Retail Rundown

November is certainly starting on a good foot—what with today’s triple-digit rally and news that the U.S. added more jobs than forecast in October. This makes me very excited for tomorrow’s unemployment rate release, but first I want to take some time to reflect on the biggest highlights from the past month.

Performance

October certainly had its share of ups and downs as investors fled riskier bets and flocked to the safety of fundamentally strong U.S. companies. So during the month of October, the Dow retreated 2.5% while the S&P 500 lost nearly 2%.

And of course some sectors performed better than others in October:

Sector

October Performance

Basic Materials

-16%

Consumer Cyclical

-13%

Technology

-11%

Financial

-8%

Healthcare

-7%

Services

-7%

Capital Goods

-4%

Energy

-4%

Conglomerates

-3%

Consumer Non-Cyclical

-2%

Utilities

-2%

Transportation

1%

But we’re still at a much better level than last year, when October 2011 represented the recovery from the worst quarter since the financial crisis. Yesterday, the indices closed over 12% higher than this time last year.

Third-Quarter Growth

Last week, the Commerce Department announced estimate-topping figures for third-quarter GDP: while analysts expected 1.7% growth, the U.S. economy grew by a 2% annual pace. However, the headline figure is weighed down by a troubling detail: Business investment outside of housing declined 1.3%—the largest quarterly decline since 2009. The best news is that consumer spending picked up to a 2.1% annual pace, compared with 1.5% in the second quarter, so consumer spending remains the bright spot in the overall U.S. economy. Meanwhile, government spending rose a surprising 3.7%.

Overall, the headline growth is a pleasant surprise, and the consumer spending figures make me even more bullish about retail stocks. But the drop in business investment underscores the uncertainty surrounding the Presidential election and what will happen to taxes in 2013.

The Tablet Wars

After launching the iPhone 5 last month, Apple Inc. (AAPL) didn’t waste any time in revealing the next big thing (or rather, things) to hit the tech world: The iPad Mini, the iPad 4, the 13-inch MacBook Pro and even a new thinner iMac.

This unprecedented amount of activity from Apple has competitors scrambling to catch up. In a bid to drum up interest for the launch of Windows 8, Microsoft Inc. (MSFT) hosted a party in New York last week. The new operating system, which is priced at $300, is designed to run on more than 1,000 devices—especially Microsoft’s Surface tablet. But while these tablets may be customized around this new operating system, Microsoft still lags behind Apple and Google in the apps department.

And following its earnings debacle, Google Inc. (GOOG) had its own reveal event on October 29, where it introduced the Nexus 4 smartphone as well as the Nexus 10—a larger version of its original 7″ Nexus tablet. These new sibling devices will start at $299 and $399 respectively, which is competitively priced to the iPhone and iPad. Now Google is selling nearly 1 million Nexus 7 tablets a month, but it still has quite a ways to go before it can match Apple’s sales pace of 14 million iPads every quarter.

Personally, I think these players will need more than that to go toe-to-toe with Apple, but there’s no doubt that the tablet wars are helping boost spending as consumers vie for the latest and greatest in gadgetry.

Speaking of consumer spending, retailers had some encouraging October sales data to share with us this morning. Twenty or so American retailers announced that same-store sales advanced an average of 4.7% last month, compared with the 4.3% consensus estimate. Despite uncertainties caused by the impending election, several retailers posted robust growth:

  • Costco Corp. (COST) posted 7% same-store sales growth on higher gas prices and a weak dollar—better than the 6.6% consensus.
  • Kohl’s Corp. (KSS) grew same-store sales by 3.3%, beating out the 1.1% growth forecast by analysts.
  • Nordstrom Inc. (JWN) blew the 6% consensus estimate out of the water by posting 9.8% same-store sales growth.
  • Macy’s (M) same-store sales advanced 4.1% and its online sales jumped 44.6% in October.
  • TJX Cos. (TJX) announced 7% same-store sales growth and subsequently raised its third-quarter and full-year guidance.

These retail results, along with record consumer confidence figures, paint a picture where the U.S. consumer continues to drive the bulk of economic growth. And even with Hurricane Sandy throwing a wrench in some operations in on the East Coast, many retailers are confident that they can more than make up for lost time with the upcoming holiday shopping season.

Tomorrow, I’m going to give you a sneak peek of what you can expect in for the month of November. I have good reason to believe that we’re nearing the end of this cyclical correction, and I want you to prepare for the shift that’s about to come.

Sincerely,

Louis Navellier

Louis Navellier

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