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Consumer Confidence Sees Revival in May: Here's What it Means

Zacks Equity Research

U.S. Consumer Confidence recovered slightly in May, buoyed by the gradual re-opening of the economy, thereby lifting consumers’ spirits. Consumer spending, which drives roughly two-thirds of all economic activities in the United States, started to dwindle after the outbreak of novel coronavirus. The pandemic forced widespread business shutdowns across the country, sending the economy into a slump.

Consumer Confidence Rebounds in May

The Conference Board’s Consumer Confidence Index, indicative of consumers’ assessments of present conditions and the degree of optimism about the future, inched up to 86.6 in May from 85.7 in April. But it still remains near a six-year low. Economists polled by Dow Jones expected the consumer confidence index for the current month to further weaken in the wake of layoffs and a bleak economic outlook, while those polled by Reuters made an upbeat forecast from the last reported reading.

The Present Situation Index, which gauges consumers’ opinion on current business and the labor market scenario, fell marginally to a reading of 71.1 this month from 73.0 in April. But the Expectations Index, based on how consumers foresee short-term income, business and labor market conditions, rose to 96.9 in May from 94.3 last month.

The proportion of consumers describing business prospects to be “good” fell from 19.9% to 16.3%, while those who claimed business situations to be “bad” climbed to 52.1% from 45.3%. Americans who said jobs were plentiful declined to 17.4% from 18.8%. The percentage that stated, jobs were hard to find decreased from 34.5% to 27.8%. 

Consumers were more optimistic about the short-term projections with 43.3% expecting business conditions to improve from 39.8% in the previous reading while those who see it worsening fell to 21.4% from 25.1%. In terms of consumers’ views on their short-term income prospects, those expecting an increase came in at 14% from 17.2% while those expecting a decline was recorded at 15% from 18.4%. 

Confidence Catalysts

Consumers’ confidence bounced back in May as lockdowns were relaxed and businesses gradually resumed. Consumers anticipated the Trump administration to implement new stimulus measures in response to the pandemic in the form of loans to support small businesses and direct cash payments. Consumer expectations with respect to student debt forgiveness, federal welfare benefits and affordable housing skyrocketed in April as more than half of Americans foresee expanded unemployment benefits. Expectations regarding reforms in federal taxes like reduction in gasoline or payroll tax or tax hike for the superrich is also gaining traction.

The University of Michigan authorities stated that its consumer sentiment index jumped to a reading of 73.7 in May, up from 71.8 in April and ahead of analysts’ expectations of a marginal decline. While Americans were apprehensive about their finances, the coronavirus relief package helped them tide over the turmoil and raise their hopes.

Will Consumer Sentiment Continue Its Momentum?

Economists and the Federal Reserve opine that consumer spending will shape up the future of economic growth. Although a dramatic decline in the spending activity amid lockdown and stay-at-home orders is set to weigh on the second-quarter growth numbers, the unwinding of economy and federal aid would steer growth in the coming months. 

Consumers appear to be more upbeat about the economic recovery. But economists have an opposing view. They believe that the economy will take years to come back on track in the absence of a vaccine against the virus. Even the Federal Reserve Chairman Jerome Powell warned the U.S. economy of a bumpy turnaround from coronavirus, exorbitant economic costs of which could last until late 2021.

There is also a fallout among the political parties when it comes to the COBID-19 syndrome. Per a recent CNBC/Change Research poll, 97% of Democrats was hugely worried about the virus compared to only 39% of the Republicans. A similar dissonance was seen over reopening the economy. A poll conducted by ABC News/Ipsos shows 92% of Democrats oppose an immediate reopening in comparison to only 35% of the Republicans. 

Although The Conference Board’s confidence data suggests that the worst of the virus-fuelled economic downturn may be over, the path to recovery is unlikely to be rapid amid the possibility of a second wave of COVID-19 outbreak and a high rate of unemployment. The United States recorded job losses of more than 20.6 million due to COVID-19 since mid-March this year, the highest since the Great Depression of 1930s.

Our Top Picks

At this stage, it will be better to invest in consumer-centric stocks with a strong growth potential. We narrowed down our search to five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). 

You can see the complete list of today’s Zacks #1 Rank stocks here.

Wayfair Inc.W, headquartered in Boston, MA, is one of the world's leading online sellers of home goods products, consisting of furniture and home decor. It operates worldwide through Wayfair.com and four other branded websites namely, Joss & Main, AllModern, Birch Lane and Perigold. Its global e-commerce platform, tech-driven supply chain, solid metrics growth, focus on international expansion and a sturdy balance sheet are positives. In the past 30 days, 14 estimates for the current-year earnings moved north for Wayfair. The company spirts a Zacks Rank of 1. 

Sprouts Farmers Market, Inc.SFM operates in a highly fragmented grocery store industry and has a unique model that features fresh produce at the center of the store, an expansive bulk foods section and a vitamin department focused on overall wellness. This Zacks #1 Ranked company remains focused on product innovation, emphasis on e-commerce, expansion of private label assortment and enhancement of technology. As consumers are visibly opting more for e-commerce services in the wake of the coronavirus outbreak, it launched the Sprouts.com website and a mobile app to help customers experience hassle-free shopping. The company has a trailing four-quarter positive earnings surprise of 37.17%, on average. The Zacks Consensus Estimate for current- year earnings has witnessed seven upward revisions in the past 30 days.

Guess, Inc.GES designs, markets, distributes and licenses casual apparel and accessories for men, women and children. It has long been benefiting from its robust digital efforts, such as linking brick-and-mortar stores, e-commerce and mobile sales to improve its online operations. Although this Zacks Rank #2 company announced temporary store closures amid the growing coronavirus spread, it continues to operate online, whichis likely to offer some cushion against the lost store sales.Over the trailing four quarters, the company’s earnings surpassed the Zacks Consensus Estimate on each occasion, the average being 14.90%.

CVS Health CorporationCVS, domiciled in Woonsocket, RI, is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. The company, currently carrying Zacks Rank of 2, has four reportable segments: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other. Surging demand for Pharmacy Benefit Management (PBM) and specialty pharmacy along with substantial growth observed in the retail business is encouraging. The company has a trailing four-quarter positive earnings surprise of 8.82%, on average. The Zacks Consensus Estimate for current financial-year earnings has seen four upward revisions in the past 30 days.

Domino’s Pizza, Inc.DPZ is a top player in the Quick-Service Restaurant and is one of the largest pizza chains globally. In the United States, the company is the market leader in the delivery segment and ranks second in the carry-out division. Its firm digital ordering system, fortified international footprint and other sales initiatives are likely to aid the company in the days ahead. This Zacks #2 Ranked company recently announced that it transitioned to 100% contactless delivery model across the United Sates after having to temporarily shutter approximately 900 restaurants in the international market due to COVID-19 outbreak.As far as earnings surprises are concerned, the company boasts an excellent record, having surpassed the Zacks Consensus Estimate in all the trailing four reports, the average being 12.72%.

 

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Click to get this free report Dominos Pizza Inc (DPZ) : Free Stock Analysis Report CVS Health Corporation (CVS) : Free Stock Analysis Report Guess, Inc. (GES) : Free Stock Analysis Report Wayfair Inc. (W) : Free Stock Analysis Report Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research