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Is Consumer Spending Back in High Gear?

This week, the Wall Street Journal posted an article about how “Consumers Are Showing Little Fear of the ‘Fiscal Cliff.’” In it, writer Ben Casselman points to the fact that October’s consumer confidence reading was the highest since the Great Recession, and that a separate RBC Capital Markets survey showed a mere 14% of Americans have changed their spending or investing behavior as a result of the looming tax increases and spending cuts.

We can quibble over how this has happened — maybe it’s optimism about a solution after Election Day, maybe it’s an uninformed public distracted by football and the World Series, or maybe it’s just plain ol’ fatigue about the issue.

We also can quibble over whether the whole thing even makes sense.

But as a 16% year-to-date rally for the S&P 500 shows, it doesn’t pay to argue with the results — even if you don’t agree with the logic.

And the results on the consumer spending front are these:

  • Last Friday, the University of Michigan/Reuters’ consumer sentiment gauge rose to a preliminary reading of 83.1 in October, up nearly five points from the final reading of 78.3 in September. This was a big surprise, since economists expected a decline to 78 in October.
  • Based on this report, consumer sentiment now is at its highest level in more than five years (since September 2007), which bodes well for consumers going into the holiday shopping season.
  • This week, core retail sales increased 0.9% in September. That topped economists who had expected a 0.3% gain last month — with electronics jumping an impressive 4.5%, possibly due to the release of Apple‘s (NASDAQ:AAPL) new iPhone 5.
  • Also last Friday, the Labor Department announced that the Producer Price Index excluding food and energy (the so-called “core PPI”) was unchanged despite a 0.2% increase forecast. So much for inflation eroding purchasing power.
  • In slightly older news, last month, the National Association of Realtors said that sales of previously owned homes were up 7.8% in August to hit a two-year high.

It all paints a pretty rosy picture of the American consumer, doesn’t it?

Of course, persistent increases in food and energy prices could squash that positive sentiment. So could an unfavorable resolution to the fiscal cliff mess. Then there’s the issue of corporate earnings slowing down, GDP stagnant at a mere 1.3% annual rate in Q2, trouble in Europe and other big-picture fears that could weigh on headlines and attitudes going forward.

But as consumer sentiment’s recent rebound shows us, Americans sometimes see what they want to see. And if they want to be optimistic … well, who are we to argue with them? Maybe it’s simply time to get in line to capitalize on the trend instead.

Those looking to play a resurgence in consumer spending might want to jump into the SPDR S&P Retail ETF (NYSE:XRT) before it runs higher. The fund has outperformed the market year-to-date with a 20% return or so, but would be positioned to move higher if this trend continues — especially across the holidays. Top holdings include specialty retailers like Barnes & Noble (NYSE:BKS) and AutoNation (NYSE:AN) right now, but it also has allocations in mainstream megastores like Wal-Mart (NYSE:WMT) and Family Dollar (NYSE:FDO).

You also could play some of these specialty retailers directly if you believe in a particular “flavor” of consumer spending. The apparel segment historically has been a very lucrative momentum play if you pick the fashionable names. Newcomer Francesca’s (NASDAQ:FRAN) is up 77% year-to-date and could benefit big-time from a consumer rebound as it expands.

I personally am just dabbling at the edges of retail because, frankly, it doesn’t make sense to me to dive in headfirst. But if that’s what consumers are going to do … well, it’s better to profit from the trend than to argue with it.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple but no other stocks named here.

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