Oil prices continue to rise rapidly due to the growing turmoil in the Middle East. This market is looking more and more like early 2008 when the run up in oil prices was one of the factors that tipped the economy into recession (The financial crisis made it the worst downtown since the Great Depression). Energy inflation is already impacting consumer sentiment and it is my belief it will have major impacts to consumer spending and the overall economy. One of the market sectors that is likely to be hit especially hard is consumer discretionary stocks. I decided to look at a basket of twelve well known retail stocks from the beginning of 2008 to the end of July that year (6 weeks before Lehman) to see how they behaved in order to see if this research could give insights on how this sector is likely to trend over the next six months if oil remains at these prices or rises further.
The companies I picked represent various parts of retailing universe. They are Sears, Macys, Best Buy, Abercrombie and Fitch, Walmart, Gap, Amazon, Target, Costco, Lululemon, Tiffany, and Apple. Over the time period of January 1st, 2008 through July 31st, 2008 the S&P index lost a little over 12% for comparison purposes. After doing the analysis, these are the results:
1. Costco and Target lost between 7-8% of their value
2. Tiffany and Best Buy lost between 14-15% of their value
3. Sears, Macys, Abercrombie & Fitch, Gap, Apple and Amazon lost between 20-28% of their value
4. Lululemon lost approximately 50% of its value
5. Walmart actually gained over 20% over this time period
CONCLUSIONS: So what can we conclude from this limited analysis? (NYSE:A) Stocks that sell staples like Walmart, Target and Costco should hold up better than the market overall and much better than other retail stocks in an environment with high oil prices. (NYSE:B) Stores that sell higher end items like Tiffany and Best Buy should move roughly in line with the market. (NYSE:C) Retailers that sell apparel or basic discretionary items like Sears, Macys, Abercrombie & Fitch, Gap and Amazon should fall harder than the market overall. (NYSE:D) High beta retailing stocks that sell highly discretionary items such as Yoga wear like Lululemon are likely to be hit the hardest in any kind of oil induced pullback.
Given all the geopolitical and domestic challenges the market currently faces, I would be cautious here. Be careful out there.
Disclosure: I am long WMT.