The outlook on consumer spending will drive stocks in the week ahead

2/17/08 4:17 pm ct

By Dave Harris

The data suggested a weak consumer and a sluggish economy. The University of Michigan's February reading on consumer sentiment came in lower than expected and registered a decline from the previous month. Fed chairman Ben Bernanke spoke of slow economic growth in 2008, with conditions improving by year's end. The tone for today’s market is downbeat and volatile. There’s no trading Monday in observance of president's day. Retailer Wal-Mart (WMT) releases earnings Tuesday. On Wednesday, the labor department reports on consumer inflation with the CPI. Last month's housing starts and building permits data will likely confirm our already lowered expectations. I believe credit conditions and the sluggish housing environment will continue to pressure spending and generate further volatility in stocks.

On a positive note, higher energy costs helped January retail sales come in better than expected. Even the core figure, excluding autos, looked good. So maybe spending is a little better than we think. I think oil and gas company Chevron (CVX) is a good buy here. The stock was just added to the Dow Jones industrials. Bank of America (BOA), along with Chevron, took the places of Altria (MO) and Honeywell (HON). Chevron is a good core-portfolio holding, plus you get a decent 2.8 percent dividend yield.

A food company such as Kellogg (K) is a perfect defensive play in this environment. It's not too late to buy because I see continued upside. The stock is at $51, on the way back to its 52 week high of 56.89. Plus, Berkshire Hathaway (BRK-A) recently bought a big chunk of Kraft (KFT). You never should question Warren Buffett.

Another significant piece of data will be Wednesday's release of the Fed meeting minutes from January 29^th and 30^th. Analysts will dissect the language in the report, likely resulting in further market volatility. Like I've been saying the past few months, your best bet is to stay diversified and overweight on the defensives.