As holiday shopping season wraps up, U.S. equity investors are gauging whether long-languishing shares of brick-and-mortar retailers can sustain their recent rebound in anticipation of a full economic reopening in 2021.
The SPDR S&P Retail ETF, which tracks a broad group of retailers such as department and specialty stores, is up nearly 40 per cent this year. Its gain reflects a rally that has lifted shares of companies in sectors particularly sensitive to the economic cycle, such as industrials and energy, in the wake of recent breakthroughs in COVID-19 vaccines.
Those numbers pale in comparison with the massive gains online companies such as Amazon.com Inc, Etsy Inc. and Wayfair Inc. have notched this year, after the pandemic accelerated a shift toward internet shopping.
Some investors, however, believe that more traditional retailers may be able to narrow that gap in the coming year. Their view dovetails with a broader bet that vaccines against the coronavirus will spur widespread economic reopenings across the United States, helping the industries that have suffered most from the effects of COVID-19.
“There’s anticipation of people shopping,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “Wall Street is looking forward to a time when we are not locked down.”
Investors this week will have an eye on the University of Michigan’s widely followed consumer sentiment index, which remains below prepandemic levels but has recently ticked higher.
One source of consumer spending could come from additional stimulus cheques to individuals included in a US$900-billion coronavirus aid package that Congress has moved closer to approving, said Alex Ely, chief investment officer of Macquarie Investment Management’s small and mid-cap growth equity team.
At the same time, brick-and-mortar stores that have withstood the economic onslaught from the pandemic may have more solid footing next year as competitors have faltered, said Eric Marshall, portfolio manager at Hodges Capital Management.
J.C. Penney, J. Crew, Pier 1 Imports and Neiman Marcus are among the retailers that declared bankruptcy this year.
“On the back side of this ... there could come a period of prosperity,” Mr. Marshall said.
Retail shares likely will not advance in unison, as the pandemic has only magnified long-standing trends that will separate winners from losers, investors said.
Jason Hans, portfolio manager at BMO Global Asset Management, expects department stores to resume their underperformance. At the same time, certain specialty retailers could catch up once in-store shopping recovers, he said. He has added to his position in children’s clothing company Carter’s Inc.
Traditional retailers’ online presence may also play an important role in determining their fate.
Mr. Marshall, for instance, owns shares of American Eagle Outfitters Inc., which has substantially increased its online sales.
Ms. Forrest said she has gravitated to retailers such as Urban Outfitters Inc, which she classifies as “good real-world merchandisers” – those that successfully lure customers into impulse buys and have potential to translate that strength into online sales.
The retail recovery, however, may face some hitches. U.S. retail sales fell more than expected in November, likely weighed down by raging new COVID-19 infections and decreasing household income. Further delays in additional fiscal stimulus could place more near-term strain on economic indicators.
But some investors are willing to look past that momentary weakness.
“The fundamentals are going to be much better in the second half of 2021 and 2022,” Mr. Ely said. “But you want to buy six to nine months ahead of when things are great. Now is the time.”
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