Consumer Stocks: Can the Rally Last?

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"Sentiment has improved," says Michael Church, president of Addison Capital Management. "People are starting to recognize that it's not the end of the world."

But it's a long way from "not the end of the world" to a true, strong recovery in consumer spending or the economy as a whole. That leaves many investors wondering whether, after such a solid rally, consumer discretionary stocks might have gotten ahead of themselves. "Certain areas of retail [might] still have further to run," Church says. But, "the consumer is still in a rough spot." Therefore, these days, consumer discretionary stocks are "at the top of the list" of the stock market's most vulnerable sectors, Church says.

William Rutherford, president of Rutherford Investment Management, says companies still have to prove they deserve the massive jumps in their stock prices. "Sooner or later, the companies are going to have to match the performance of their stocks," he says.

Hard for Consumer Outfits to Impress

They will have a chance to do so in coming weeks, when several retailers report quarterly earnings. Macy's reports results on May 13, followed by Kohl's (KSS) on May 14, Abercrombie & Fitch (ANF) on May 15, and Target (TGT) on May 20.

Other longer-term trends that could drive the sector's performance include the state of the housing and labor markets. In a recovery, "home sales tend to lead retail sales," Kalivas says. So, investors are hoping for more signs the dismal housing market could be hitting bottom. Homebuilders are also included in the consumer discretionary sector.

But, for Peta, employment is "the big driver." If job losses slow in future months, "that would suggest that perhaps we are turning a corner here," he says. The concern is that the consumer discretionary sector's current stock prices already assume the economy has taken a turn for the better. If so, it could be increasingly difficult for consumer firms to continue to impress the market.

Steverman is a reporter for BusinessWeek's Investing channel.

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