For the segment of American society squeezed by surging prices and the wind-down of pandemic financial support, it’s getting tougher to spend -- even at discount retailers.
Wall Street has noticed.
In the options world, where derivatives dealers set the cost of insurance against stock plunges, traders are bracing for more consumer belt tightening. Prices for bearish options on stocks of discount-retailers Ollie’s Bargain Outlet Holdings Inc. and Dollar General Corp. as well as fast-food chains like McDonald’s Corp. have begun to soar.
These firms are “more leveraged to that low-end consumer than they would be to your middle-income or higher-end consumer,” Amy Wu Silverman of RBC Capital Markets said on Bloomberg TV and Radio last week. “The options market is starting to flag that concern to the downside.”
More Americans are having a harder time making ends meet. Consumer prices surged in January, sending the annual inflation rate to a four-decade high. Rents are skyrocketing. The government’s pandemic financial support has largely dried up, and expanded unemployment benefits ended last summer. The child tax credit -- worth up to $300 per child per month -- saw its last monthly payout in December.
So the price of protection for bargain retailers’ shares is rising. According to Silverman and data compiled by Bloomberg, three-month puts betting on a 10% decline in Dollar General are now 5 points above calls wagering on a comparable increase, a fattening of “skew” that signals bears are getting the upper hand. Similarly, the spread between one-month puts and calls for Ollie’s widened to 12 points last week before retreating.
Silverman is tracking the same trends for fast-food chains like McDonald’s, Jack in the Box Inc. and Yum! Brands Inc., parent of KFC, Taco Bell and Pizza Hut. Protection against plunges for delivery services like DoorDash Inc. are also getting more expensive.
Yet the signals sent by their shares are by no means clear, as many factors can affect prices. Walmart Inc.’s market fortunes have long been viewed by many as a contrarian signal for growth -- the better it does, the worse off consumers must be. Though Dollar General’s shares are down 15% on the year and Ollie’s has fallen 12% in the same period, strapped shoppers in search of deeper discounts could end up adding to discounters’ bottom lines.
And calculating how much broad economic trends weigh on individual stocks can be risky. Anthony Chukumba, a managing director at Loop Capital Markets who covers Ollie’s, says stores like it are more exposed to supply-chain disruptions than other brands, which may explain trader skittishness.
Even the impact of inflation is far from obvious. Dollar Tree, for example, said in November that it would raise standard prices to $1.25, edging away from the price strategy that gave it its name.