Retailers rocked by tariff hike

They have survived COVID, bypassed the supply chain and have, so far, managed to navigate their way through a multi-generational inflation spurt. Now, as retailers face their fourth major economic test in the last 25 months, many of the same players who not only thrived but emerged stronger from the previous three tests suddenly find themselves at risk of being stumbled by the final hurdle: rising interest rates.

Although still only a fraction of the historical 50-year average, the rapid increase in the rate of a typical 30-year mortgage has seen this benchmark rate nearly double over the past two years, but perhaps more painfully, to go from around 3% to almost 5% in the first quarter of 2022 alone.

mortgage rate chart

While these four headwinds are interconnected and interest rate hikes are intentionally pushed higher by the Federal Reserve, this last hurdle is already weighing down in the near term on a number of rate-sensitive retailers who are directly exposed to all of which makes housing even less affordable.

An economic cancer

In the same way that radiation therapy and chemotherapy inflict great harm on the patient by killing cancer, higher borrowing costs are comparatively deadly.

Rising rates not only slow down overall buying, but also limit construction as well as furnishing of these properties. So Home Depot shares have fallen 25% this year at a time, while the broader S&P 500 has fallen just 6%.

It doesn’t stop there. Take a look at the reaction seen by furniture or bedding retailers and rate-sensitive retirement gets even uglier, with brands like Wayfair and RH (formerly Restoration Hardware) each down nearly 40% in 2022, with mattress retailer Tempur Sealy is also seeing similar declines this year.

Additionally, appliance-related names such as Whirlpool and paint store Sherwin Williams are each down around 25% year-to-date.

The list goes on and on, but the effect is always the same: as much as the Fed is (rightly) working to rein in a scorching housing market while seeking to calm inflation, which is rising much faster than consumer wages. , the repercussions of these actions ripple deeply through the economy and the entire retail industry.

Not just housing

To be fair, all of the aforementioned companies are still up from the March 2020 COVID lockdown low of 25% to 100% – even after the recent rate-focused retreat.

Even though retailers benefiting from the home-nesting trend have benefited greatly over the long term, they are not the only ones being hammered by this rate-driven tough time that is inflicting damage on all item suppliers. “at a high price”.

After housing, of course, that means cars. Although the auto industry has been and continues to be hit by unique supply constraints, rising interest rates have also inflicted difficulties this year on most vehicle showrooms and dealerships across the country. country.

In particular, multi-store brands such as AutoNation, Penske Auto Group and CarMax all underperformed broader markets this year and fell 11%, 12% and 21%, respectively.

With that in mind, it’s also important to note that most economists expect this trend, and the disastrous effect it is having on many retailers, to get worse before it gets better.

In fact, the rate hike could get worse when the latest inflation data comes out Tuesday morning April 11th. Economists forecast the headline CPI to hit 8.5% in March, up from a 40-year high of 7.9% in February and more than triple the 2.6% pace posted in March 2021. It will be a figure that will quantify what consumers already know and the Federal Reserve already fears, but this one could have profound implications for rate-sensitive retailers, who will release their own updated reading for March on Thursday (April 14).

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