as if [consumer discretionary companies] been able to navigate it well," he says.

Looks Like the Bottom

No doubt these factors played a role, but the biggest driver of consumer discretionary stocks has been the economy, many market experts say. "Even if we're still in a recession, the bottom has been reached and now we're turning up," says independent market strategist Doug Peta, who cites the release almost every day of "better-than-expected economic data points."

Consumer discretionary is typically an "early cyclical sector," meaning it's one of the first sectors to move when the economic conditions look ready to change, Peta says.

"Retail stocks are a bit of a leader of the overall market because they're very sensitive to the economy," Kalivas says. (Many retail chains reported April sales gains on May 7.)

Consumer Still in a Tough Spot

So investors are looking ahead, buying consumer stocks on the bet that an economic recovery is in the cards. The Reuters/University of Michigan Consumer Survey bolstered that case on May 1, when it showed consumer confidence rose in April. The confidence reading was 65.1 in April, compared to 57.3 the previous month and even higher than the 62.6 reading in April 2008.