The U.S. consumer may be out in the malls spending again thanks to the tax cut, but that doesn't mean investors should stay long retail stocks.
In fact, consumer spending momentum and the subsequent gradual interest rate hikes from the Federal Reserve could prove to be the death of retail stocks looking into year end. New research out of Morgan Stanley (see chart below) points out retail stocks have historically under-performed the S&P 500 I:GSPC during periods of interest rate hikes. The opposite has proven true when rates are on the decline.
The reasons for the inverse relationship is such:
- Rising rates often lead to higher interest payments for heavily indebted retailers. The last thing a dying Sears (SHLD) needs is more cash going out the door to a bank.
- Rising rates means more expensive consumer credit costs, which could start to weigh on spending trends.
- Rising rates means a higher cost of credit at a time in which retailers are trying to invest to fend off Amazon (AMZN) - Get Report .
Couple these factors with already thinning profit margins, and the last thing retailers need are higher interest rates. And by extension, the last thing investors need is to own a basket of retail stocks.