Many big retail stocks, battered by worries of increasing competition with e-commerce, are starting to show signs of life. The S&P 500 Retail Index (RLX) is beating the broader market, up 11% since the start of the year versus the S&P 500’s decline of less than 0.5%. “Retail hasn’t looked this good in years,” says Ari Wald, one of a number of analysts who believe retail is poised for a strong rebound, according to CNBC.
Using a chart that plots the S&P Retail ETF (XRT) relative to the S&P 500 since December 2014, Wald shows that retail stocks have had a rough couple of years compared to the broader market. However, beginning around the middle of last year, the downward trend stalled and has even more recently begun to reverse itself. In November, the line broke out above its 200-day moving average (MA) and has, for the most part, held above that trend line ever since.
Supporting Wald’s analysis, chief economist at The Phoenix Group Max Wolff, sees retail stocks improving as a shift in investor sentiment takes place. Retail stocks are benefiting from a “major sector rotation,” he told CNBC, which “favors older and beat-up as opposed to the new and the tech names.”
Wald specifically points to Nike Inc. (NKE) as one retail giant that will take a leadership role in the sector’s broader rebound. The shoe and apparel retailer is up 8% so far this year. A number of other retailers are also showing strength, outperforming the S&P 500 since the start of the year: Macy’s Inc. (M) is up 15%; Target Corp. (TGT) is up 11%; Dollar General Corporation (DG) is up 4%; JC Penney Co. Inc. (JCP) is up 2%; Kohl’s Corp. (KSS) is up 16%; and Dillard’s Inc. (DDS) is up 33%. (To read more, see: 4 Cheap Retail Stocks That Can Outperform.)
At least one of the reasons these stocks have performed well early on this year is strength in their earnings. In its most recent earnings report, Macy’s reported strong earnings boosted by a pickup in same store sales over the holidays. Kohl’s has also come off a strong earnings season, beating analysts’ estimates on strong sales growth and maintaining a tighter control over inventory.
While investor sentiment for retail stocks may have picked up as a result of retailers posting stronger earnings after a busy holiday season, that sentiment may fade. Competitive forces from online retailer Amazon.com as well as the traditional brick and mortar retailer Walmart are only becoming more intense. Thus, recent retail gains may be fleeting if these older names don’t find a way to set themselves apart.