Written by David Randall and Louis Krauskopf
NEW YORK (Reuters) – Rising U.S. interest rates are weighing on the U.S. retail sector, with several companies' stocks hurt by months of tight monetary policy while the shares of a few companies rose.
The consumer discretionary distribution and retail index is up about 14% this year, roughly in line with the S&P 500's year-to-date gains. However, much of the sector's power has been concentrated in a small group of stocks, including heavyweight Amazon (NASDAQ:), which is up nearly 21% this year.
Meanwhile, stocks of companies focused on lower-income consumers are struggling, partly because buyers in that sector are more affected by rising interest rates, analysts said. Among the biggest laggards are shares of Dollar Tree (NASDAQ:), which is down roughly 27% year-to-date, and Dollar General (NYSE:), which is down roughly 9%.
The retail sector is one of several areas of the economy – along with real estate and consumer staples – that have come under pressure due to rising interest rates. The Fed stressed earlier this week that it needs to see more evidence of cooling inflation before lowering borrowing costs.
“The low- to middle-income segment is under pressure from gas and grocery prices,” said Greg Halter, director of research at Carnegie Investments. “They feel bad even though the economy is in good shape.”
The consumer will be in focus next week when the US reports retail sales data on Tuesday. Analysts polled by Reuters expect retail sales to grow 0.2% in May. The weaker-than-expected results — following data released earlier this week that showed encouraging progress in inflation — could strengthen the Fed's case for easing interest rates sooner rather than later.
Futures markets reflected investors' growing expectations for a rate cut in September, even though the Fed expected it would only lower borrowing costs in December.
The mixed performance of retail stocks has prompted investors to focus on companies whose customers can continue to tolerate high interest rates or that offer discounts on brand-name household items like clothing or groceries, such as warehouse club company Costco Wholesale (NASDAQ:).
The Halter Fund buys shares of companies such as Walmart (NYSE:), Costco, and TJX Companies (NYSE:) whose business models emphasize value to the consumer. Their shares rose 28%, 29% and 16%, respectively.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said he owns Costco and TJX, citing their strong management and inventory controls.
“I think inflation will remain moderate and consumers will still be looking to get the most out of their dollars,” he said.
Bokeh Capital Partners owns shares of Urban Outfitters (NASDAQ:), which are up more than 20% this year. Urban Outfitters' strength as a fashion retailer has helped the company weather the inflationary environment, said Kim Forrest, Bokeh's chief investment officer, adding that “people will sacrifice to look good.”
Josh Cummings, portfolio manager at Janus Henderson Investors, believes areas such as online shopping will continue to boom even if interest rates remain high.
He's been targeting companies like Carvana, whose shares have nearly doubled this year, and DoorDash (NASDAQ:), whose shares are up about 13%.
“We're not super excited about the consumer sector overall, but we think we're in the early stages of some of these growth stories,” he said.
