Energy price surge impacts discretionary spending

What happened: Energy prices surged in March due to geopolitical tensions, particularly the US-Israel war on Iran. This led to a significant increase in consumer prices, with energy costs rising 3.3% in March alone. Consumers are feeling the pinch, with consumer confidence dropping 6% in March, and households anticipating financial deterioration. Retail spending is being impacted, with card spending at discretionary sectors like furniture and department stores falling, while gas station sales surge. Fast food sales are also declining, with restaurant industry sales down every week in March.

Market impact: The energy price surge is driving consumers to cut back on discretionary spending, impacting sectors like retail and restaurants. Companies like Six Flags Entertainment (NYSE: FUN) and Walmart (WMT) are seeing the effects, with FUN shares declining due to potential pullback in discretionary spending. However, Walmart shoppers remain resilient to $4 gas for now. The hit to real disposable income is expected to weigh particularly on spending on cars and discretionary goods and services.

What to watch next: On May 3, the Bureau of Labor Statistics will release the April Consumer Price Index, which will provide an update on inflation and energy prices. On May 17, the University of Michigan will release its preliminary May Consumer Sentiment Index, offering insight into consumer confidence amidst rising energy prices. Additionally, retailers' earnings reports in the coming weeks will provide real-time data on the impact of energy prices on consumer spending.