Consumer discretionary and staple stocks traded in opposite directions on Tuesday, reflecting encouraging U.S. retail sales for April but disappointing earnings and forecasts from chain retailer Walmart (WMT-US), which will Blame it all on high inflation.
Walmart closed down 11.38% on Tuesday after it reported a 25% drop in first-quarter profit and lowered its full-year profit forecast due to rising fuel and labor costs. At the same time, Walmart also highlighted essential inflation at multi-decade highs, compressing consumer spending on non-essential items.
It was Walmart’s biggest one-day drop since its 11.79% plunge on October 16, 1987, the last trading day before “Black Monday” when the Dow collapsed more than 22%.
Target (TGT-US), which is due to report on Wednesday, fell more than 1.4 percent, dragged down by Walmart. Dollar General (DG-US) and Dollar Tree (DLTR-US) both fell about 3 percent.
While the S&P 500 consumer staples sector fell 1%, the consumer discretionary sector rose 2.7% as shares of some apparel, travel and automakers rose.
U.S. retail sales rose strongly in April, data showed, suggesting improving supplies and consumers spending more on cars. Also, consumers are spending more at restaurants, boosting the economy at the start of the quarter.
Some analysts believe that consumer discretionary and staple stocks have moved in opposite directions because soaring inflation has hit customers with lower incomes, who are also regulars at Walmart or dollar stores, but higher-priced stores. immune to inflationso shares rose, such as Under Armour (UA-US) up 4%, Ralph Lauren (RL-US) up about 3.8%, and PVH Corp (PVH-US) up 3.4%.
Eric Theoret, global macro strategist at Manulife, said higher food and energy prices caused by the Russian-Ukrainian war are necessities that consumers cannot avoid, so consumers with lower incomes will really feel the income shock.
Theoret said: “In terms of spending power, low-income consumers are closer to exhausting their savings during the epidemic. In terms of income, although wages have grown steadily, the growth rate is less than 20%, which is not enough to keep up with the pace of inflation. , leading to erosion of consumer purchasing power.”
Shares of packaged-food companies also followed the trend, such as Kraft Heinz (KHC-US) down 2% and General Mills (GIS-US) down 0.75%. Walmart previously said consumers were switching from big-name brands to cheaper store-owned brands.
Ally’s chief market and currency strategist, Lindsey Bell, noted that while some wealthier consumers also switched to grocery shopping, retail sales data showed that those consumers still had money to spend.
Bell said: “These consumers are still spending money, consumers are not dying, they are willing to pay for services and experiences, which may be one of the reasons for the rise in the stock price of clothing stores, because to go out to different activities requires different combinations. apparel.”
Also, the staples sector is down just 1% so far this year, outperforming the consumer discretionary sector, which has tumbled 25.9%. “Investors are starting to realise that there has been a general sell-off in consumer discretionary stocks in favor of staples.”
Jim Paulsen, chief investment strategy officer at The Leuthold Group, noted that while consumers remain wary and fearful, “they’re in really good shape right now.”
Paulsen said almost all of the fear is about inflation, but inflation stabilizes, which means investors and consumers can also stop worrying about higher bond yields, central bank rate hikes or an impending recession. thing.
“If inflation ends, consumer confidence will go up, and I’m sure the general public and Wall Street agree on that,” Paulsen said.
