Retail stocks are looking for direction as interest rates remain high

Wall St week ahead

FE team
| Published: June 15, 2024 9:09:16 PM

NEW YORK, June 15 (Reuters): Increased U.S. interest rates are putting pressure on the U.S. retail sector, where shares of many companies have been battered by months of tight monetary policy while a select few have soared.
The S&P 500 Consumer Discretionary Distribution & Retail index is up nearly 14 percent this year, roughly keeping pace with the S&P 500’s gains this year. However, much of the sector’s strength is concentrated in a small group of stocks, including heavyweight, which is up nearly 21 percent this year.
Meanwhile, shares of companies that target lower-income consumers have struggled, in part because buyers in that segment have been hit harder by higher interest rates, analysts said. Among the biggest laggards are shares of Dollar Tree, which are down nearly 27 percent this year, and Dollar General, which are down almost 9 percent.
Retail is one of many sectors of the economy – along with real estate and consumer goods – that are under pressure from higher interest rates. The Federal Reserve reiterated earlier this week that it must first see more evidence that inflation is cooling before cutting borrowing costs.
“The lower to middle income segment is coming under pressure because of gas prices and groceries,” said Greg Halter, research director at Carnegie Investment Counsel. “They feel bad even though the economy is doing well.”
Consumers will take center stage next week when the US releases retail sales data on Tuesday. Analysts polled by Reuters expect retail sales to grow 0.2 percent in May. Weaker-than-expected results — after data earlier this week showed encouraging progress on inflation — could strengthen the case for the Fed to cut rates sooner rather than later.
Futures markets reflected increased investor expectations of a rate cut in September, although the Fed forecast that borrowing costs would not fall until December.
The divergent performance of retail stocks has prompted investors to focus on companies whose consumers can continue to tolerate higher interest rates, or those that offer discounts on name-brand household items such as clothing or groceries, such as warehouse club company Costco Wholesale.
Halter’s fund has bought shares of companies like Walmart, Costco and TJX Companies, whose business models emphasize consumer value. Their shares are up 28 percent, 29 percent and 16 percent respectively.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said he has owned Costco and TJX Companies, pointing to their strong management and inventory controls.
“I think inflation will remain subdued and consumers will still try to get the most out of their dollars,” he said.
Bokeh Capital Partners owns shares of Urban Outfitters, which are up more than 20 percent this year. Kim Forrest, Bokeh’s chief investment officer, said Urban Outfitters’ strength as a fashion merchandiser has helped the company weather the inflationary environment, adding that “people are making sacrifices to look good.”
Josh Cummings, portfolio manager at Janus Henderson Investors, believes areas such as online shopping will continue to flourish even if interest rates remain high.
He focuses on companies like Carvana, whose shares have nearly doubled this year, and DoorDash, whose shares are up about 13 percent.
“We’re not very excited about the consumer sector in general, but we do think we’re in the early stages of some of these growth stories,” he said.