Wall St Week Ahead With Black Friday ahead, investors are looking to US stocks to buy | So Good News
NEW YORK, Nov 18 (Reuters) – As the most important shopping season of the year approaches, some investors are betting that faltering consumer shares will benefit if inflation continues and retail sales remain strong.
Consumer discretionary, a group whose members run the gamut from Amazon.com Inc ( AMZN.O ) and automaker Tesla Inc ( TSLA.O ) to retailer Target Corp ( TGT.N ), was surrounded by higher rates, and the S&P. The 500’s Consumer discretionary sector is down about 33% year-to-date compared to about 17% down for the broader index.
However, recent data has shown signs that inflation is easing due to stronger than expected spending, raising hopes that the economy can avoid recession or just slow down. Investors poured $1.05 billion into consumer-buying stocks last week, the sixth largest weekly increase since 2008, BofA Global Research showed.
This coming Friday, the day after the US Thanksgiving holiday and one of the busiest shopping days of the year, could give investors more insight into how shoppers are opening their wallets.
“There are questions about consumer strength, so this is going to be a tough holiday season,” said Edward Yruma, an analyst at Piper Sandler. “Everyone is seeing the power of the consumer and so far the consumer has caught on.”
Yruma is bullish on retailers Nordstrom Inc (JWN.N) and Target. He believes, however, that it may be too early to bet on the sector as a whole as inflation remains at record highs while many on Wall Street fear that the Federal Reserve’s monetary tightening could trigger a US recession.
To be sure, consumer stocks have had more than their share of problems this year.
Shares in the target fell on Tuesday after the company warned of a “significant change” in consumer behavior that is hurting demand. Amazon.com, the world’s largest online retailer, said on Oct. 27 plans to grow slowly because “public funds are limited” due to inflation.
The company’s shares are down 29.6% and 43.5% year to date, respectively.
Although retail sales were strong in October, data shows delinquencies on subprime auto loans are increasing and high-income buyers are starting to sell, Morgan Stanley economists said Friday.
“The consumer has been a pillar of strength this year, but as prices rise and the labor market shrinks, consumers will have no choice but to withdraw,” the company’s economists wrote. Bank professionals are very few in the discretionary consumer sector.
Others, however, see reasons to remain steadfast – despite the economic crisis.
“Fears of a recession are very expensive for the group,” said Jim Paulsen, chief financial officer at Leuthold Group. “If we’re going to have a financial crisis … they’re going to do well from here on out.” They are betting that the retail, hotel and restaurant sectors will win the entire sector in the coming year.
Low valuations for some companies could also provide opportunities for investors if the economy slows, said Bobby Griffin, an analyst at Raymond James. His firm has a strong “buy” rating on shares of Home Depot Inc (HD.N), which are trading at a 15% discount based on their price-to-earnings record.
“We’ve had this fear of inflation all year and consumers have done very well so far,” he said.
At the same time, signs of consumer strength may also be a red flag for the Fed to fight inflation, encouraging the central bank to continue with the tight monetary policy that has pressured the markets and eliminated the risk appetite this year.
Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, believes signs that consumers are not concerned about inflation could lead to a higher-than-expected interest rate hike by the Fed.
“We doubt that the worst is behind us,” he said.
Reporting by David Randall in New York Editing by Ira Iosebashvili and Matthew Lewis
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