Wall Street Thinks Consumers Are Screwed

Wall Street shows where the market is headed as they short the retail sector… hard

Is the American shopper on the verge of tapping out?

Some Wall Street investors tend to believe that buyers are burnt out and have nothing left to spend.

According to a research released this week by S&P Global Market Intelligence, short selling in consumer stocks — effectively betting on the sector’s share prices falling — has reached a new high since January 2021.

“As of mid-February, the consumer discretionary sector remained the most-shorted sector, as short sellers continued to wager that skyrocketing inflation would eat into demand for nonessential products,” the S&P analysts wrote in the report.

This year, retailers Big 5 (BGFV) and Citi Trends (CTRN), electric vehicle charging company EVgo, plant-based food provider Beyond Meat (BYND), and dental braces producer SmileDirectClub have all been aggressively shorted (SDC).

The market is plainly concerned about whether consumers can endure future increases in oil and other commodity costs, as well as the Federal Reserve’s projected interest rate hikes.

The SPDR S&P Retail (XRT) and Consumer Discretionary Select Sector SPDR (XLY) exchange-traded funds have both lost almost 15% this year – falling way more than the rest of the market.

Inflation took a toll on Christmas shopping, resulting in a drop in consumer spending in December.

“The month of December was not especially favorable for retail,” said Phil Orlando, Federated Hermes’ chief equities market analyst. “And I’m being generous. It was a disaster.”

Although spending increased in January, Orlando claims that a large portion of the increase was attributable to the usage of Christmas gift cards, which are reported as retail sales when redeemed.

And now that energy prices are soaring, consumer spending may suffer much more.

With that in mind, Orlando believes consumer stocks will continue to suffer, particularly as increasing gasoline and gas prices, along with the likelihood of higher interest rates, are weighing on consumer confidence.

Furthermore, the pandemic’s stimulus checks have run out.

As a result, consumers would have to either take on additional debt or dip into their savings to maintain their current spending habits.

Orlando figures that the average consumer doesn’t have much buying ammunition left – if any at all.

The result? Retail stocks could crash & burn if consumer spending slows.

“Stocks are not going to recover in a couple of months,” said Phillip Toews, CEO of Toews Asset Management.

“The bear case was that, because to high inflation and increasing interest rates, we would be headed for a bear market before the [Russian] invasion,” Toews said. “Energy prices are now skyrocketing. Consumer equities may be part of a larger sell-off.”

Simply put: Consumer spending is what keeps the economy afloat.

If that’s cut off because of inflation and rising interest rates, the party could very well stop… plunging the economy into a full-blow recession.