Market Insights

Traditional retailers are jumping as money shifts from megacap growth stocks to forgotten corners of the market.

Companies like Williams-Sonoma (WSM), Dillard’s (DDS) and Deckers Outdoor (DECK) have outperformed the broader S&P 500 by a wide margin in the last month. The trend seems to result from promising economic conditions, changing investor sentiment and strong earnings.

Consumer Economy

Several recent economic reports may favor consumption and retail:

• The University of Michigan’s consumer sentiment index rose to a 13-month high in early November on optimism that conditions would improve after the presidential election.
• Initial jobless claims, the fastest-moving data point on employment conditions, fell more than expected to the lowest level since April. (Lower readings are “good” because it means fewer Americans are filing for unemployment benefits.)
• Retail sales have increased more than expected in each the last five months.
• A survey from TransUnion on November 20 said almost two-thirds of millennials are optimistic about their finances, with 41 percent reporting an income boost in the previous three months.
• The New York Federal Reserve noted on November 13 that consumer debt-to-income ratios are below pre-pandemic levels.

Williams-Sonoma (WSM) daily chart, with select patterns and indicators.

From Megacaps to Mall Retailers?

For years, megacap growth stocks like Nvidia (NVDA) and Microsoft (MSFT) have led the market. But that’s changed since the summer as capital migrates to other sectors.

Consider technology for example. Its S&P sector tracking index peaked in July and stalled below that high in early November. The resulting “double top” is a potentially bearish reversal pattern.

The consumer discretionary index, on the other hand, has made successively higher highs and jumped into new record territory on Monday.

The advance/decline line on the S&P 500 also started hitting new highs last week for the first time since mid-October. That may suggest investors are broadening their interests to smaller companies.

Deckers Outdoors (DECK) daily chart, with select patterns and indicators.

Retail Earnings

Several retailers have rallied on strong quarterly results. Others report soon.

• Williams Sonoma (WSM) had one of the biggest moves so far. It made 7 percent more in per-share profit despite sales dropping about 3 percent. The kitchen retailer accomplished this by lowering the cost of its merchandise and buying back stock.
• Dillard’s (DDS), a traditional department-store operator, has been growing margins and buying back stock since the pandemic. It also beat estimates on November 14.
• Deckers Outdoors (DECK) reported strong quarterly results on October 14. It rallied, pulled back and then surged to new record highs last week.
• Under Armour (UAA), Ralph Lauren (RL), Bath & Body Works (BBWI), Ross Stores (ROST),  and On Holdings (ONON) have also climbed after issuing results.

Ross Stores (ROST) daily chart, with select patterns and indicators.

Other companies report soon:

• Abercrombie & Fitch (ANF), Nordstrom (JWN), Dicks Sporting Goods (DKS) and Best Buy (BBY) announce results this morning.
• RH (RH): The luxury-furniture company jumped to a new 52-week high yesterday. It’s expected to report earnings around December 5, but hasn’t yet provided official timing.

So far, Target (TGT) is the only big name to fall sharply on results. (Earnings and revenue both missed estimates.) The big box retailer apparently lost business to Walmart (WMT) and struggled to move its products.

In conclusion, sentiment has been shifting away from AI stocks like chipmakers since July. Investors have already targeted sectors like financials and utilities. Now there could be signs of traditional retailers returning to favor — just in time for the holiday-shopping season.