Relation between consumer confidence and retail sector
Consumer confidence is one of the major factors that affect consumer spending, so the retail sector has a direct relationship with this metric. Investors look at consumer confidence to understand the prospects of retail companies, because when people feel secure with future income prospects and employment conditions in the economy, consumer spending increases.
A sense of security gives consumers the liberation to spend more and save less for the future. This is a big plus for the retail sector and its future, as it directly affects the top line sales of companies. This relation can be seen very well by comparing the Consumer Confidence Index and the SPDR S&P Retail ETF (XRT).
As can be seen from the above chart, XRT, which could be substituted for the retail sector of the United States, has shown a positive relationship with the Consumer Confidence Index. The correlation between the index and the ETF stands at around 0.90 since 2010.