Investors watch retail stocks as inflation bites

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Investors watch retail stocks as inflation bites

NEW YORK Reuters - Investors are closely watching U.S retail stocks as a barometer of consumer confidence as inflation bites, as the most important shopping season of the year begins on Friday.

Consumer discretionary stocks, measured by the S&P 500 Consumer Discretionary Sector - the group of companies that benefit from spending on retail, restaurants, and vacations, are down 32% for the year to date, more than double the 15.5% decline in the broad S&P 500 as consumers have been walloped by rising inflation and the swiftest increase in interest rates since the 1970 s.

Jim Paulsen, chief investment strategist at the Leuthold Group said these stocks are a clue as to how fast the economy is slowing and whether slowing inflation is lifting confidence on Main Street.

U.S. consumer prices went up at a slower pace than expected in October, pushing the annual increase below 8% for the first time in eight months, and helping spark a rally in the broad U.S stock market, after hovering near 40 year highs.

The National Retail Federation predicts that holiday sales, including e-commerce, will go up between 6% and 8% during November and December, between $942.6 billion and $960.4 billion. That would come in at the same level as the 13.5% jump reported last year and the 9.3% gain in 2020.

Retailers began running unusually early discounts this year to entice shoppers.

The companies did not respond to a request for comment.

Even with steep discounts, consumers will still have to spend more for popular products like a PJ Masks toy car or Mattel Inc's Mega Hauler semi-truck because prices have risen faster than promotions, according to data provided by DataWeave.

Mattel didn't respond to a request to comment.

The consumer sentiment poll from the University of Michigan was revised up Wednesday to up to 56.8 from 54.7, beating the consensus expectation of 55.0 but still below the 59.9 index level from October. The survey found that expectations for purchasing long-lasting manufactured goods fell 21% due to high interest rates and high prices.

The sentiment data has been sliding as consumers try to reconcile solid economic and labor market conditions against expectations of a recession and harmful inflation, said Thomas Simons, an economist at Jefferies LLC.

As consumers emerge from the coronavirus epidemic, retailers have struggled to change their offerings, leaving some companies bogged down with excess inventory.

Walmart Inc. lifted its annual sales and profit forecast on the back of expectations that demand for groceries would hold up despite higher prices. Target forecast a surprise drop in holiday-quarter sales.

Shares of Walmart are up 7.5% for the month to date, while shares of Target are down 1.2%.

Macy's Inc. raised its annual profit forecast last week. The company's shares are up nearly 12% month-to-date. Kohl's forecast withdrew its forecast as it faces weaker demand due to rising prices. The company's shares are up 6.7% month-to-date.

Walmart, Macy's and Kohl's didn't respond immediately to requests for comment.