Broker Check

Retail is Evolving, Not Dying

| December 02, 2019

With the holidays upon us, we’re making a lot of purchases. In fact, the National Retail Federation forecasts nearly $731 billion in holiday spending this year. Yet, we often hear in the media about the “death of retail” or some other gruesome tale.

The truth is the American economy is driven by consumers. The proof lies in the performance of the Information Technology (IT) and Consumer Discretionary sectors, which are both generating more than 22-percent annual returns over the last decade.

Why are they performing so well? E-commerce, or as Merriam-Webster defines it, “commerce conducted via the Internet.” The combination of IT and consumer spending is e-commerce.

So, retail isn’t dead – it’s alive and well online.

The below chart shows the IT and Consumer Discretionary sectors’ performance relative to the Dow Jones Internet Composite (DJIC) Index, which targets companies focusing their efforts on the Internet.

Conceptually speaking, if you were to combine the IT and Consumer Discretionary sectors, the overlap between them would produce something close to the DJIC index.

There are 41 companies in the DJIC index that are also in the S&P 500 index. The IT and Consumer Discretionary sectors have 64 and 68 firms in the S&P 500, respectively. The overlap is a direct correlation to e-commerce.

We believe this concentration of firms in the DJIC index is what has produced larger annualized returns. In other words, the larger DJIC returns are due to e-commerce and provide further evidence of the nature of our consumer-driven economy.

Over time, the value of the overlap edge can be meaningful:

When we hear about retail dying, it can make retail investors wary of the legs of this bull market. But the data show that narrative is a little overblown and misleading. What we’re seeing is a transition to increased e-commerce retail, which is evident in the cumulative returns.

Where and how consumers buy things is changing. But make no mistake, people are spending (especially during the holidays) and it’s driving our economic growth.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.