Investor optimism about U.S. holiday sales is declining, as signaled by the performance of two small-cap stock groups.
The Russell 2000 Consumer Discretionary Index has trailed the Russell 2000 Consumer Staples Index by 2 percentage points since Nov. 25 as of 10 a.m. in New York, reversing about one-third of its relative gains during the prior two months. The discretionary group -- made up of 280 companies including boat and bowling-ball manufacturer Brunswick Corp. and footwear maker Steven Madden Ltd. -- outpaced the staples, which include Rite Aid Corp., TreeHouse Foods Inc. and 63 other businesses, by 5.4 percentage points between Sept. 23 and Nov. 25.
The performance of these indexes in the past week shows investors are less sanguine about the U.S. holiday season, said Tim Ghriskey, chief investment officer at Solaris Group LLC in Bedford Hills, New York, which manages over $1.5 billion. They appear to be bracing for a very modest increase in sales now that the shopping rush has begun, he said, adding that this shift comes as some retailers have cut their earnings forecasts.
“The market is telling us sales volumes and margins are becoming more of a concern,” Ghriskey said. “The holiday season may be more disappointing than investors previously thought, especially in the U.S. and particularly for boutique-type retailers.”
Investing in these two groups of stocks is a “classic trade” useful for gauging investor expectations for consumption -- particularly timely with less than a month until Christmas, said Steven DeSanctis, Bank of America Corp.’s strategist for small-cap equities in New York. Companies in these indexes have “very little overseas exposure,” so they reflect spending by Americans, he said, adding that about 85 percent of sales for both groups come from the U.S.
The decline in the economically sensitive discretionary group relative to essentials comes after several U.S. retailers reported weaker demand. Wal-Mart Stores Inc. and Target Corp. are among companies that recently reduced their earnings estimates -- Bentonville, Arkansas-based Wal-Mart for the second time since August.
Meanwhile, forecasts for the holiday season also vary. Cyber Monday online sales rose 20.6 percent from 2012, International Business Machines Corp. said today in a statement.
That came after U.S. retailers eked out a 2.3 percent sales gain at brick-and-mortar stories on Thanksgiving and Black Friday, according to Chicago-based researcher ShopperTrak. That’s in line with its previous prediction that sales for the entire holiday season will rise 2.4 percent, the weakest since 2009. Black Friday is so-named because of the myth that retailers don’t become profitable until the day after Thanksgiving each year.
The National Retail Federation projects sales will rise 3.9 percent to $602.1 billion this year and the International Council of Shopping Centers predicts a 3.4 percent gain.
“There was a lot of disparity in projections for the holiday season this year, but now that the shopping has commenced, those forecasts appear to be subject to downward revision,” Ghriskey said. In addition to the potential impact of a generally sluggish economy on consumers’ appetite to spend, there are six fewer shopping days between Thanksgiving and Christmas this year than last.
Small-cap discretionary stocks historically have underperformed the Russell 2000 Index heading into December “because expectations usually are pretty rich and people start to worry about whether sales forecasts will be met,” DeSanctis said. This year appeared to be bucking that trend, as the group led the broader market between Oct. 21 and Nov. 21, though its performance has weakened more recently.
The relative performance of small-cap discretionary and staples stocks shows that investor sentiment has shifted in the past week, according to Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. While a downtrend in place since May has broken, “the near-term picture has weakened” as the cyclical group failed to hold above its September peak relative to its defensive peers, he said.
The performance of these indexes ahead of Black Friday may have overstated investor optimism, said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees $367 billion. The discretionary group is a “goulash” of many types of businesses including hotels, restaurants and auto-related enterprises -- which don’t all depend on Christmas sales, he said.
“What’s going on at traditional brick-and-mortar retailers doesn’t necessarily tell the whole story,” Creatura said.
Several retailers and restaurants reported “squeamish numbers” in the third quarter, which helped underscore DeSanctis’ decision to downgrade the discretionary stocks in August. He maintains an underweight recommendation on both groups because they “look awfully expensive” and there are more attractive growth opportunities outside the U.S., he said.
Bank of America’s outlook for U.S. holiday sales is “fairly conservative” -- close to 1 percent growth -- as this year could be “pretty weak overall,” DeSanctis said.
Even so, some catalysts could bolster consumer spending. The average price of a gallon of regular unleaded gasoline -- at $3.27 as of Dec. 1 -- has fallen 14 percent from a February peak. In addition, employers have added an average of 186,300 jobs each month this year, up from 172,700 in the comparable period last year. October payrolls grew 204,000, beating all 91 forecasts of economists surveyed by Bloomberg.
In addition, consumers have demonstrated resilience. Retail sales rose 0.4 percent in October, the most in three months, with broad-based gains in nine of the 13 categories, according to data from the Commerce Department.
Still, investors appear to have lost some conviction in American shoppers during the past week, though the amount of spending done online could be stronger, Ghriskey said. After Black Friday shopping results were released, the discretionary group lagged behind the staples by 0.8 percentage point yesterday, the biggest one-day decline since Oct. 7.
“After putting money down on a decent holiday season, investors appear to be less confident now,” Ghriskey said.
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