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Aug. 23, 2019, 12:51 p.m. EDT

Double jeopardy for retailers: the online menace and recession

Will retail stock ETFs designed to profit from wave of brick-and-mortar shutdowns outperform in a recession ?

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By Andrea Riquier


Getty Images
People shop at the Macy's flagship store on 34th St. on Black Friday in November, 2018 in New York City.

From Macy’s /zigman2/quotes/201854387/composite M -3.37%   to the Gap /zigman2/quotes/201996496/delayed DE:GAP -1.97%  , from Nordstrom /zigman2/quotes/203902116/composite JWN -3.30%   to Foot Locker /zigman2/quotes/204092533/composite FL -4.06%  , the retailpocalypse rolls on.

That means an exchange-traded fund that tracks the broad retail landscape, the SPDR S&P retail ETF /zigman2/quotes/206947004/composite XRT -1.87%  , is basically flat for the year to date, a period in which the Dow /zigman2/quotes/210598065/realtime DJIA +0.01%   and S&P /zigman2/quotes/210599714/realtime SPX +0.0073%   indexes are both up double digits.

And it probably means that ETFs designed to profit from the ongoing wave of brick-and-mortar shutdowns will outperform, right?

See: Malls are dying. There aren’t enough homes. Is there a solution?

Perhaps. But an analysis out Thursday from Ned Davis Research notes that there’s a lot of nuance surrounding the current moment in retail, and ETF investors may want to tread lightly.

Leading up to the past two recessions, online shopping surged, the analysts noted. Indeed, as measured by the performance of two online retail ETFs, a similar pattern is now emerging.

ProShares’ Decline of the Retail Store ETF /zigman2/quotes/200757065/composite EMTY +1.96%   has gained about 12% so far this year, while the Long Online/Short Stores /zigman2/quotes/207285925/composite CLIX +0.41%   fund from the same company is up about 26%.

“Investors are clearly rewarding retailers that generate the majority of their sales online,” the Ned Davis team noted. If we are facing the end of the expansion, online retailer stocks may actually be more vulnerable, given their richer valuations relative to brick-and-mortars, they added. It’s also unclear whether we are facing a cyclical downturn or just some temporary turbulence.

Read: Retail sales surge in July in a reassuring sign for the U.S. economy

“However, online retailers should withstand the next recession much better than traditional retailers given lower overhead expenses,” the analysts said. “This makes CLIX an attractive vehicle to play the long-term shift in retail sales trends.”

Ned Davis’ analysts also note that the consumer discretionary sector starts to underperform the market as early as 12 months before the onset of a recession, which is why they’ve been watching the space closely.

“We like to say the consumer leads us into recession and the consumer leads us out of recession,” they said. “So even if we downgraded

Discretionary on pre-recessionary fears, we would likely upgrade soon after discovering we are in fact in a recession.”

Read: The housing market’s slowdown is going to kill the home renovation boom too

/zigman2/quotes/201854387/composite
US : U.S.: NYSE
$ 15.18
-0.53 -3.37%
Volume: 17.28M
Dec. 13, 2019 6:30p
P/E Ratio
4.91
Dividend Yield
9.95%
Market Cap
$4.69 billion
Rev. per Employee
$197,992
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/zigman2/quotes/201996496/delayed
DE : Germany: Frankfurt
14.90
-0.30 -1.97%
Volume: 0.00
Dec. 16, 2019 9:04a
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
N/A
Rev. per Employee
N/A
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/zigman2/quotes/203902116/composite
US : U.S.: NYSE
$ 38.38
-1.31 -3.30%
Volume: 2.77M
Dec. 13, 2019 6:30p
P/E Ratio
11.17
Dividend Yield
3.86%
Market Cap
$5.96 billion
Rev. per Employee
$214,324
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/zigman2/quotes/204092533/composite
US : U.S.: NYSE
$ 37.13
-1.57 -4.06%
Volume: 3.93M
Dec. 13, 2019 6:30p
P/E Ratio
8.03
Dividend Yield
4.09%
Market Cap
$3.88 billion
Rev. per Employee
$161,332
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/zigman2/quotes/206947004/composite
US : U.S.: NYSE Arca
$ 44.67
-0.85 -1.87%
Volume: 4.46M
Dec. 13, 2019 8:00p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,135.38
+3.33 +0.01%
Volume: 254.81M
Dec. 13, 2019 5:14p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,168.80
+0.23 +0.0073%
Volume: 1.96B
Dec. 13, 2019 5:14p
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/zigman2/quotes/200757065/composite
US : U.S.: NYSE Arca
$ 34.87
+0.67 +1.96%
Volume: 1,160
Dec. 13, 2019 8:00p
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/zigman2/quotes/207285925/composite
US : U.S.: NYSE Arca
$ 48.76
+0.20 +0.41%
Volume: 2,037
Dec. 13, 2019 8:00p
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Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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