Why The Retail Sector Should Continue Higher

Today's Conference Board showing confirms that the rebound in consumer confidence from March's lows continues. Last month, the index posted its highest reading since 1991 (after the Gulf War), and it managed to improve on these gains again in May to 83.8 -- its highest level in six months. This number is especially meaningful, however, when taken into context with the current growth in the money supply. The reason is that without an increase in liquidity to complement the higher consumer sentiment, the economy and stock market would not have the fuel to keep moving higher.

Money with zero maturity, which is the preferred measure of the money supply, has risen by close to $100 billion in the past four weeks to a record high $6.3 trillion. This number is led by major flows into savings deposits by consumers, to the tune of $78.3 billion, and the total number now stands at an eye popping $3 trillion. This increase in liquidity has been aided by a couple of factors. First, record low mortgage rates have enabled consumers to refinance their existing debt commitments at much lower levels, and as a result, they have lowered their monthly debt payments. And second, a significant decline in energy costs has also helped free up consumer wallets, as they now have lower fixed costs at the gasoline pumps.

So expect consumer stocks and their broader holders, such as (RTH | Quote | Chart | News | PowerRating) and (XLY | Quote | Chart | News | PowerRating) to continue moving higher in the months ahead as higher liquidity and improving sentiment continue to underpin growth.

Edward Allen