What did 'Smart Money' see again? Hedge funds are selling heavily, betting on a decline in US consumer spending

While optimistic signals are being released by US economic data, hedge funds are voting with their feet.

Goldman Sachs Prime Book data shows that last week, there was a net sell-off in US consumer stocks, with long positions selling more than short covering. The nominal deleveraging of consumer stocks - the sum of long selling and short covering - hit the second highest level in the past year, ranking in the 96th percentile over the past five years. Hedge funds also hold a cautious attitude towards restaurant stocks.

Hedge funds' massive sell-off indicates their lingering doubts about the resilience of US consumption. However, recent economic data released in the past week shows no signs of a recession in consumption.

Earlier data revealed that US retail sales increased by 1% month-on-month in July, exceeding expectations and hitting the highest level since early 2023. The University of Michigan's Consumer Confidence Index for August rose for the first time in five months, with stable inflation expectations.

The latest financial reports from global retail giants also released positive signals. Walmart's second-quarter revenue and net profit both exceeded expectations, and the company raised its full-year performance guidance. The world's largest "buy now, pay later" service provider stated that US consumers show no signs of reducing spending.

Morgan Stanley analyst Sarah Wolfe wrote in a recent report:

We have always maintained that due to tight monetary policy and a broader normalization of consumer behavior, consumer spending will decline in 2024. However, we believe that the fundamental drivers of consumption still support stable spending; it will neither re-accelerate nor decline. The July retail sales data confirms that purchasing power still exists.

According to a previous article by Wall Street News, Goldman Sachs stated that the performance of consumer sector companies is consistent with macro data. In the S&P 500 index, 60% of consumer companies exceeded expectations in the second quarter, indicating that US consumption still has some resilience. Goldman Sachs' developed consumer indicator - the US Consumer Dashboard - further shows that the current US consumption situation is very healthy.

Apollo Asset also believes that US consumption remains strong:

...strong retail sales, declining unemployment claims, strong restaurant bookings, strong air travel, high hotel occupancy rates, accelerated bank credit growth, declining bankruptcy applications, steady credit card spending, strong Broadway audience numbers and box office revenue.

The latest data on retail spending and unemployment benefits has eased some of the concerns about the US economy, although some sectors are still constrained by rising interest rates. In July, retail sales saw the largest increase since early 2023, with overall retail sales rising. Walmart's upward revision of its performance guidance also indicates that consumers, while becoming more cautious, are still spending.