With Black Friday ahead, investors look to US consumer stocks

As the most important shopping period of the year approaches, some investors are betting shares of beaten-down consumer stocks will benefit if inflation keeps falling and retail sales stay strong.

Consumer discretionary stocks, a group whose members run the gamut from Amazon.com Inc and automaker Tesla Inc to retailer Target Corp, have been walloped by surging prices, with the S&P 500’s consumer discretionary sector falling nearly 33 per cent for the year to date compared with a nearly 17 per cent fall for the broader index, reports Reuters.

Yet recent data has shown signs that inflation may be ebbing in the face of stronger-than-expected retail spending, raising cautious optimism that the economy could avoid a recession or experience only a mild downturn. Investors poured a net $1.05 billion into consumer discretionary stocks in the past week, the sixth-largest weekly inflows since 2008, data from BofA Global Research showed.

The upcoming Black Friday, the day after the US Thanksgiving holiday and traditionally one of the year’s biggest shopping days, may give investors greater insight into the extent that consumers are opening their wallets.

“There’s some questions as to how strong the consumer really is, so this will be a tricky holiday season,” said Edward Yruma, an analyst at Piper Sandler. “Everybody is watching the strength of the consumer and so far the consumer has held.”

Yruma is bullish on retailers Nordstrom Inc and Target. He believes, however, it may be too early to bet on the sector as a whole since inflation remains high by historical standards while many on Wall Street fear the Federal Reserve’s monetary policy tightening may bring on a US recession.

To be sure, consumer stocks have had more than their fair share of woes this year.

Target shares plunged on Tuesday after the company warned of "dramatic changes" in consumer behaviour that were hurting demand. Amazon.com, the world's biggest online retailer, said on Oct. 27 it was preparing for slower growth because "people's budgets are tight" due to inflation.

The companies' shares are down 29.6 per cent and 43.5 per cent year-to-date, respectively.

While retail sales in October were strong, data suggests that subprime auto loan delinquencies are increasing and higher-income shoppers are starting to trade down, Morgan Stanley economists said in a note on Friday.