The Globe and Mail

The results from the early stages of the holiday shopping season have suggested that retailers, after being handed lumps of coal the past couple of years, may finally be in for a Merry Christmas and a Happy Hanukkah. And who should they thank when they unwrap their profits on Dec. 25?

Why, the stock market, naturally.

Market analysts point out that historically there has been a close correlation between a rising stock market and strong retail sales. As a result, they believe the rally in equities over the past few months was timely for retailers, providing a harbinger of brisk business in their most critical time of the year.

‘POWERFUL RELATIONSHIP’

Citigroup equity strategist Tobias Levkovich argues that the “powerful relationship” between stocks and retail sales boils down to wealth creation. Put simply, higher stock prices put more money in the pockets of consumers – and, most importantly, in the pockets of the richest consumers.

“Since the top 20 per cent of American income earners disproportionately account for nearly half of all discretionary consumer spending and they own roughly 90 per cent of all equities, the stock market’s ‘wealth effect’ is deterministic for the capacity to spend,” he wrote in a research note this week.

No less an authority than Federal Reserve Board Chairman Ben Bernanke acknowledges this connection between stocks and shopping. In a Washington Post op-ed article last month, Mr. Bernanke said that “higher stock prices will boost consumer wealth … which can also spur spending.”

UBS Wealth Management analyst Mike Ryan says there is considerable debate over the cause and effect in this relationship (“are strong equity markets a result of good retail sales or is it the other way around?” he asked in a recent report), but he nevertheless believes the correlation is so strong that it justifies optimism on the retail side this shopping season.

“If equity markets remain flat from [late November] until the end of December, and historical relationships between equity markets and retail sales hold, [holiday] retail sales should increase 4.5 per cent,” he wrote. “Even a decline of 10 per cent in equity markets between now and the end of the year suggests that holiday sales [growth] would still be greater than 3.5 per cent.”

THE LAP OF LUXURY

This propensity for the wealthiest consumers to spend any new-found gains from the market rebound is evident in the relative performance of high-end retail stocks, too.

Strategist Pierre Lapointe of Brockhouse Cooper compared the stock returns for global luxury, discount and general department-store retailers since the end of the recession, roughly 18 months ago. While the discounters and general department stores have had very similar stock performances, “luxury brands … have outperformed the two other categories” by a considerable margin, he found.