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Early indications suggest that the growth experienced throughout markets could drive a Santa Claus rally for a number of retail stocks. 

The festive cheer spreading throughout retail stocks in Q4 2024 can be seen in the recent performance of the VanEck Retail ETF RTH, which has soared nearly 6% between October 31 and November 12, 2024. 

To add to the positive sentiment towards retail stocks, Citi analysts have anticipated a favorable short-term outlook for retailers, noting that the conclusion of the election season should see consumer uncertainty give way to a more sustained focus on the holiday shopping season. 

Despite the divisive nature of US politics, analysts have claimed that recent warm weather spells could see pent-up demand for seasonal purchases cause a flurry of retailer activity as cooler climates arrive now that the election has passed. 

Rate Cuts Drive Short-Term Optimism

Retailers have received a timely boost as the Federal Reserve opted to cut interest rates by 25 basis points in the wake of the election, with the possibility of further cuts on the horizon depending on economic data released prior to the Fed’s December meeting. 

The lower cost of borrowing is set to provide consumers with more spending power ahead of the festive season, but there are dangers that higher confidence could bring a resurgence in inflation data looking to the long-term. 

This, coupled with the possibility of President-elect Donald Trump reintroducing high tariffs on trade, could see more inflation in 2025 which would drive interest rates higher once again. 

Future uncertainty over the state of inflation and interest rates will lead to more investor uncertainty looking further afield, but short-term optimism for further retail rallies as rates reach lower levels could see investors flood back into a prospective Santa Claus rally for retailers. 

Focus on Value Retailers

Given the unpredictability over how Trump’s second term could play out on Wall Street, and what prospective tariffs could mean for inflation and interest rates in 2025 and beyond, the most valuable investment options within the industry revolve around discount and value stocks. 

With long-term questions over how the CPI will look moving forward, value plays focus on discount retailer stocks like Dollar General (DG), Dollar Tree (DLTR), and Five Below (FIVE). These options are likely to build their appeal to consumers beyond the short-term post-election relief rally and could be sustainable options as long-term holds. 

This lack of long-term conviction can also be seen in Citi’s recent ratings changes for two major US retail stocks. While the bank’s analysts raised their rating for Carter’s Inc. (CRI) from Sell to Neutral in recent days, Ross Stores (ROST) was downgraded from Buy to Neutral, citing the uncertainty surrounding the arrival of CEO Barbara Rentler. 

AI is an Early Christmas Present

The 2024 festive season will be the first in which many retailers have implemented generative AI solutions in their Q4 strategies to build stronger resilience. 

Buoyed by the conclusion of a challenging and uncertain period in the build-up to the November 5 election, more retailers have been able to spend the days following Trump’s victory strategizing their marketing approach for the lucrative final quarter of the year. 

The effectiveness of retailers in appealing directly to their target audience is set to grow with the help of widespread artificial intelligence adoption. 

David Curtis, chief technology officer at AI supply chain management firm RobobAI, has claimed that AI and automation will dramatically transform retail across the front-end and back-end with optimized pricing structures, more personalized marketing, and focused inventory management. 

This can help retailers become more effective when it comes to lead generation and accommodating sales while maintaining closer control of expenses. As a result, 2024 may be the first year where we see more retail stores master the art of selling at scale to newly confident consumers. 

The arrival of AI-powered solutions in the world of retail could help to deliver a more resounding Santa Claus rally in the short term, even if the longer-term prospect of the industry will hinge on Trump’s control of the US economy. 

Should Investors Buy into Optimism?

Evidence of returning confidence in the retail sector following Trump’s election win should be a positive sign for investors looking into the prospects offered by retail stocks. 

The post-election relief rally, coupled with the Fed’s decision to lower interest rates has come at an excellent time for consumers who are likely to be more confident when spending moving into the festive period. 

With Thanksgiving and Black Friday offering a strong indicator as to how Q4 will play out for retailers, it could be worth looking for signs of consumers backing retailers with purchases before riding the Santa Claus rally. 

For all the uncertainty that the future holds, the short-term prospects for retailers look brighter today. With the help of AI and other emerging tech, retail stocks have a great opportunity to make the most of newfound consumer confidence.

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