Here's Why It's Not Yet Time to Buy Retail Stocks

The markets have had a nice little rebound over the past four trading sessions. Growing recession fears have buoyed the argument, to some, that the Federal Reserve might not have to implement as severe a monetary tightening regiment as has been projected. I have used this unexpected rally to 'roll' many of my covered call positions that would have expired out of the money in July or August, forward. I also disposed of a few dogs in my portfolio that had dead cat bounces outright. These actions bolstered my cash position nicely. Larry Summers, the economist who rightly predicted that the $1.9 trillion Covid relief package passed in early 2021 would lead to large amounts of inflation, was out this week with another interesting take. In order to arrest the inflation demons that have been let loose by this legislative largess, the country will need to achieve an excess 5% unemployment over five years over an average of 5% unemployment rate. This could be achieved with five years of 6% unemployment, two years of 7.5% unemployment or one year of 10% unemployment. Somehow, even with the selloff in equities so far in 2022, I doubt this scenario is priced into the markets yet. I don't think this plays out either, although I don't disagree with Summer's thesis. I simply don't believe the Federal Reserve has the fortitude to corral inflation if it means that sort of unemployment. This also would meet massive resistance from a political class that has become used to 'kicking the can' down the road for a generation now. The poor consumer is stuck between a rock and a hard place. If the central bank does carry out the necessary rate hikes to arrest inflation, the unemployment rate might very well double. If they don't, inflation will continue to remain at elevated levels and economic activity will continue to be tepid. Something that was referred to as stagflation back in the late 70's and a scenario where the average consumer continues to lose buying power on a consistent basis. Which is why I continue to remain heavily underweight the retail sector along with other areas of the market heavily dependent on consumer spending. One has to feel for retailers not named Amazon . First, business fell off the cliff as government mandarins locked down the economy in early 2020. Then when the economy reopened, with consumers loaded up with pent up needs and large amounts of stimulus funds, demand exploded. This, of course, overwhelmed supply chains which were in the process of getting up and running from the lockdowns as well. This has been a key factor in pushing inflation to the highest levels seen since the early 80s. The challenge in 2021 was getting enough inventory to meet demand as the economy grew nearly 6% that year. Which brings us to 2022, where retailers have faced the exact opposite problem as the economy teeters on recession, stimulus has faded, and personal savings have been depleted. Now the problem is excess inventory. Retailers like Target have taken big hits recently as they adjust inventory levels which have had major impacts to profit margins. This process should continue to play out in coming months, and something tells me there will plenty of Black Friday bargains to be had this year. My hunch is that will be when retailers will mostly have inventory levels right sized and many of these names will be on 'sale' for savvy long term investors. I can easily see having a good slug of retailer stocks in my stocking at that time. Until then, I am avoiding this sector as it likely to have a few more painful months ahead of it. (Amazon is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AMZN? Learn more now.)

Here's Why It's Not Yet Time to Buy Retail Stocks

Something tells me there will plenty of 'Black Friday' bargains to be had this year.

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