Shares of consumer stocks took it on the chin this week as investors grew increasingly concerned that the US economy may be in a recession. It hasn’t helped that earnings have been generally unimpressive so far this earnings season as consumers seem to be more conservative with their spending.
According to data provided by S&P Global Market Intelligence, as of market open on Friday, shares of GameStop (GME -3.28%) have dropped 6.3% this week, Chewy (CHWY -9.92%) is down 9.1%, and Bed Bath & Beyond (BBBY -7.73%) is down 16.5%.
The big data out this week was an initial gross domestic product reading for the US that showed a 1.4% contraction in the economy. This compares with economists expecting about 1% growth, so it threw the market for a loop.
There are a few takeaways from the report that investors are thinking about. One is that consumer spending may be weaker than expected as inflation impacts product pricing and people get back to a more “normal” financial environment without stimulus checks and extended unemployment benefits.
A complicating factor is interest rates. The Federal Reserve has indicated that it will increase short-term rates aggressively this year to combat inflation, but that generally hurts economic growth. If the economy is weak and rates are increased, it could send the US economy into a recession — or we may already be in one.
Weak economic data comes on the back of some tepid earnings results from giants like Netflix other Amazonwho are seeing consumer spending slow, so we can only imagine that smaller retailers will have a harder time growing.
The stock market has been falling for months in anticipation of rate hikes and the turbulence that will be involved in getting the economy back to normal. But it seems that investors are realizing that the path may be even rockier than it first appeared and retail may be one of the hardest-hit areas.
One of the reasons I won’t be jumping on this drop right now is that we don’t know where the bottom is. Retailers like GameStop, Chewy, and Bed Bath & Beyond aren’t consumer staple providers that will have demand in any economic environment, so users may shift purchases to grocery stores or big-box retailers that provide more variety. Buyers may also look for cheaper products, hurting margins.
I think there are a lot of headwinds coming the way of retailers in 2022 and these three stocks may be in for a rocky road as a result. If the economy recovers and growth returns in the second half of the year, the story may change, but for now the risk/reward for shares is too high for me to buy the dip.