Sometimes, the market corrects itself for reasons not directly correlated to an individual market. That's what is occurring on June 24th in terms of Brexit. Overnight, U.K. voters voted to leave the European Union and that decision has created turmoil in global equity markets. While the polls leading up to the vote indicated the U.K. would remain in the European Union, this was not the outcome.
Due to the Brexit results, United States equity future markets are showing steep declines across the board. Some indexes and ETFs have been afforded the opportunity to correct recent gains due to this turmoil from Brexit and the SPDR S&P Retail ETF (NYSEARCA:XRT) is one of those ETFs. In a recent article regarding the XRT I articulated the following:
From an investor's perspective, and looking at the technicals for the XRT it may need to retest the 90-day lows before bottoming. As such, I'm not expecting department store retail stocks like TGT, JCP, M, or BBBY to outperform. While valuations for these stocks remain at historically low levels, they exhibit this valuation for valid reasons. Additionally, the reason being poor sales results, remain present if correlated to the trending monthly retail sales data. As such, if you have already deployed capital to the aforementioned retail names, it may be prudent to take advantage of potentially lower prices in the future by cost averaging. On the other hand and if you have yet to deploy capital in the aforementioned retail stocks, it may be prudent to continue to remain on the sidelines for further depreciation and advantage your portfolio with acquiring shares at lesser valuations.
Pre-market trading activity on June 24th has the XRT trading below $41 a share. The recent trading low was $39.95 in May and I would look to that level as support for the ETF. If the ETF closes below this trading low I would expect the ETF to continue to exhibit weakness. In addition to the Brexit ancillary affects on the XRT, Bed Bath & Beyond (NASDAQ:BBBY) Q1 2016 results may also impact the total sentiment for the retail sector. The home goods retailer announced quarterly results on Wednesday after the closing bell that missed on both the top and bottom line. Gross margins also contracted once again and as expected. Shares of BBBY were down as much as 5% after results were released, but managed to come all the way back and even finish positive on Thursday. Having said that, much like the majority of stocks trading in the pre-market Friday, shares are down roughly 3.5 percent on light volume.
Bed Bath & Beyond reports out of the typical retail earnings period and as such the company can offer great perspective beyond other retailers reporting a month ahead of the firm. With Target (NYSE:TGT), J.C. Penney (NYSE:JCP), Kohl's (NYSE:KSS), Macy's (NYSE:M) and others all reporting dismal sales reports in the month of May, Bed Bath & Beyond's poor sales reporting for Q1, and reduced yearly comp expectations, indicate that brick and mortar sales trends will likely persist. As such, I would not look for retail stocks to market perform, if anything, they will likely underperform and pressure the XRT for much of the year. With this as a fundamental backdrop, I would continue to avoid allocating capital to XRT and big box retailers, even as many of them offer healthy dividends. As far as BBBY is concerned, I would not dedicate capital to shares unless they break $40 a share.
Moreover, as retailers continue to exhibit poor sales performance, some have increased their dividends to lure investors. In addition to increasing the quarterly dividend payout, many retailers also offer share repurchase programs that have helped to bolster earnings in the face of contracting gross margins and net sales. Having said that, such financial engineering and increases in yield have failed to lift retail stock prices. Target recently increased its dividend payout by 7% but the stock has not benefited from the action. Macy's is another company with a lofty dividend yield that has not served long-term investors well with the stock price cut more than 55% over the last year. With respect to Brexit, Macy's is very much tied to international tourism and trade. The company noted in its last two quarterly reports that its results are being impacted by a lack of international buying at its retail locations. In short, be careful of dividend and buyback traps as they may express a value that turns out to be a value trap.
Investors should look at this morning's market activity as an initial reaction to the Brexit vote. European equity markets are expressing steeper declines intraday than U.S. equity futures are presently. As such it may be optimal to maintain cash on-hand until a clearer picture of the Brexit variables play out. Investing is a long journey and as such there is little need to prematurely put capital to work during times of uncertainty and while other investors are obviously selling equities. With both Brexit and poor retail sales performance from big box retail brands, XRT is likely not a sound investment at this time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.