2023-06-09 13:23:08 ET
Summary
- Retail stocks have seen a major surge this week, particularly benefiting from the movement in small caps.
- SPDR® S&P Retail ETF topped relative to the S&P 500 in March of 2021.
- Certain sub-sectors within the retail industry face unique challenges that can impact stock performance.
The consumer is the absolute king in everything you do. - Freddie Wong.
Retail stocks, covered by SPDR® S&P Retail ETF (XRT), have seen a major surge this week, particularly benefiting from the movement in small-caps (IWM). On the one hand, all of this is consistent with a risk-on environment, which, as I noted in The Lead-Lag Report on Seeking Alpha, all signals flipped to prior to this week. I, however, remain wary of just how long the environment can persist given earlier noted defensive sector capitulation.
Comparing Retail Stocks with S&P 500
The XRT ETF topped relative to the S&P 500 Index (SP500) in March of 2021. This was around the time I believe the bear market started, given weakening breadth and the collapse in high beta speculative names since then. The price ratio looks ugly, but it still looks like a downtrend is intact despite a lot of excitement about a continuation of strength.
Factors Affecting Retail Stocks
Consumer Behavior and Spending
One of the key factors that determines the performance of retail stocks is consumer behavior and spending patterns. Concerns about inflation and the impact of rising prices on consumer spending may temper this optimism and create headwinds for retail stocks. Combined with surging credit card rates, I remain skeptical that consumer optimism can continue. Consumer confidence still looks weak.
Industry-Specific Challenges
Certain sub-sectors within the retail industry face unique challenges that can impact stock performance. For example, the apparel retail sector has experienced a decline in sales growth and operating margins in recent years, which can negatively affect stock valuations. Additionally, supply chain disruptions and labor issues can create further challenges for retailers across various industries. But the broader point here is that the XRT ETF failing to recover would be the market itself saying demand pull inflation is about to cool off significantly.
Potential Scenarios for Retail Stocks
In light of the factors discussed above, there are several possible scenarios for the performance of retail stocks in the coming months:
- Continued Outperformance : If consumer spending remains strong and economic conditions continue to improve, retail stocks could maintain their bullish trend and outperform the broader market. This would be consistent with the idea that we are actually in a secular bull market.
- Temporary Rally : The recent gains in retail stocks could be a short-lived rally driven by market speculation. In this scenario, the industry could experience a further correction once the initial enthusiasm fades.
- Underperformance : If economic headwinds intensify and consumer spending weakens, retail stocks could revert to their historical trend of underperformance relative to the S&P 500.
Conclusion
While there is potential for continued SPDR® S&P Retail ETF outperformance, the risks associated with overvaluation and economic headwinds cannot be ignored. For those already holding positions in retail stocks, it may be prudent to consider taking some profits to minimize exposure to potential downside risks. Yes - it was a good week. No - it's not clear the downtrend is over. And with investor sentiment reaching extreme greed, being contrarian on what happens next to overall market direction might be worth considering.
For further details see:
XRT: Fake-Out Or Melt-Up?