Investors are looking for clues about consumer health as the holiday shopping season begins

NEW YORK, Nov 25 (Reuters) – Investors are closely watching U.S. retail stocks as a barometer of consumer confidence as inflation bites as the most important shopping season of the year opens on Friday.

Consumer discretionary stocks, as measured by the S&P 500 Consumer Discretionary sector — the group of companies that profit from retail, restaurant and vacation spending — are down 32% year to date, more than doubling the 15.5% decline in the overall S&P 500 (.SPX) as consumers were battered by rising inflation and the fastest rate hike since the 1970s.

“These stocks are a clue to how quickly the economy is slowing and whether slowing inflation is boosting Main Street confidence,” said Jim Paulsen, chief investment strategist at Leuthold Group.

U.S. consumer prices rose at a slower pace than economists expected in October, pushing the annual increase below 8 percent for the first time in eight months and helping spark a rally in the broad U.S. stock market on hopes that inflation is finally peaked after hovering near 40-year highs.

Overall, the National Retail Federation, a trade group, forecast holiday sales, including e-commerce, to rise between 6% and 8% to between $942.6 billion and $960.4 billion in November and December. That would be below the 13.5% jump reported last year and 9.3% growth in 2020.

Meanwhile, retailers have started offering unusually early discounts this year to lure shoppers.

Target Corp. (TGT.N), Kohls Corp. other goods by as much as 50%.

Those companies did not respond to a comment for this story.

However, even with deep discounts, consumers will have to spend more on popular products such as the PJ Masks toy car or Mattel Inc’s ( MAT.O ) Mega Hauler semi-truck as prices have risen faster than promotions, according to data , provided by DataWeave.

Mattel did not respond to a request for comment.

The attempts to woo buyers come after the closely watched University of Michigan survey of consumer sentiment was revised up to 56.8 from 54.7 on Wednesday, beating the consensus expectation of 55.0 but still below the index’s level of 59.9 since October. Expectations to buy durable manufactured goods fell 21% due to high interest rates and high prices, the survey found.

“Sentiment data is slipping sideways as consumers try to reconcile stable economic and labor market conditions with expectations of a recession and damaging inflation,” said Thomas Simons, an economist at Jefferies LLC.

Retailers are struggling to change their offerings as consumers fully recover from the coronavirus pandemic, leaving some companies mired in excess inventory.

Walmart Inc ( WMT.N ), for example, raised its forecast for annual sales and profit as grocery demand is expected to hold despite higher prices. Meanwhile, Target is predicting a surprise drop in sales during the holiday quarter.

Walmart shares are up 7.5% for the month to date, while Target shares are down 1.2%.

Department store Macy’s Inc (Minn.) raised its full-year profit forecast last week. The company’s shares are up nearly 12% since the beginning of the month. Meanwhile, Kohl’s has withdrawn its forecast as it faces weakening demand due to rising prices. The company’s shares are up 6.7% since the start of the month.

Walmart, Macy’s and Kohl’s did not immediately respond to requests for comment.

Reporting by David Randall Editing by Nick Zieminski

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