We’re getting ready to head into the last few weeks of the earnings season as mid-May approaches.
This is the part of the earnings season that gives us a great view of the consumer as many of the consumer discretionary and retail companies will provide their earnings results.
Nick and I were going back and forth in chat yesterday and I made the comment… “The consumer is dead.”
Now, this may be a little bit of an overstatement – obviously - but there are several signs that it may be time to worry about how much the consumer is going to drive the economy for the rest of 2024.
Just as a review, the consumer is the heart of our economy. Whether it’s the car you buy, the clothes you buy, a cruise you take your family on, or that shiny new set of golf clubs you’ve been eyeing.
That’s the heart of our economy.
On Monday of this week, the monthly Conference Board's Consumer Confidence Index was released. This is a high-impact poll that monitors the strength of the consumer.
Analysts were expecting the number to come in at 104 - but instead, we got 97.
The key takeaway from the report is that consumers are somewhat positive about present conditions but not about the future. Job availability and income concerns suggest a slowdown in discretionary spending.
Let’s face it: Inflation is wearing the consumer thin. The jobs market has remained strong, but the recent JOLTS report showed that employees are now quitting their jobs much less, despite the fact that there are more job openings.
That’s a sign that confirms the American consumer is afraid of losing their jobs as we look forward to the economy tightening.
Want to see what that looks like on my “Walk Down Main Street”?
McDonald’s (MCD): The fast-food giant’s revenue and earnings weren’t as strong as expected. The company’s outlook was flat. An analyst from Evercore called the quarter “one of the most sobering McDonald’s quarters we’ve heard in quite some time.”
Darden Restaurants (DRI): More of the same. The company said that “the lower income consumer does appear to be pulling back.” Darden has always been “a canary in the coalmine” for consumer spending. This was one of the first restaurants to get busy in the post-covid era, and it’s not because of their breadsticks.
There are some signs to the contrary, but they are getting fewer and farther between.
From a seasonality perspective, May and June are two of the lower performance months of the year for the consumer discretionary sector. Over the last 20 years, the Consumer Discretionary Select Sector ETF (XLY) has returned an average of 0.0% followed by June’s average performance of -0.01%.
The combination of higher interest rates worries over the jobs market, persistent inflation, and a clear tightening of the consumer’s wallet suggests that consumer discretionary stocks are likely to participate in the “sell in May” phenomenon.
Here’s How to Trade This
From a conservative perspective, I begin to review my portfolio holdings for companies like restaurants, retail, and recreation… the “Three Rs.” I consider adding stops to these holdings or outright selling them with the plan to buy them in September. Later in the summer, we’ll get into the September retail trade.
Aggressively, I consider a put on the XLY shares when they cross below the $170 level.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.