Trade Around Declining Consumer Confidence (LULU vs NKE)

While investors would look at the consumer discretionary sector when the Fed cut interest rates as rate cut normally would have a positive effect on consumer spending habits through easier and cheaper financing rates.

But this time economic data shows that the state of consumer is not the same as before. We are seeing some of the stocks in the consumer discretionary space being rotated into other sectors.

In the article I would like to share what I have looked at the consumer discretionary sector stocks. But do note that we will be expecting some important event that could affect the sentiment.

One of the event to watch is Fed Chair Powell Speech on 30 Sep 2024 at 1:55pm ET.

Even when economists and hedge funds manager could be looking at the economic data in black and white, there are many factors which could affect how consumer behave.

One of the factor that I observe is psychology. Consumer has to balance their finances with rising unemployment rates, inflation in items like rent, groceries, and insurance.

In economies that are performing better, the divergence between earning power and inflation has caused one major shift in the financial sector. Credit card delinquencies are on the rise, and so are car repossession rates in their 23% annual spike.

So this mean that consumer would see their personal savings rate ended up negative, this means that they would focus on necessities rather than items like clothing and other discretionary items when they worked out their monthly spending budget.

So this could mean that stocks which are depending on domestic consumer spending on them might take a cut.

Lululemon stock had been an investor favorite since the COVID-19 pandemic, when the Fed cut interest rates to a near historical low, an event that helped Lululemon see better prospects. However, today’s rate cuts come up against the weakening consumer state, which would not probably have the same effect on the stock as they had a few years ago.

So in order to trade around the declining consumer confidence, I would think that investors should be looking at retail stocks with much more international sales exposure.

If we were to look at how LULU have been trading from the technical analysis, even though we are seeing more than 4% gain on last Friday (27 Sep) trading.

Though the MACD is showing a promising bullish crossover, but LULU has just trade above the short-term MA, and currently the long-term MA is above the short-term MA which denote a downward momentum.

MTF is showing neutral signal, but we might want to continue to monitor the price action on LULU over this week and see how consumer and investors think of this stock.

The large presence is going to help the financials of the business diversify across different trends and cycles. With a much bigger international presence, Nike is able to stay away from the potentially bigger contractions to be seen from the consumer sector in the United States,

If we looked at Nike from the technical analysis, we can see that MACD is already on an uptrend, and Nike is trading above the long-term MA, and with its earnings coming up on Tuesday (01 Oct) after market close, are we going to see a surprise.

Even though the MA is showing a downward momentum with long-term MA above short-term MA, we could see that Nike is going to perform an upward trend despite MTF showing neutral signal.

I would think that Nike stock price is a bargain now, I would be monitoring the price action today (30 Sep) to see if there is an opportunity to take a position.

These two stocks are one of the many in the consumer discretionary sector which I am using to assess whether if it is still a good bet on the consumer discretionary sector despite declining consumer confidence when rate cut is announced.

Appreciate if you could share your thoughts in the comment section whether you think consumer discretionary sector would continue to show weakness as consumer confidence declined?.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.