Analysis: Rally in U.S. consumer stocks teeters with Fed, inflation in focus

Shoe Station

21/09/2022 06:00

By David Randall
    NEW YORK, Sept 21 (Reuters) - Expectations of more Federal
Reserve tightening and economic worries are weighing on a
rebound in consumer discretionary stocks, though some investors
believe the sector will outperform other areas of the market if
growth begins to wobble in coming months. 
    The S&P 500’s consumer discretionary sector  .SPLRCD , a
group of companies ranging from Amazon.com Inc  AMZN.O  and
Tesla Inc  TSLA.O  to discount retailer TJX Companies Inc
 TJX.N , is up 14.3% for the quarter to date following a
pummeling when it lost nearly 35% in the first half of the year.
    The broader S&P 500, by comparison, is up just 1.9% for the
quarter, after a summer rally crumbled on worries the Fed will
tighten rates at a faster clip than previously anticipated. The
index is down 19.1% this year.  urn:newsml:reuters.com:*:nL1N30N1O1
    The gains in the consumer discretionary sector may prove
fleeting. Shares of Ford  F.N  fell nearly 12% on Tuesday after
the automaker flagged a bigger-than-expected $1 billion hit from
inflation, echoing warnings from sector constituents like
Walmart and Target earlier in the year. The sector has fallen
some 10% from its recent mid-August highs.  urn:newsml:reuters.com:*:nL4N30R3AY
 urn:newsml:reuters.com:*:nL3N2XB2ML
    Still, some investors believe inflation and growth woes may
already be largely reflected in many consumer discretionary
shares. At the same time, they are betting these stocks can
continue to benefit as consumers make purchases ranging from
cruise tickets to new cars that they delayed early in the
pandemic, said Randy Frederick, managing direction for trading
and derivatives at Charles Schwab.
    Eric Marshall, a portfolio manager at Hodges Capital, has
been adding to positions in consumer discretionary stocks
including retailer Academy Sports and Outdoors Inc  ASO.O ,
which is up 32.6% for the quarter, and Shoe Carnival Inc
 SCVL.O , which is up 0.4% for the quarter. 
    "It's not even a question as to whether there's going to be
a recession, but how severe it will be and for how long it will
last," he said. "But we're seeing a lot of consumer stocks that
we think will hold up and come out of this in a better
position." 
    Bets that consumer spending on non-essential items such as
vacations, coffee and automobiles will stay comparatively strong
even if the Fed's battle against inflation hurts growth have
helped drive the sector's gains in recent months. 
    Amazon.com and Tesla, which together make up about 50% of
the sector's weighting, are up 15% and 37.5% respectively for
the quarter, fueling much of its performance. Many smaller
constituents have also outperformed, including shares of General
Motors Co and Chipotle Mexican Grill Inc  CMG.N , which are up
nearly 30% over the same time. 
    There are signs consumers remain optimistic. Wages rose 5.2%
over the year that ended in August, while consumer confidence
rose more than expected the same month and U.S. retail sales
rebounded.  urn:newsml:reuters.com:*:nL1N30M154 urn:newsml:reuters.com:*:nL1N30813F
    The Fed's rate hikes, meanwhile, will only slightly increase
the unemployment rate to 4.1% by the end of 2023 from its
current 3.7%, Goldman Sachs estimates. 
    At the same time, U.S. gasoline prices are expected to
continue falling through the end of the year as refiners
overproduce fuel to rebuild low inventories. That should
continue bolstering discretionary stocks, since consumers spend
roughly 80% of their savings at the pump on restaurants,
entertainment or at department stores, according to estimates by
J.P. Morgan Chase & Co. urn:newsml:reuters.com:*:nL1N30D2OD
    "Continued Fed rate hikes imply that the broad economy
remains on a growth track, which typically is associated with
strong consumer consumption trends," said Terry Sandven, chief
equity strategist at U.S. Bank Wealth Management. "Consumers do
not appear to be overextended."
    Inflation and supply chain woes, however, are never far from
investors' minds. Global fund managers have remained bearish on
consumer discretionary stocks despite recent gains, with nearly
25% of those surveyed by BofA Global Research this month
underweight the sector - the most of any group. 
    Shares will likely remain volatile until there is more
evidence that the Fed has inflation under control, said Sam
Stovall, chief investment strategist at CFRA Research.
    "Selling in this group will likely continue until investors
again believe that future inflation measures will begin to
ease," Stovall said. 

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Consumer Discretionary Stocks Lead S&P 500 for the Quarter to
Date    https://tmsnrt.rs/3DGb6EH
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 (Reporting by David Randall; Editing by Ira Iosebashvili and
Josie Kao)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))