Market Decline Starts: The Stocks That Will Fall the Most

    Investment Contrarians
    By Investment Contrarians

    Market Decline StartsOne of the most important criteria for getting the economy back to optimal speed is for consumer confidence to begin accelerating. Much of a developed nation’s economy is based on consumer spending.

    When making an economic forecast for a developed nation, taking into account shifts in consumer spending is extremely important. With new information raising doubts that consumer confidence will rise anytime soon, a more cautious economic forecast is necessary.

    According to the Bloomberg Consumer Comfort Index, in February, the difference between positive expectations and negative expectations by consumers remained at –7 from the previous month. While current conditions by consumers in the Comfort Index rose during the week of February 17 to –33.4 from –35.9 the previous week, clearly, there is still a substantial amount of negativity when it comes to consumer confidence. (Source: Smialek, J., “Consumers in the US hold negative economic Outlook as fuel climbs,” Bloomberg, February 21, 2013.)

    The composite reading in the Comfort Index shows a weak yet stable belief in the underlying economy. Interestingly, men have turned slightly more optimistic, with 34% reporting an improvement in the economy for February, versus only 24% in January. However, women turned more pessimistic in their opinion, with only 26% stating the economy is improving in February, versus 32% in January. Overall, the data points to continued weakness in consumer confidence.

    I believe that several factors are causing this reduced level of consumer confidence. The obvious factor is the two percent increase in the payroll tax for Social Security. My economic forecast has to incorporate the lower level of take-home pay, especially for the middle- and lower-income earners.

    The higher the income a person makes, the less impact the payroll tax will have on disposable income. When combined with higher fuel and food costs, this continues to erode the potential for disposable income, lowering consumer confidence and decreasing the economic forecast for the level of consumption by this individual.

    Additionally, while the economy has been creating jobs, the pace is not rapid enough to create a substantial increase in income. The jobs created have also been lower in quality, which means new hires are not seeing an increase in after-tax pay.

    While the opinion of those polled by Bloomberg on the current state of the economy increased once again—for the fourth week in a row—future expectations remain quite weak. With the American public continuing to witness the political ineptitude of their elected officials, there is very little faith that pro-business policies created to help generate long-term growth will be enacted.

    For an economic forecast to be revised upward substantially, we would need to see a considerable rise in consumer confidence. With higher taxes for most Americans, political bickering continuing unabated, higher commodity costs, and a lack of optimism setting in, this certainly worries me about the future for America.

    When it comes to specific companies, I would be cautious toward retailers that cater to the mid- and low-end consumer, such as Wal-Mart Stores, Inc. (NYSE/WMT), Sears Holdings Corporation (NYSE/SHLD), Dollar Tree, Inc. (NASDAQ/DLTR), and Family Dollar Stores, Inc. (NYSE/FDO).

    While some retailers might gain market share at the expense of others in this segment, it appears the overall pie might dwindle. With consumer confidence being cautious about the future, we will see less enthusiasm from consumers to spend, putting a damper on any economic forecast.

    We will know more if the sequestration is averted; perhaps this might alleviate some of the concerns prevalent amongst consumers. Until that point, I would most likely avoid firms that cater to this market segment, as there currently appears to be little possibility of upside potential for growth.

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    Original: http://www.investmentcontrarians.com/stock-market/market-decline-starts-the-stocks-that-will-fall-the-most/1488/
    By: Sasha Cekerevac
    Posted: February 26, 2013, 11:17 am

    Investment Contrarians

    Investment Contrarians

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    We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....