The Hedgeye Macro team presented its 2Q22 Macro Themes call today. That call included a reiteration of the Quad4 setup for 2Q. Quad4 (growth and inflation slowing) has been the macro market call since January, though some spiking commodities drove a defacto 1Q inflation acceleration. We are about to head into a deeper Quad4 environment given the consumption compares and the high probability of disinflation as we lap the CPI ramp of mid to late 2021. As a reminder, Quad4 in aggregate is bad for consumer discretionary equities. The worst performers historically are growth and high beta names like those in ecommerce. The best performing categories of consumer discretionary tend to be staple and necessity related retail like WMT, COST, dollar stores, and auto parts/maintenance.
Some pressures on consumer discretionary spending are well known, like the lack of stimulus YY and rising food/housing/gas costs. Then there's rising interest rates, but also coming in May is the end of student loan forbearance. In 4Q21 retail earnings reporting season (just ending) the net view of management teams was positive around the consumer appetite to spend, noting recent/backward looking trends (most reporting before the start of tough March compares). However, over the last few weeks we've been getting some signals of a consumer slowdown or comments of caution within management outlooks that could be the early signs of the risks for retail we highlighted on our Consumer P&L Retail Themes presentation in January.
Everyone wants to know when we'll be getting out of Quad 4 with the macro model currently projecting Quad1 for 3Q22. It’s a bit of a good news / bad news conundrum. The worse and deeper the growth result of 2Q, the more likely we get a growth acceleration in 3Q. So in order to have a rising probability of Quad1 in 3Q, we need worse pressure on consumer discretionary in 2Q. So we have to deal with what's next and the time and space of incoming data before we can say for sure when we'll be able to get outright bullish on consumer stocks.
Another flag from the presentation is that housing, which historically does well in Quad4, currently has a negative setup. Spiking rates and high prices mean affordability is crashing which will no doubt slow housing demand, pressuring housing related retail. Disinflation should send rates in the other direction as the year progresses, so there could be a spot where we go bullish on housing from a Macro perspective, but we're not seeing the data yet to justify that.
We have scheduled a 2Q update of our Retail Themes on April 14th at 12:30pm EDT. There we will provide updates on the direction of consumer income and spending and the risks and opportunities we see in retail equities. More details to follow.
