2013 Will Be Ugly For Retail Stocks

“While some retailers managed to join in Wednesday’s post-fiscal cliff market rally, many big names showed declines even as the broader market gained 2%. I believe this merely foreshadows continued weak performance for retailers through 2013. While Congress managed to avert a disaster for the time being, current U.S. fiscal policy is unlikely to result in meaningful economic growth. Consumer spending will be particularly sluggish in 2013, and retailers dependent on discretionary spending will be hard pressed to maintain profits at 2012 levels, let alone grow them. I think that there are numerous potential short targets in the sector, and few if any stocks worth buying at this point.

The biggest drag on retail spending comes from the expiration of the 2% payroll tax reduction that has been in effect for the past 2 years. Individuals earning $50,000 will take home $1000 less in 2013, and those earning $100,000 will have $2000 less in take home pay. All in all, the government will “save” about $120 billion by ending this tax cut, and most of that amount will come out of consumer spending. Any way you slice it, a flat 2% increase in taxes on income up to $113,700 will impact spending habits for all but the very richest Americans. Meanwhile, the top 1% or so of taxpayers will face a cap on itemized deductions and a significant increase in the top tax bracket to 39.6%.

Additionally, government spending will be cut back over the course of 2013, which will create another drag on the economy. Tuesday’s legislation only delayed the “sequester” (a series of automatic, across the board budget cuts) for two months. Republicans in particular are sure to demand significant cuts to current and future spending, come February, to replace the sequester. These cuts will begin to exert a dampening effect on the economy by the time the 2013 holiday season rolls around.

Moreover, consumers still face rampant uncertainty as Republicans and Democrats appear to be gearing up for another big battle over the next two months…..”

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