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Retail ETFs Beating Broader Market While Warning Signs Flash

Are retailer ETFs about to get marked down in price?

Retailer-focused exchange-traded funds are beating major indexes this year as American consumers, enjoying high employment rates, buy more products despite high inflation. January retail sales rose 3% to $697 billion from the previous month, according to the Census Bureau.

Still, warning lights are flashing. Big consumer goods sellers Walmart Inc. and Home Depot Corp. both signaled trouble with either quarterly results or forecasts that fell short of expectations.

Higher interest rates and skyrocketing prices may finally sap the spending strength of what had been a resilient American consumer. S&P Global recently predicted retail sales will grow 0.5% this year, which is a 0.1% decline when accounting for inflation, due to weaker consumer demand. Walmart, the world’s biggest retailer, whose shares are in 255 ETFs, appeared to agree this week.

“We take a pretty cautious outlook on the rest of the year," Chief Financial Officer John David Rainey said during the firm’s fourth-quarter earnings call Tuesday. "The consumer is still very pressured, and if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods."

As retail names begin reporting earnings for the fourth quarter and offer predictions for the months ahead, they caution of storm clouds gathering.

Data released on the U.S. economy had painted a mixed picture thus far. What appeared to be a success for the Federal Reserve earlier this year after inflation eased in January caused investors to flock back to equity and bond markets after their worse performance in over a decade.

That success may have been celebrated too soon, as data released in February showed inflation remained stickier than expected and the job market remained resilient.

Treasury notes have oscillated as investors attempt to decipher the central bank’s path forward, with the yield on the benchmark 10-year note reaching its highest level since November on Wednesday.

Walmart posted a 7.3% increase in year-over-year revenue. It also updated its earnings guidance to $5.90 to $6.05 per share for the year through January 2024, less than analyst estimates of $6.50.

Still, retail ETFs widely notched gains after the news. Both the iShares U.S. Consumer Focused ETF (IEDI) and the Vanguard Consumer Staples ETF (VDC) inched up 0.3%, while the VanEck Retail ETF (RTH) was lifted 0.4%, according to ETF.com data.

Meanwhile, Home Depot reported fourth-quarter revenue Feb. 21 that missed expectations. Revenue  of $35.83 billion missed the $35.97 billion expected by Bloomberg-polled analysts.

"We've assumed, like many economists, that we will see flat, real economic growth and consumer spending in 2023,” the firm’s CFO, Richard McPhail, said during Tuesday’s earnings call.

According to CFRA’s Vice President of Equity Research Arun Sundaram, the path forward for big-name retailers like Walmart could be dependent on when and where the Federal Reserve stops raising interest rates.

“They're still very cautious, especially on the outlook as there's a lot of macro uncertainty,” Sunderam said to ETF.com, referring to retail companies, “especially given what the Federal Reserve is doing with raising interest rates.”

Still, he noted, retailers who specialize in groceries and staple products have opportunities to perform well during the year, while firms that specialize in larger discretionary items such as electronics or furniture may face obstacles.

 

Contact Shubham Saharan at shubham.saharan@etf.com

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