NEW YORK Expectations of Federal Reserve tightening as well as economic concerns are weighing on a rebound of consumer discretionary stocks. However, some investors believe that the sector will outperform other parts of the market if there is a slowdown in growth in the coming months.
After a bruising first half, which saw it lose nearly 35%, the S&P 500’s consumer discretionary section (NASDAQ: AMZN) is now up 14.3%.
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After a strong summer rally, the S&P500 is down 1.9%. This is despite fears that the Fed will tighten rates faster than expected. This year, the index is down 19.1%.
These gains may be temporary in the consumer discretionary market. Ford shares fell almost 12% Tuesday as Ford reported a $1 billion inflation hit. This was in line with warnings from other sector constituents such as Walmart (NYSE WMT), and Target (NYSE TGT_) earlier this year. This sector has dropped 10% from its mid-August highs.
Some investors still believe that inflation and growth woes are already largely reflected by many consumer discretionary shares. They also believe these stocks will continue to be profitable as consumers purchase new cars and cruise tickets that they delay due to the pandemic. Randy Frederick, managing director for trading derivatives at Charles Schwab (NYSE SCHW), said.
Eric Marshall, a portfolio manger at Hodges Capital has been increasing positions in consumer discretionary stock including retailer Academy Sports and Outdoors Inc which is up 32.6% for quarter and Shoe Carnival Inc (NASDAQ: SCVL) Inc which is up 0.4%.
He said, “It’s not a question about whether there will be a recession or how severe it will become and how long it will last.” We are seeing a lot consumer stocks that we believe will be able to hold on and emerge from this situation in a better place.
The sector’s recent gains have been driven by bets that consumer spending on non essential items like vacations, coffee, and automobiles will remain comparatively strong despite the Fed’s fight against inflation.
Amazon.com, Tesla, and Chipotle Mexican Grill Inc, which make up approximately 50% of the sector’s weighting respectively, have seen their shares rise by 15% and 37.5% for the quarter. This is a major factor in the sector’s performance. A number of smaller constituents have also performed well, including shares in General Motors Co (NYSE GM and Chipotle Mexican Grill Inc [NYSE: CG], which are nearly 30% higher than the previous quarter.
Consumers remain optimistic. The August year ended with 5.2% wage growth. Consumer confidence increased more than anticipated the same month. U.S. retail sales also rebounded.
According to estimates by Goldman Sachs (NYSE, GS), the Fed’s rate increases will only slightly raise the unemployment rate to 4.1% from 3.7% at the end of 2023.
U.S. gasoline prices will continue to fall through the end-of-the year, as refiners overproduce fuel in order to replenish low inventories. According to J.P. Morgan Chase & Co., consumers spend approximately 80% of their savings at gas pumps, which should help boost discretionary stocks.
Terry Sandven, chief equity strategist, U.S. Bank Wealth Management, stated that “continued Fed rate increases imply that the broad economic remains on a growth track which typically is associated with strong consumers consumption trends.” “Consumers don’t appear to be overextended.”
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However, investors are always aware of supply chain and inflation woes. Despite recent gains, global fund managers remain bearish on consumer discretionary stock stocks. Nearly 25% of those surveyed this month by BofA Global Research are underweight the sector – which is the highest percentage of any group.
According to Sam Stovall (chief investment strategist at CFRA Research), shares will remain volatile until more evidence is available that the Fed has lowered inflation.
Stovall stated that “selling in this group will likely keep going until investors believe future inflation measures will ease.”