Consumer Spending

New research from Wells Fargo Equity Research showed a link between gasoline prices and valuations of retail stocks. A relationship described as “cloudy at best,” the report still found evidence that retail stocks have been traded as if there is a strong correlation between the two industries — although the tie is somewhat tenuous.

Wall Street’s investment thesis was simple: lower fuel costs translated to higher consumer spending.

The report found that as gasoline prices began to fall in mid-2014, investors continued to buy retail stocks even though valuations were declining and the retail segment as a whole was in a volatile state. At that time, an average stock price of the segment showed an increase of 23 percent (over the following ten months), despite that retail was in a turbulent state, the analysts noted in their report.

This dynamic changed last fall. “As fundamentals for our group have eroded in recent months, investors remain squarely focused on several key headwinds facing the retail landscape (shift to e-commerce, delayed tax refunds, holiday shifts, consumers shunning the mall, etc.), but there is also another possible headwind looming that has been little discussed: rising gasoline prices,” said Ike Boruchow, senior analyst at Wells Fargo Securities.

“After nearly four years of consistent gas-price deflation (providing a $125-$150 billion tailwind to retail during this time), consumers began spending more at the pump [year-over-year] beginning November 2016 (bad timing given the importance of these months to retail),” Boruchow said. “Furthermore, gasoline inflation has accelerated [year to date], which may explain some of the surprisingly deep sales and traffic declines experienced in recent months.”

The analyst went on to note that these findings do not apply to the apparel and footwear industries. Spending did decline in those sectors from 2012 to 2016, but gasoline prices remained low.

Annual consumer spending on gasoline reached a pinnacle at nearly $380 billion in 2012, but declined to roughly $240 billion in 2016. The $140 billion in annual, extra spending capacity did not trickle into apparel and footwear. Instead, consumers doled out money in the “experience economy.”

“While it’s unclear if this [gasoline] is actually contributing to sluggish sales/traffic trends, the fact that consumers are spending more at the pump probably doesn’t help,” Boruchow added. “Obviously the direction of gas prices can be volatile, and can also experience sustained upward momentum over a multiyear period, as we saw in 2010-12, but for now, it appears that the most inflationary period is behind us.”

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