What happened
Shares of e-commerce names Chewy (CHWY -0.58%), Pinterest (PINS 0.06%), and Etsy (ETSY -1.47%) were falling hard on Tuesday to start the year, down 5.5%, 4.9%, and 6.3%, respectively, as of 12:30 p.m. ET.
There wasn't much in the way of company-specific news today, so the sell-off looks to be sector-based. All three of these stocks trade at either high multiples of their earnings or aren't profitable at all, and those types of stocks are having a difficult time in the new world of higher interest rates.
Furthermore, investors appear to be anticipating an economic downturn or recession as a result of those very interest rate hikes, and some commentary from economists and Federal Reserve officials over the holiday and today fed those very fears.
With consumers having loaded up on goods during the pandemic, some may fear bad sales and earnings numbers, particularly for these expensive consumer discretionary stocks, in the upcoming earnings season.
So what
Over the holiday and today, a slew of commentators predicted a recession in 2023. International Monetary Fund Chief Kristalina Georgieva appeared on Face the Nation this past weekend, and predicted a global recession this year as a result of the synchronized rate hikes coming from multiple central banks. Moreover, while the stronger economies such as the U.S. may skirt the official definition of a recession, Georgieva also said that even if it is not an official recession, "It would feel like recession for hundreds of millions of people."
Then on Tuesday, former Federal Reserve Bank of New York President William Dudley spoke with Bloomberg, calling a recession "pretty likely."
These are just a few of the leading economic thinkers predicting a downturn this year. Even worse for Chewy, Pinterest, and Etsy is that these names are mostly related to somewhat discretionary products. Etsy's e-commerce platform is mostly handmade goods, while Pinterest's digital ads revenue is also mostly related to home, wedding, and other discretionary categories people browse on the platform. These types of purchases can be withheld in lean times.
Chewy may be perhaps the best positioned to weather a discretionary spending downturn, as pet owners won't stop buying food for their pets; however, prospective pet owners may hold off on buying or adopting a new pet, or they may trade down to cheaper types of food.
Therefore, despite Chewy, Pinterest, and Etsy already being down 37.6%, 36%, and 46% over the past year, respectively, and even though all of these companies beat expectations on their third-quarter earnings reports, investors may be having a hard time gauging a bottom in these types of stocks.
Since they trade at higher multiples of earnings or have little profits relative to more predictable mature stocks, and since those future earnings are highly uncertain in 2023, it's perhaps no surprise these stocks are highly volatile in this uncertain environment.
CHWY 1 Year Total Returns (Daily) data by YCharts
Now what
It is hard to know what to predict for these three stocks in the near term, but longer-term-oriented investors may want to think about putting each of these stocks on their watch lists. The macroeconomic environment, with higher rates and recessionary fears present at the same time, is about as bad as it can get for these types of consumer growth names.
However, each company is executing quite well on its own terms. Etsy is actually profitable, and has carved out a seemingly defensible niche within handmade and "special" goods. Chewy has been reporting strong numbers, and its customer satisfaction is very high. Meanwhile, Pinterest has a new CEO from Alphabet, as well as an activist investor involved in Elliott Management, which just put one of its portfolio managers on the board.
So while it's possible these stocks could fall further if the economy enters a recession, investors with a longer-term orientation may want to scoop up shares if they do. After all, even William Dudley quoted above suggested in the same Bloomberg interview this morning that if the U.S. does enter a recession, it is highly likely to be shallow and short-lived.
