A year ago, retail stocks were taking a beating. A wicked combination of rising interest rates and supply chain bottlenecks wreaked havoc on most retailers’ first quarter results.

It wasn’t just the smaller stores that were affected. Some of the biggest merchandisers, including Walmart (NYSE: WMT) and Target (NYSE: TGT), shocked Wall Street with subpar performance.

As I noted then, “It appears that all of the major retailers are suffering equally at the moment. They have similar business models and are heavily dependent on overseas suppliers for most of their merchandise.”

The good news is those supply chain bottlenecks have been mostly resolved. The bad news is interest rates have gone considerably higher since then.

And since most retail purchases are made using some form of credit, retailers are guiding for a slowdown in spending. Walmart said it is expecting a 2.5% to 3.0% increase in consolidated net sales this year.

Target’s guidance is even more subdued. The company said that it “expects comparable sales in a wide range, from a low-single digit decline to a low-single digit increase.”

That is not what Wall Street wants to hear. Especially when the unemployment rate is at a 50-year low, and consumers are still spending.

That lack of excitement is evident in the performance of the VanEck Retail ETF (RTH). After peaking above $192 at the end of 2021, the fund was back below $164 at the start of this month.

Despite those ups and downs, RTH has gone nowhere over the past 2 years. Neither has the S&P 500 Index, so in that regard the retail sector has been holding its own.

Timing is Everything

A year ago, I felt that retail stocks had become oversold. For that reason, I suggested buying one that was performing better than the others but suffering the same fate.

I singled out Bath & Body Works (NYSE: BBWI), which was one of the smallest positions in RTH. I reasoned that it would rebound quicker than the others once selling pressure abated.

I was right about its future behavior but early in my timing. Had I waited another month, I could have bought BBWI for $10 less.

After that, BBWI took off. On February 1, it closed a few pennies below $48. From its low last July, that works out to a gain of 87%.

As the old saying goes, timing is everything. And I’m beginning to think that the timing is good to make another bet on the retail sector.

Except this time, I think retail stocks are about to take a hit. The economy is slowing down, as evinced by the 1.1% annual growth rate of GDP (gross domestic product) during the first quarter of this year.

That was its third consecutive quarter of deceleration, and less than half its growth rate during the previous quarter. Even worse, a very accurate leading indicator of GDP growth just went negative.

The Conference Board Leading Economic Index (LEI) fell in March to its lowest level since November 2020. The Conference Board “forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

Over the past twenty years, the LEI has been deadly accurate in predicting downturns in GDP. And right now, it is nearly as low as it was three years ago when the coronavirus pandemic nearly shut down the global economy.

A Different Option This Time

This time, I don’t suggest picking an individual stock to make a play on retail stocks. Instead, I will go with the RTH since it is a proxy for the entire sector.

And since I think they are likely to go down, I’ll buy a put option. A put option increases in value when the price of the underlying security goes down.

Last week while RTH was trading a little over $166, the put option that expires on September 15 at that strike price could be bought for $6.

For this trade to be profitable, RTH must fall below $160 by the time this option expires. That works out to a decline of less than 4% over the next four months.

If I’m wrong, then this option could end up being worthless. But if I’m right, it could skyrocket in value.

And if RTH falls below $150, where it was trading a year ago when GDP turned negative, the return on this trade would be more than 150%.

To be clear, I’m not hoping for a recession. If that happens, a lot of people might lose their jobs.

But at the same time, I have to call ’em like I see ’em. And right now, I don’t like what I see coming up for the retail sector.

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