Investors look for clues on consumer as holiday shopping kicks off

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By David Randall

NEW YORK (Reuters) -Investors are closely watching U.S. retail stocks as a barometer of consumer confidence as inflation bites, as the most important shopping season of the year begins on Friday.

Consumer discretionary stocks, measured by the S&P 500 Consumer Discretionary sector - the group of companies that benefit from spending on retail, restaurants, and vacations - were flat in morning trading Friday.

The sector is down 32% for the year to date, more than double the 15.5% decline in the broad S&P 500, as consumers have been walloped by surging inflation and the swiftest increase in interest rates since the 1970s.

"These stocks are a clue as to how fast the economy is slowing and whether slowing inflation is lifting confidence on Main Street," said Jim Paulsen, chief investment strategist at the Leuthold Group.

Expedia (NASDAQ:EXPE) Group Inc, Ralph Lauren Corp (NYSE:RL) and Home Depot Inc (NYSE:HD) paced the sector higher Friday, each gaining more than 1.6% compared with a 0.1% gain in the benchmark S&P 500.

Consumers  spent a record  $5.29  billion online on Thanksgiving Day, according to Adobe (NASDAQ:ADBE) Analytics data, up 2.9% from a year ago, driven by big discounts in categories such as toys and electronics.

The steepest discounts on Black Friday were for toys, peaking at 34% off listed price, electronics, and computers.

U.S. consumer prices rose at a slower pace than economists expected in October, pushing the annual increase below 8% for the first time in eight months and helping spark a rally in the broad U.S. stock market on hopes that inflation had finally peaked after hovering near 40-year highs.

Overall, the National Retail Federation, a trade group, forecasts that holiday sales, including e-commerce, will rise between 6% and 8% to between $942.6 billion and $960.4 billion during November and December. That would come in below both the 13.5% jump reported last year, and the 9.3% gain in 2020.

Retailers, meanwhile, began running unusually early discounts this year to entice shoppers.

Target Corp (NYSE:TGT), Kohls Corp , and Amazon.com Inc (NASDAQ:AMZN) ran so-called early Black Friday deals - the term for the day after the Thanksgiving holiday - that discounted toys and some other goods by as much as 50%.

Those companies did not respond to comment for this story.

Yet even with steep discounts, consumers will still have to spend more for popular products like a PJ Masks toy car or Mattel Inc (NASDAQ:MAT)'s Mega Hauler semi-truck because prices have risen faster than promotions, according to data provided by DataWeave.

Mattel did not respond to a request to comment.

The attempts to lure shoppers comes as the closely-followed University of Michigan consumer sentiment poll was revised up Wednesday to up to 56.8 from 54.7, beating the consensus expectation of 55.0 but still below the 59.9 index level from October. Expectations for purchasing long-lasting manufactured goods fell 21% due to high interest rates and high prices, the survey found.

"The sentiment data has been sliding sideways as consumers try to reconcile solid economic and labor market conditions against expectations of a recession and harmful inflation," said Thomas Simons, an economist at Jefferies LLC.

Retailers have struggled to shift their offerings as consumers fully emerge from the coronavirus pandemic, leaving some companies bogged down with excess inventory.

Walmart (NYSE:WMT) Inc, for instance, lifted its annual sales and profit forecast as demand for groceries was expected to hold up despite higher prices. Target, meanwhile, forecast a surprise drop in holiday-quarter sales.

Shares of Walmart are up 7.5% for the month to date, while shares of Target are down 1.2%. Shares of Walmart fell 0.2% Friday, while shares of Target fell 0.7%.

Department store Macy's Inc (NYSE:M) raised its annual profit forecast last week. Shares of the company are up nearly 12% month-to-date. Kohl's (NYSE:KSS), meanwhile, withdrew its forecast as it faces weakening demand due to rising prices. Shares of the company are up 6.7% month-to-date.

Walmart, Macy's and Kohl's did not immediately respond to requests for comment.