Investors Focus on Consumer Stocks Before Black Friday

As the most important shopping season of the year approaches, some investors wager that shares of beaten-down consumer companies will appreciate if inflation continues to decrease and retail sales stay healthy.

Consumer discretionary stocks, including Amazon.com Inc (NASDAQ:AMZN), automaker Tesla Inc (NASDAQ:TSLA), and retailer Target Corp (NYSE:TGT), have been battered by rising prices, with the consumer discretionary sector of the S&P 500 falling nearly 33% year-to-date compared to a drop of nearly 17% for the broader index.

Recent data, however, suggest that inflation may be dropping in the face of stronger-than-expected retail spending, giving rise to cautious optimism that the economy may avoid or endure just a minor recession. According to statistics gathered by BofA Global Research, the last week witnessed the sixth highest weekly inflows into consumer discretionary stocks since 2008.

Black Friday, the day after Thanksgiving in the United States and historically one of the busiest shopping days of the year, may give investors extra information regarding the extent to which consumers are opening their wallets.

This holiday season will be difficult, according to Piper Sandler analyst Edward Yruma. "There are questions about the consumer's strength," he remarked. "Everyone is witnessing the consumer's resilience, which has thus far persisted" Yruma has a constructive outlook on Nordstrom Inc (NYSE:JWN) and Target. However, he believes it may be too early to wager on the industry as a whole, given that inflation remains high relative to historical norms and many Wall Street investors fear that the Federal Reserve's tightening of monetary policy would produce a U.S. recession. This year, consumer stocks have seen more than their fair share of challenges. On Tuesday, Target's stock price plunged as the company warned that "dramatic shifts" in consumer behavior were significantly harming demand. As a result of inflation, Amazon.com, the largest online retailer in the world, declared on October 27 that "people's budgets are tight."

The companies' shares are down 29.6% and 43.5%, respectively, for the year to date. Economists at Morgan Stanley (NYSE:MS) published a note on Friday stating that while October retail sales were strong, there is indication that subprime auto loan delinquencies are increasing and higher-income consumers are trading down.

The consumer has been a pillar of strength this year, but if interest rates continue to increase and the labor market continues to falter, consumers may be forced to curtail their spending. The bank's analysts are underweight in the consumer discretionary industry.

Others, meanwhile, see reasons to remain positive despite the potential of an economic slump.

The Leuthold Group's chief investment strategist, Jim Paulsen, commented, "This group is so priced for recession concerns." If a modest recession occurs, their future performance will be outstanding. He predicts that shares of retailers, hotels, and restaurants will outperform the rest of the business over the course of the following year.

According to Bobby Griffin, an analyst at Raymond James, the lower prices of some corporations may also provide investors some wiggle space if the economy slows. According to his firm's suggestion, Home Depot Inc (NYSE:HD) shares are trading at a 15% discount to their historical projected price-to-earnings ratio.

He added, "We've been fearful about inflation all year, but consumers have fared rather well thus far."

In spite of this, signs of consumer resilience might be a red flag for the Fed's inflation-fighting efforts, bolstering the case for the central bank to sustain the monetary policy tightening that has pinched markets and depleted risk appetite this year.

Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, believes that signs that consumers are unfazed by higher interest rates might force the Fed's rate-hiking cycle to peak earlier than anticipated.

He stated, "We are skeptical that the worst is past."