David Randall and Lewis Krauskopf
NEW YORK (Reuters) – Higher U.S. interest rates are weighing on the U.S. retail sector, where many stocks have been battered by months of tight monetary policy while a select few have risen sharply.
The Consumer Distribution and Retail Index is up nearly 14% this year, roughly matching the S&P 500’s year-to-date gain. However, much of the sector’s strength is concentrated in a small group of stocks, including heavyweight Amazon.com (NASDAQ:), which is up nearly 21% this year.
Meanwhile, stocks of companies targeting low-income consumers are struggling, in part because buyers in that segment have been hit harder by rising interest rates, analysts say. Among the biggest laggards are Dollar Tree (NASDAQ:), which is down nearly 27% year-to-date, and Dollar General (NYSE:), which is down nearly 9%.
The retail sector is one of several areas of the economy, other than real estate and consumer staples, that have come under pressure from higher rates. Earlier this week, the Federal Reserve reiterated that it needs to see more evidence of falling inflation before cutting borrowing costs.
“The low- and middle-income segment is being squeezed by gas and food prices,” said Greg Halter, director of research at Carnegie Investment Counsel. “They feel bad even though the economy is doing well.”
Consumers will be in focus next week when the US releases retail sales data on Tuesday. Analysts polled by Reuters expect retail sales to rise 0.2% in May. The weaker-than-expected results – following data earlier this week showing encouraging progress in inflation – could strengthen the case that the Fed will cut rates sooner rather than later.
Futures markets reflected increased investor expectations for a rate cut in September, although the Fed forecast it would only lower borrowing costs in December.
The varied performance of retail stocks has pushed investors to focus on companies whose consumers can continue to withstand higher interest rates, or those that offer discounts on name-brand household goods such as clothing or food, such as warehouse club company Costco Wholesale (NASDAQ :).
Holter’s fund has bought shares of companies such as Walmart (NYSE:), Costco and TJX Companies (NYSE:), whose business models emphasize consumer value. Their shares increased by 28%, 29% and 16%, respectively.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said he owned Costco and TJX, pointing to their strong management and inventory control.
“I think inflation will remain moderate and consumers will continue to look to get the most value for their dollars,” he said.
Bokeh Capital Partners owns shares of Urban Outfitters (NASDAQ:), which are up more than 20% this year. Kim Forrest, Bokeh’s chief investment officer, said Urban Outfitters’ strength as a fashion retailer has helped the company weather an inflationary environment, adding that “people are willing to make sacrifices to look good.”
Josh Cummings, portfolio manager at Janus Henderson Investors, believes areas such as online shopping will continue to thrive even if interest rates remain elevated.
He’s targeting companies like Carvana, whose shares have nearly doubled this year, and DoorDash (NASDAQ:), which is up about 13%.
“We’re not very excited about the consumer sector as a whole, but we think we’re in the early stages of some of these growth stories,” he said.