Restaurant stocks are serving up a heaping helping of worry for investors in 2024. While the broader market enjoys a tech-fueled rally, the Russell 3000 Restaurant Index is burning, dropping nearly 2% on July 1st and sinking below its May low. This freefall extends a downtrend that began in March, according to Jonathan Krinsky, chief market technician at BTIG. Since then, the Restaurant Index has shed 6%, a stark contrast to the S&P 500’s 6% gain over the same period.
Krinsky’s analysis paints a concerning picture. The weakness in restaurants isn’t an isolated incident; it joins a growing list of ailing sectors like homebuilders, industrials, and materials. This broad consumer-related decline makes it difficult to ignore the potential for a larger market issue, particularly in the late-cycle stage we currently find ourselves in.
“These groups are no longer opportunities waiting to catch up,” warns Krinsky. “Instead, they’re sending ominous signals about the health of the market.”
This warning carries extra weight considering the Federal Reserve’s dovish stance. The last rate hike occurred nearly a year ago, and long-dated Treasury yields peaked eight months back. Despite this seemingly favorable environment, restaurant stocks – with a few exceptions – continue their descent.
The year-long relative underperformance of restaurants compared to the market isn’t a new development. However, Krinsky emphasizes that the recent absolute price breakdown holds greater significance. This freefall, he argues, suggests “clearly some issues with this group, and likely the consumer at large.”
Key Takeaways:
- Restaurant stocks are experiencing a significant decline, falling nearly 2% on July 1st and trading below May lows.
- This weakness extends a downtrend that began in March, significantly underperforming the broader market.
- The restaurant sector’s struggles are part of a larger trend impacting consumer-related industries.
- BTIG’s Jonathan Krinsky views this broad consumer weakness as a potential late-cycle warning sign.
- The recent breakdown in absolute prices, despite a dovish Fed, suggests deeper problems within the restaurant industry and potentially the consumer base.
Conclusion:
The sizzling summer for restaurant stocks is quickly turning into a scorching sell-off. This sector’s woes, coupled with weakness in other consumer-driven areas, raise concerns about the health of the overall market, especially considering the Federal Reserve’s accommodative stance. While relative underperformance has been simmering for some time, the recent absolute price breakdown suggests a more concerning issue at play. Investors should closely monitor the restaurant industry and broader consumer spending trends in the coming months to gauge the severity of this potential late-cycle slowdown.
