After seeing a wipe out of $1.8 trillion in market value in the first half of the year, investors in consumer stocks are nursing their wounds because of the soaring inflation and swollen inventories that crimp corporate profits.
The S&P 500 Consumer Discretionary Index has slumped 33%, its worst first half of the year on record in a market strained by rising costs and rising interest rates. The S&P 500 Index is the biggest loser because of the recession concerns that affect shoppers spending decisions. US consumer spending fell for the first time this year in May, signalling a cooling economy that is on a weaker footing.
As consumers continue to pull in their horns, I think these stocks can go lower, said Matt Maley, chief market strategist for Miller Tabak Co.
The rout this year was laid down in the quarterly earnings season when companies from Walmart Inc. to Target Corp. cut their annual profit forecasts. RH became the latest retailer to temper investor expectations for the year, while Bed Bath Beyond Inc. released a lackluster earnings report showing quarterly sales fell even more than anticipated.
The problem is that stores are awash in products that consumers don't want. At the same time, companies are grappling with surging fuel and labor expenses, and the challenge to pass on those costs to consumers.
In 2022, the consumer discretionary index plunged 66% as the boost to online sales from the Covid-19 pandemic fades. Bath Body Works Inc., Caesars Entertainment Inc. and Carnival Corp. are among the top decliners.
The only stocks in the 58 member index set to make gains for the first half of the year are Dollar Tree Inc., Dollar General Corp. and AutoZone Inc. They are up about 11%, 4% and 3% this year.
The retail stores of deep-discount reported stronger-than-expected quarterly results last month, with consumers beginning to trade down less expensive products. AutoZone has advanced as analysts from Morgan Stanley and Goldman Sachs Group Inc. upgraded their recommendations on shares, touting the largely non-discretionary nature of auto-part sales.
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Consumer discretionary stocks aren't cheap, despite being the worst performing group on the S&P 500, trading at around 20 times projected earnings, while the benchmark has an earnings multiple of 16.
The derating in consumer discretionary has been major, but I still don't think it's worth it to dip your toe into that pool just yet, Jonathan Mackay, Schroders investment strategist, said earlier this week.
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