US Economy Is Strong... But Why Are Consumer Goods Stocks Declining?

Although the U.S. economy continues to grow more robustly than expected, consumer goods stocks have struggled to avoid weakness. It is assessed that consumers, weary from high inflation and high interest rates, are becoming increasingly cautious in their purchasing behavior, a trend confirmed across the retail industry. Recently, the sharp rise in Treasury yields has also become a factor reducing the investment appeal of consumer goods stocks, which are classified as 'dividend stocks.'

[Image source=Getty Images Yonhap News]

The daily Wall Street Journal (WSJ) reported on the 16th (local time) this market sentiment in an analysis article titled "If the economy is so strong, why are consumer goods stocks plummeting?" Among the companies listed in the essential and discretionary consumer sectors of the S&P 500 index, more than 20 companies have hit 52-week lows this month. Major corporations such as Dollar General, Target, Kraft Heinz, Conagra Brands, Clorox, and Colgate-Palmolive were also included.

Since the beginning of the year, Dollar General's stock price has fallen by about 54%. Target dropped by 25%, and Kraft Heinz by about 22%. While the S&P 500 index peaked on July 31 and fell by 5.7%, the SPDR S&P Retail ETF's decline reached 13%.

The WSJ analyzed, "Although the U.S. economy generally appears to be booming, consumers across the retail sector are exercising caution in their purchases," adding, "Rising gasoline prices, credit tightening, and persistent inflation have begun to grip consumers." The U.S. Consumer Confidence Index has also declined for two consecutive months, suggesting growing consumer anxiety about household finances and economic health.

Dollar General recently reported that customers are reducing discretionary purchases while continuing to buy essentials such as food. Walgreens Boots Alliance also confirmed a trend where consumers are withdrawing plans for discretionary purchases and utilizing various promotions. The company plans to close 150 underperforming stores in the U.S. Anna Rasburn, Chief Investment Officer (CIO) of CBIZ Investment Advisory Services, explained, "If grocery or gasoline prices are high, people buy fewer discretionary items they want."

Additionally, rampant theft in retail stores has become a factor worsening profitability. Target previously forecasted that increased theft would reduce annual earnings by more than $500 million during its Q2 earnings report. Last month, it announced plans to close nine stores nationwide, including in Harlem, New York, citing safety concerns. Nike and Macy's have also lowered their net income forecasts due to theft.

The WSJ particularly noted that this weakness in consumer goods stocks coincides with the recent sharp rise in Treasury yields. As Treasury yields surge steeply, the investment appeal of consumer goods stocks, most of which are classified as 'dividend stocks,' is relatively declining. Dollar General and Target have dividend yields of 2.1% and 3.9%, respectively, while Kraft's is around 5.1%.

According to data provider EPFR, outflows from consumer goods sector funds were observed in 10 of the past 12 weeks. In the recent three weeks, when Treasury yields accelerated their rise in the bond market, outflows exceeded $1 billion, the largest level since March 2022. EPFR added that Wall Street fund managers have been reducing exposure to this sector since April.

However, winners still exist within the consumer goods sector. Costco and Walmart are representative companies that have recently increased sales performance. Their stock prices have risen by more than 24% and 13%, respectively, since the beginning of the year. Both stocks are showing upward trends today as well.

This content was produced with the assistance of AI translation services.