HO-HO-HOPES COULD GET AHEAD OF RETAILERS´ REALITY / THE WALL STREET JOURNAL

Heard on the Street

Ho-Ho-Hopes Could Get Ahead of Retailers’ Reality

Retail Stocks Rebound Ahead of the Holidays

By Justin Lahart

Nov. 14, 2014 4:26 p.m. ET

Christmas is coming after all. That doesn’t mean everybody is going to get a pony.

A short month ago, investors were worried that the holiday shopping season would be a bust. Back-to-school shopping, believed by many to be a harbinger for the holidays, had been soft. Promotional activity and liquidation sales from struggling retailers, like Sears Holdings , threatened to cut into other stores’ results. Global growth worries were hitting the stock market, threatening to sap confidence.

It turned out investor jitters were overdone, as witnessed by a sharp rebound for retail stocks.

Now, though, the danger is that markets overshoot the other way.

Concerns have obviously fallen away. Friday, the Commerce Department reported that retail sales rose 0.3% in October from September—better than the 0.2% economists were looking for—and that it had revised upward sales figures for August and September.

A preliminary reading showed the University of Michigan’s consumer-sentiment index rose to 89.4 this month from 86.9 in October, bringing it to its highest level since July 2007. Coming on top of Wal-Mart Stores ’ unexpectedly strong quarterly results Thursday, it looks as if holiday sales will be just fine.

Not that that should ever have been in doubt. Consider: The Labor Department reported there were 2.6 million more jobs in the U.S. last month than a year earlier, with average weekly earnings, in aggregate, 4.8% higher. The share of income Americans need to spend paying down debt is near a record low. Regular gasoline, averaging $2.91 a gallon last Monday, is at a four-year low. So shoppers have plenty of firepower. With an improving economic backdrop, some of it is going to be directed at holiday shopping.

That good news has begun to get reflected in stocks. The S&P 500 Retailing Index has rallied about 10% from its lows of last month to a record. As the reality of a good holiday season for the stores unfolds, retailing shares could go even higher. That could be where the risk lies.

The reality of holiday sales is that even when the economy is shaky, they are rarely as weak as investors worry they might be; for some reason, people still buy gifts for their kids and spend a bit more than they’d planned to. Conversely, even when times are good, people tend not to behave quite as extravagantly as investors sometimes hope.

Given the quick turnaround for retailing stocks, this could be one of those years when expectations run too far in front of reality. Moreover, strong holiday sales wouldn’t alleviate the big problems many stores face. The country will still have too many stores in too many of the wrong places. Amazon.com will still be chipping away at market share and profit margins.

So, yes, retail stocks could be higher by the end of the year than they are now. But when the celebration is over and they are facing the harsh light of a new year, investors may have some regrets.