American consumers took an increasingly optimistic view of the economy in September, per a preliminary reading of consumer sentiment. The University of Michigan consumer sentiment index increased to a six-month high, nearing a 14-year peak and beating most estimates. A more favorable outlook for jobs and income was the primary catalyst for the month’s gains.

At this moment, the biggest worry for consumers seems to be the negative fallout from tariffs. But such fears are being largely ignored for the moment, as evident from last week’s bullishness on the bourses. Other economic indicators also support the optimism. This is why it is still a good time to invest in consumer discretionary stocks.

Optimism About Jobs, Income Boosts Index

According to the University of Michigan's Surveys of Consumers, sentiment increased from 96.2 in August to 100.8 in September. This is significantly higher than the estimated level of 96.6 generated by a Thomson Reuters survey. It is also the second-highest reading registered since 2004.

The gauge of current economic conditions increased from 110.3 to 116.1. Also, increasingly favorable prospects for jobs and incomes boosted the index of consumer expectations from 87.1 to 91.1, its highest level since July 2004.

According to Richard Curtin, the chief economists of the survey, the jump in consumer sentiment was “largely due to more favorable prospects for jobs and incomes.” Curtin added that consumers currently believe that steady economic growth “would produce more jobs and an even lower unemployment rate during the year ahead.”

Tariff Worries Continue to Weigh on Consumers

According to economists at Oxford Economics, the biggest worry for consumers “continues to be the anticipated negative effects from trade policy”. The report echoed this view, stating that fears of the detrimental impact of the tariffs on the domestic economy were cited by “nearly one-third of all consumers in the past three months, up from one-in-five in the prior four months.”

However, the bourses have largely ignored trade concerns this week with the S&P 500 gaining for the fifth straight session. Investor sentiment has also been buoyed by reports that the United States and China are attempting to restart trade talks. Also, the latest jobless claims’ numbers remained flat at a 49-year low. U.S. GDP is also widely expected to grow by at least 3% in the third quarter.

Our Choices

The initial reading of the University of Michigan’s consumer sentiment index suggests that consumers’ views about the economy remain hugely optimistic. A vibrant job market and robust economic growth are the primary catalysts for this level of optimism.

The only impediment to economic well-being is tariff-related worries. However, the recent effort to restart trade talks indicates that good sense could ultimately prevail. This is why it still makes sense to add consumer discretionary stocks to your portfolio. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and VGM Score of A.

Guess?, Inc. (GES - Free Report) designs, markets, distributes and licenses casual apparel and accessories for men, women, and children as per the American lifestyle and European fashion sensibilities.

Guess?’s projected growth rate for the current year is 48.1%. The Zacks Consensus Estimate for the current year has improved 3% over the last 30 days.

Johnson Outdoors Inc. (JOUT - Free Report) is a designer, manufacturer and marketer of watercraft, diving, outdoor equipment, and marine electronics products on a global basis.

Johnson Outdoors’ projected growth rate for the current year is 67.2%. The Zacks Consensus Estimate for the current year has improved 11.4% over the last 60 days.

Bridgepoint Education, Inc. (BPI - Free Report) provides postsecondary education services.

Bridgepoint Education’s projected growth rate for the current year is 8.5%. The Zacks Consensus Estimate for the current year has improved by more than 100% over the last 60 days.

Callaway Golf Company (ELY - Free Report) is a designer, manufacturer, and seller of golf clubs and related accessories.

Callaway Golf’s projected growth rate for the current year is 87.9%. The Zacks Consensus Estimate for the current year has improved 23.5% over the last 60 days.

Summer Infant, Inc. (SUMR - Free Report) is a designer, marketer, and distributor of branded durable juvenile health, safety and wellness products (for ages up to three years), which are sold principally to large U.S. retailers.

Summer Infant’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved 50% over the last 60 days.