text size
A shopper passes washers and dryers at a Lowe’s home improvement store in Miami.
Joe Raedle/Getty Images
American consumers, one of the greatest economic powers in world history, are scared.
Investors may be debating whether the economy will fall into recession as the Federal Reserve normalizes interest rates, but consumers aren’t waiting for an answer. They are changing their shopping behavior and trying to save money.
In the grocery store—where inflation is driving up the price of everything—store-brand items are suddenly popular. The same goes for off-brand booze and tobacco.
This change in behavior was last seen during the financial crisis of 2008-09. Back then, the phenomenon of “shopping out” was first seen as people stopped going to restaurants. They ate at home to save money. Instead of buying a rib-eye steak, buy a skirt steak or chicken to save money. When white meat chicken became expensive, they switched to dark meat.
It’s unclear how much of this change in consumer behavior will translate to stocks, or even be recognized by investors.
Many retail stocks are vulnerable and fragile. While most people know it’s a great time to get outdoor furniture, it’s not exactly clear how the collapse in demand will play out in the economy. High gasoline prices are painful in a country that relies on cars and trucks for transportation.
To get ahead of a trade-down event, investors can buy a “stretch collar,” a put option, sell another bond with the same expiration date but at a lower price, and sell a call option—on it.
Choose the Consumer Choice Sector SPDR
Exchange Traded Fund (ticker: XLY). ETFs include a mix of companies – including
Lowe’s
(low) and
Tesla
(TSLA) – People sell what they want but don’t always want, causing them to sell their money.
The ETF’s performance this year has been impressive. He seems to be struggling to gain support after the rally for the past few weeks. The technical chart shows that the stock is winding down and preparing to retrace some or all of the 16% rally it enjoyed since mid-June.
Aggressive investors are trying to profit from a bearish trading pattern, but it’s worth considering the longer view. If the U.S. economy slows and the Fed raises rates—some companies, like retailers, are warning that they may have a fair amount of inventory to spare—retail spending could be hurt.
With the ETF at $148.48, investors could consider buying the January $145 put and selling the January $135 put, as well as selling the January $170 call option.
The extended collar is a false bet that pays off if the ETF drops to $135. The sale of the call covers the cost of the spread, but if the ETF rallies rather than declines—say, because gas prices are falling sharply or consumers don’t want to cut back on spending—the call’s value increases. In that case, investors would prefer not to sell it to finance the business.
The strategy generates a credit of $1.20. If the ETF is at $135 at expiration, the put’s collar is $11.20. It has ranged from $133.04 to $215.06 over the past 52 weeks.
The end of January covers the important back-to-school and Christmas shopping seasons, three meetings of the Fed’s rate-setting committee and countless economic reports. Investors are using economic data to inform decisions, and if the U.S. economy falls and exits or simply trades, that translates into determination.
Steven M. Sears is the CEO of Alternative Solutions, a specialty asset management firm. Neither he nor the firm has a position in the options or guarantees mentioned in this column.
Email: editors@barrons.com
