Retail stocks look for direction as rates stay high By Reuters

By David Randall and Lewis Krauskopf

NEW YORK (Reuters) – High interest rates in the United States are putting pressure on the U.S. retail sector, where shares of many companies have been hit by months of tight monetary policy, while a few have soared.

The Consumer Discretionary, Distribution and Retail index is up nearly 14% this year, roughly keeping pace with the S&P 500's gain so far this year. Much of the sector's strength, however, has been concentrated in a small group of stocks, including heavyweight amazon.com (NASDAQ:), which is up nearly 21% this year.

Meanwhile, stocks of companies focused on low-income consumers have struggled, in part because buyers in that segment have been hit harder by high interest rates, analysts said. Among the laggards are shares of Dollar Tree (NASDAQ , which have fallen almost 27% so far this year, and Dollar General (NYSE , which have fallen almost 9%.

The retail sector is one of several areas of the economy – in addition to real estate and consumer staples – that have come under pressure from high rates. The Federal Reserve reiterated earlier this week that it needs to see more evidence of cooling inflation before reducing borrowing costs.

“The low- and middle-income segment is coming under pressure because of gas and food prices,” said Greg Halter, director of research at Carnegie Investment Counsel. “They feel bad even though the economy is doing well.”

The consumer will be in the spotlight next week when the United States reports retail sales data on Tuesday. Analysts polled by Reuters expect retail sales to have grown 0.2% in May. Weaker-than-expected results, following data earlier this week that showed encouraging progress on inflation, could strengthen the case for the Federal Reserve to cut rates sooner rather than later.

Futures markets have reflected higher investor expectations of a rate cut in September, although the Federal Reserve projected it will only reduce borrowing costs in December.

The divergent performance of retail stocks has pushed investors to focus on companies whose consumers can continue to afford higher interest rates or those that offer discounts on brand-name household items, such as clothing or groceries, such as the club company Costco Wholesale (NASDAQ:) stores.

Halter's fund has been buying shares of companies such as Walmart (NYSE ), Costco and TJX Companies (NYSE whose business models emphasize consumer value. Their shares are up 28%, 29% and 16% respectively.

Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said he owned Costco and TJX Companies, noting their strong management and inventory controls.

“I think inflation will continue to be moderate and consumers will continue to look to get the most out of 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 merchandiser has helped the company weather the inflationary environment, adding that “people will 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 high.

It has been targeting companies like Carvana, whose shares have nearly doubled this year, and DoorDash (NASDAQ:), whose shares are up about 13%.

“We're not very excited about the consumer sector overall, but we do think we're in the early stages of some of these growth stories,” he said.