Though Retailers Have Been Riding High, Stimulus Money Is Drying Up

Expiration of Child Tax Credits Means Americans Have Less to Spend

Analysts predict downward pressure on retail stock prices in the early part of 2022, partially because expanded child tax credits are set to expire. These payments had provided parents with up to $300 per child on a monthly basis — a move that some experts say effectively boosted retail sales after COVID-19 stimulus payments dried up.

If the Build Back Better legislative package is passed, expanded child tax credits could return and increase consumer spending power by around $16 billion every month. In the absence of this, however, retailers could be in for a slowdown. Sales dropped noticeably from April-July 2021 as stimulus checks ceased and the child tax credit had yet to take effect.

Tax-Refund Season May Not Boost Retail in 2022

Retail sales expanded each month in 2021 after child tax credit payments began on July 15. Looking across the board, Mastercard (MA) reports department stores and clothing sales saw the biggest increases. Tax-refund season typically provides a similar boost for retail, but that may not be the case this year.

According to the National Retail Federation, nearly a quarter of taxpayers planned to use their 2021 refund on a major purchase or home improvement project. In speaking with one retailer, AutoZone (AZO) reports they saw “big spikes” in sales last year during any period containing a tax refund. Yet the problem for businesses is that many households already received half of what would otherwise be in their refund check by way of child tax credit payments.

Retail Stocks Are Riding High, But for How Long?

In addition to diminished spending power tied to stimulus checks, Americans have saved less overall since November 2021. Some analysts say these combined factors could prime retail stocks for a decrease. The S&P 500 retail index is also worth watching, as its enterprise value as a multiple of forward revenue has climbed 13% higher than the five-year average.

Both Lowe’s (LOW) and Home Depot (HD) show enterprise values as multiples of forward sales not seen in almost a decade. Dollar General’s (DG) share price as a multiple of forward revenue is currently 28% over its five-year average, with the company more exposed to low-income consumers than other retailers. Analysts also warn retail stock prices could fall before major retailers report their results. Ultimately, the expired child tax credits and their connection to refund checks mean consumers have less money to spend in the opening months of the year.

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