• Discretionary among most net sold sectors last week: Goldman
  • Retail ETF continues to slide after worst week in over a year

Hedge funds are turning more bearish on US stocks and retailers amid uncertainty about how Americans are coping with persistent inflation and elevated borrowing costs.

The group net sold global equities for a second straight week, led by North America and Europe, and at the fastest pace since mid January, according to prime brokerage data from Goldman Sachs Group Inc. Consumer discretionary was among the most net sold US sectors last week, with managers reducing long positions and shorting retail ETFs.

The cautious signal coincided with a reversal in fortunes for retailers’ shares. The SPDR S&P Retail ETF had surged 36% from an October low through March, fueled in large part by bets that the Federal Reserve would soon begin cutting interest rates, which would ease pressure on Americans’ budgets. The retail gauge is now coming off its worst week in more than a year.

The pain continued Wednesday after a hotter-than-expected inflation reading, which followed a strong March employment report and reinforced that interest rates are likely to remain high. The SPDR S&P Retail ETF slid as much as 2.7% on Wednesday to touch the lowest intraday level in more than six weeks.

“The consumer is fine, but we’re still seeing the consumer remain very disciplined in how they spend and what categories they’re spending in,” said Mari Shor, senior equity analyst with Columbia Threadneedle.

A key US price gauge topped forecasts for a third straight month in March on gains in rents and transportation costs, according to government data that was released Wednesday. Food-at-home costs also rose, as did energy expenses. Gasoline prices have reached the highest level since October, leaving consumers with less disposable income.

“If the food and energy complex continues to stay at these high prices, this trend will hurt retailers and consumer discretionary companies,” said Frank Monkam, senior portfolio manager at Antimo.

Bank of America Corp. said in an April 9 report that its clients sold US equities last week in six of the 11 sectors, including consumer discretionary. Health care and technology saw the biggest outflows.

Ulta Beauty Inc., which was among the worst performers in the retail ETF last week, was one of the latest companies to stoke concern about the state of the US consumer. The retailer warned on April 3 that shoppers’ demand for beauty products — which had remained strong in recent years — has recently cooled. Its chief executive called out higher credit-card debt and the return of student loan payments as weighing on consumers.

While most on Wall Street aren’t concerned about an imminent and substantial weakening in the US consumer, largely because of the strong labor market, they’re remaining selective. In the consumer discretionary space, Shor at Columbia Threadneedle likes off-price retailers including TJX Cos., which can benefit as shoppers seek value. Shor also likes Nike Inc. after its recent stock underperformance, and Gap Inc. as new management turns around the business.

Within consumer discretionary, specialty retail is now the second most notionally net sold subsector behind autos, according to Goldman’s prime brokerage data.

“I would stay away from specialty retail companies as they’re most exposed to the economic uncertainty. Stocks such as Lowe’s or Best Buy are caught in the middle of the consumer income space,” said Michael Obuchowski, founder and chief investment officer at Merlin Asset Management. “They cannot lower the prices because it will hurt their margins and they can’t increase the prices because then nobody is going to shop.”

“I would focus on the highest end consumer goods companies as they are the most resilient regardless of how the environment is going to evolve over the next several months,” he added.

Written by:  and  @Bloomberg

The post “Hedge Funds Are Dumping US Retailer Stocks” first appeared on Bloomberg

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