Maybe That Soft Retail Sales Print Was Not Such a Big Surprise

Summary

• Equity markets seemed to see November’s soft retail sales data coming for several weeks: the retail ETF XRT underperformed the broader market SPY by 15% over the past month.
• Despite Omicron, our reopening recommendations – PEJ (leisure activities), JETS (airlines) and AWAY (online travel services) – have outperformed XRT since Thanksgiving.
• This squares with increasing anecdotal evidence that Americans are prioritizing normality over Covid risks.

Investment Implications

• We recommend being long SPY and service sector ETFs PEJ, JETS and AWAY and underweight or shorting XRT. We believe these trades will outperform in coming months and quarters.

Even as forecasters were pencilling in a handsome 0.8% jump in November retail sales, equity investors were going the other way. Over the past several weeks, the retail ETF XRT is down a substantial 15% versus the SPY ETF that tracks the S&P 500 (Chart 1).  

Instead, retail sales rose a modest 0.3%. More importantly, they are still 15% above the post-Global Financial Crisis trend (Chart 2). We have recommended investors underweight or short the XRT ETF versus the SPX on the view that as the economy reopens, retail sales will level off or decline as consumers return to spending on services. 

We still think the trade makes sense over the medium term. However, we understand that trading-oriented investors may be tempted to unwind it after recent gains, especially given Omicron’s arrival might be expected to slow the shift from goods to services spending.

But markets seem to be sending a different signal.

The elections in early November clearly showed voters wanted an end to Covid-related restrictions. Consequently, we recommended several services-oriented ETFs on the expectation that the economic reopening would remain on track and even accelerate. Specifically, we recommended PEJ (leisure activities), JETS (airlines), and AWAY (online travel services), versus underweighting or shorting the goods-oriented XRT ETF.

These underperformed initially. But somewhat surprisingly, they have been gradually recovering since shortly before Thanksgiving, even with the pressure from Omicron (Charts 3a-c).

This squares with a growing variety of anecdotal evidence that Americans are increasingly deciding to live with Covid and now Omicron. Covid fatigue has set in, with people increasingly fearing further restrictions over Covid.

Travel and leisure ETFs are not in any meme-stock-style boom. But their underlying strength combined with weakness in XRT suggests Americans will be trying to return to something like a more normal life in 2022.

These are more fundamental macro trades. We believe they will outperform in coming months and quarters – although, given ongoing uncertainties about Covid, it may not be a straight line up!

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)