With Black Friday Approaching, Investors Eye U.S. Consumer Stocks By Reuters

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Written by David Randall

NEW YORK (Reuters) – With the most important shopping period of the year approaching, some investors are betting that battered consumer stocks will benefit if inflation continues to fall and retail sales remain strong.

Consumer Discretionary Equity, a group whose members run the gamut from Amazon.com Inc (NASDAQ:) and automaker Tesla (NASDAQ:) Inc to retailer targeting Corp (NYSE: ), has been overwhelmed by rising prices, as the consumer discretionary segment of the S&P 500 is down nearly 33% for the year so far compared to a drop of nearly 17% for the broader index.

However, recent data has shown signs that inflation may be ebbing in the face of stronger-than-expected retail spending, adding to cautious optimism that the economy can avoid a recession or only face a moderate contraction. Investors poured $1.05 billion into consumer discretionary stocks last week, the sixth largest weekly inflows since 2008, data from BofA Global Research shows.

The upcoming Black Friday, the day after the Thanksgiving holiday in the United States that is traditionally one of the biggest shopping days of the year, may give investors insight into how much consumers have opened up their wallets.

“There are some questions about how strong the consumer really is, so this is going to be a tough holiday season,” said Edward Yerma, an analyst at Piper Sandler. “Everyone is watching the power of the consumer and yet the consumer retains.” Yerma is bullish on the retail traders Nordstrom Corporation (NYSE:) Aim. But he thinks it may be too early to bet on the sector as a whole because inflation is still high by historical standards while many on Wall Street fear that the Fed’s monetary tightening could lead to a recession in the US. Undoubtedly, consumer stocks have suffered more than their fair share of problems this year. Target shares fell on Tuesday after the company warned of “dramatic changes” in consumer behavior hurting demand. Amazon.com, the world’s largest online retailer, said on Oct. 27 that it was preparing for slower growth because “people’s budgets are tight” due to inflation.

The companies’ shares are down 29.6% and 43.5% year-to-date, respectively. While retail sales were strong in October, data suggests that subprime auto loan delays are on the rise and high-income shoppers are beginning to decline, Morgan Stanley (NYSE:) said economists in a note on Friday.

“The consumer has been a pillar of strength this year, but as prices continue to rise and the labor market slows, consumers will have no choice but to cut back on spending,” the company’s economists wrote. The bank’s analysts downplay the importance of the consumer goods sector.

Still, others see reasons to remain hopeful — even in the face of a potential economic downturn.

“Recession fears are very calculated for this group,” said Jim Poulsen, chief investment strategist at Leuthold Group. “If we have a mild recession…they’re going to do very well from now on.” He is betting retailer, hotel and restaurant stocks will outperform the rest of the sector next year.

Low valuations of some companies could give investors room to maneuver if the economy slows, said Bobby Griffin, an analyst at Raymond James. His company has a strong “buy” of shares Home Depot Inc (NYSE: ), which trades at a discount of 15% to the historical forward price-to-earnings multiple.

“We’ve had this fear of inflation all year, and the consumer has held up pretty well so far,” he said.

At the same time, signals of consumer strength could serve as a red flag for the Fed as it battles inflation, bolstering the central bank’s stance to press ahead with the tightening that has pressured markets and sapped risk appetite this year.

Chris Zaccarelli, chief investment officer at the Independent Advisors Association, believes that signals that consumers are unfazed by rising prices could lead to a higher-than-expected peak in the Fed’s rate-hiking cycle.

“We suspect the worst is behind us,” he said.