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Gap Hit By Weak Consumer Confidence

Tuesday - 3/26/2013, 3:07pm  ET

Shares of Gap dropped as much as 3.1% in early Tuesday trading and remain down 2.6% with less than an hour left in the session. They weren't alone.

Sharing Gap's misery are retailers including Sears Holdings and American Eagle Outfitters , down 1.3% and 1.5%, respectively, while other clothiers suffer to a more limited extent.

What's behind the sell-off? In two words: consumer confidence. Today's Conference Board report on the ephemeral feel-good metric for American shoppers showed a drop from the "68" level of February to 59.7 in March. To put that in context, AP says that any number below "90" means the economy remains unhealthy.


Recent reports of strong home sales and declining unemployment levels notwithstanding, I doubt many of us were under the impression that America's economy was going great guns. And that makes today's reaction -- overreaction, I should say -- and overpunishment of Gap shares all the more remarkable.

If you're an investor and feel you need to respond to Conference Board estimates of how "confident" Americans are feeling -- buying when confidence is up and selling when it's down -- then you need to be aware of what you're in for. These confidence reports come out every month, and I can tell you one thing with 99% certainty: Whatever number the Conference Board reports in April will not be the 59.7 number we see today in March.

It'll be higher, or it'll be lower, and if you insist on hopping every time the Conference Board says "toad!", then you can expect to pay trading commissions each and every month of the year. You'll get dinged by the IRS for short-term gains (if you're lucky), as well. And likely as not, you'll have to reverse your decision just 30 days later.

A bit of Foolish advice
So what should you do instead? Invest for the long term. Don't buy or sell Gap based on an eternally fluctuating confidence number. Instead, buy or sell Gap based on whether you think the stock is worth its current 15 times earnings at its projected 9.4% growth rate.

Personally, I don't think it is. But whether you agree or disagree, at least you'll be trading on hard-and-fast numbers that won't change 12 times a year -- only four.

This article was originally published as Gap Hit By Weak Consumer Confidenceon

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