- Short sellers have been ramping up bets against consumer discretionary stocks in recent months.
- Short sellers held 4.57% of outstanding shares in the group in July, rising as COVID cases mount.
- 'Disappointing retail sales and consumer sentiment suggest the US consumer is fading,' said Morgan Stanley equity analysts.
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Investors are increasing bets that stocks in the nearly $9 trillion consumer discretionary sector will decline, with S&P Global Market Intelligence saying those moves are taking place as rising coronavirus infections risk hurting spending by consumers at restaurants and on clothes and other non-essentials.
Short sellers at the end of July held 4.57% of outstanding shares in the consumer discretionary group, the firm said Monday in tracking companies on major US stock exchanges. It said short interest in the sector has risen significantly in recent months, up from 4.23% at the end of February but slightly less than June's rate of 4.59%.
The ramp-up in short bets reflects concerns that rising COVID-19 infections, led by the highly transmissible Delta strain, will lead shoppers to rein in their spending on non-essential items such as cars and for leisure activities like eating out at restaurants or visiting entertainment venues. The seven-day average of new daily cases in the US on Monday surpassed 137,000 for the first time since February, according to the Centers for Disease Control and Prevention.
"Disappointing retail sales and consumer sentiment suggest the US consumer is fading," Morgan Stanley equity analysts led by Michael Wilson said in a separate research note published Monday, but they don't see the Delta variant as the key driver in dampening spending.
"Generous stimulus checks have found their way into the economy but that now begs the question, will there be a payback in demand as this stimulus runs off? We think the answer is 'yes' and we think the market agrees, with Consumer Discretionary stocks underperforming over the past several months and in line with our mid-cycle transition," the analysts said.
The $8.7 trillion consumer discretionary sector this year has gained roughly 8.4%, lagging behind gains in nine other S&P 500 index sectors and performing just ahead of the 8.2% rise for the consumer staples group.
"We think the degree of underperformance is likely to get worse as we lap difficult [comparisons], the supplemental unemployment benefits come to an end, and higher prices lead to demand destruction," said Morgan Stanley.
President Joe Biden in March signed a $1.9 trillion coronavirus relief bill that included direct payments of $1,400 to most Americans. Meanwhile, an extra $300 a week in federal unemployment benefits for millions of Americans is set to expire on Labor Day in early September.
Morgan Stanley said recent reports on US retail sales and consumer sentiment supports its view on the consumer discretionary sector.
"Consumer Staples over Discretionary and Communication Services over Semis are our two favorite ways to play it," said Morgan Stanley.
Spending by Americans fell by 1.1% in July, a much larger rate than anticipated. Meanwhile, consumer sentiment in August fell to its lowest level since 2011 in the early August reading from the University of Michigan.
The real estate and financial sectors have been the strongest S&P 500 gainers in 2021, up by 29% and 28%, respectively.
Short sellers, on average, held 2.22% of all S&P 500 stocks, said S&P Global Market Intelligence, a division of credit-ratings agency S&P Global.