U.S. consumer discretionary stocks are running ahead of the broader S&P 500 by a record margin while retail sales data disappoints. This sounds like a recipe for disaster.
In terms of actual performance numbers, the S&P 500 is higher by 134 per cent since March of 2009. The S&P Consumer Discretionary Index is higher by 252 per cent for the same period.
According to a chart prepared by Bank of America research, helpfully retweeted by Sober Look, U.S. consumer discretionary stocks have never outperformed the broader index to this extent in the almost 100 years that records have been available.
That's reason enough for concern that the sector is a bit ahead of itself but, just to add to the fun, Friday morning's U.S. retail sales data fell well short of expectations. August retail sales less Autos was reported barely higher at 0.1 per cent when a gain of 0.3 per cent was expected.
So, after an unprecedented rally, consumer discretionary stocks are now confronted with slowing sales.
The average trailing price-to-earnings ratio for the S&P Consumer Discretionary Index is not obscenely out of line at 21 times, which is roughly in line with 2005. Still, it's hard to see the drivers for further outperformance when sales are declining.
There are undoubtedly individual opportunities within the sector that make sense as investments, but on the whole, U.S. consumer discretionary stocks are best avoided until retail sales strengthen significantly.