The SPDR S&P Retail ETF (XRT) has crashed to an eight-year low as "shelter-in-place" guidance takes effect across the United States in reaction to the coronavirus pandemic. There's little doubt that the crisis marks the biggest threat to the survival of brick-and-mortar retailers since e-commerce, draining additional market share while these companies struggle to cut expenses and pay their bills. Unfortunately, the closure of bars, restaurants, and movie theaters is compounding the economic pain, putting lethal pressure on department stores and other mall tenants.
Big box retailers and e-commerce are picking up the slack, as evidenced by waiting lines outside Target Corporation (TGT) and Walmart Inc. (WMT), but Amazon.com, Inc. (AMZN) stands to gain the most from the pandemic. It's no surprise that the company just announced it will hire an additional 100,000 workers to handle increased demand, which could persist long after the virus runs its course. Waves of bankruptcy could hit competitors at the same time, allowing Bezos and Co. to solidify the world's fastest growing monopoly.
Even so, Amazon stock has been dropping like a rock in recent weeks, despite the competitive advantage. There's little doubt that consumer spending has plummeted in the first quarter, even in the rock-solid e-commerce group, with Americans hoarding the family savings in case things spin out of control. The company also has to deal with potential supply disruptions in the same way that toilet paper and other essentials have disappeared from supermarket shelves.
The technical timing couldn't be worse because Amazon stock broke out to a new high in February, trapping bulls in a decline that has now reached 2019 support near $1,650. Selling pressure has been intense during this period, dropping the on-balance volume (OBV) accumulation-distribution indicator in a straight line. Despite the sell-off, Amazon is better positioned than 99% of the market universe right now, although it might need to wait until the third or fourth quarter to rebound.
Macy's, Inc. (M) highlights the struggle for survival faced by mall anchors in 2020. The stock was fully engaged in a major decline for 16 months before the virus outbreak hit the headlines in January. A decline starting at that time expanded into a full-blown death spiral in February, dumping the old-school retailer nearly 60% in just four weeks. Rivals Kohl's Corporation (KSS) and Nordstrom, Inc. (JWM) have posted similar losses, adding to doubts about the future.
The sell-off has now reached within 1.5 points of the bear market low posted in November 2008, which marks intense support. However, it's tough to buy a bounce at that level because the decline's vertical trajectory ensures a huge supply of trapped shareholders, looking to get out. In addition, attempts to stabilize the industry through government bailouts have almost no chance of working, with the paradigm shift into e-commerce permanently altering the retail landscape.
Dow component The Home Depot, Inc. (HD) posted an all-time high at $247.36 on Feb. 21 and turned south, dumping 34% into Monday's closing print. The trajectory is astounding, given the company's solid performance over the past decade. It's also confusing because home improvement stores tend to outperform during periods of economic contraction because homeowners do their own repairs rather than spend money for contractors.
The halt in building activity is driving a good portion of the downside, which still seems excessive. Just one week ago, analysts were pointing to the mortgage refinancing boom as a catalyst for higher prices, but the threat of a recession, or worse, could delay that beneficial force well into the future. Even so, millennials are likely to continue their nest building activities at a rapid pace in future years, underpinning Home Depot's results.
The Bottom Line
Retailers have plummeted to multi-year lows in the wake of the coronavirus pandemic, raising the likelihood of bankruptcies.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.