A once-hot sector is turning cold, and that could signal trouble with the consumer

The consumer is becoming cautious and that's making discretionary spending stocks a riskier bet this year, says one market strategist.

"At this stage of the cycle, with the Fed committed to raising interest rates over the next two years, we've got to lighten up and sell high," Mark Tepper, president of Strategic Wealth Partners, told CNBC's "Trading Nation" on Tuesday.

Tepper recently changed his position on consumer discretionary to underweight on the twin threats of a Federal Reserve ready to raise rates and a consumer laden with debt.

"There's no doubt that the consumer has been on fire," says Tepper. "However, that pace just can't be sustained."

Consumer spending has already shown the beginnings of a slowdown. Retail sales in February fell for a third month in a row, a surprise to economists looking for a slight gain and its longest stretch of declines since 2012. Fourth-quarter sales were at their strongest in seven years.

"The consumer is far from dead, but we see enough warning signs out there on the horizon that have caused us to just scale back given the fact that we're in the seventh or eighth inning of this bull market," said Tepper.

What money consumers have spent has largely been funded by credit and debt. Household debt in the U.S. over the fourth quarter increased at its fastest pace in a decade, while the personal savings rate dropped to its lowest level since 2008.

"At this point even a modest tick down in consumer confidence coupled with rebuilding up that savings can really dent consumer spending," said Tepper.

If the Fed raises rates as expected this year, interest rates on consumer loans will rise and the availability of cheap debt will drop. The central bank is expected to raise rates at least three times this year, the first as soon as next week.

Higher and more expensive debt could have consumers cutting down on expenses, says Tepper. The first casualties, he says, will be companies that rely on non-essential spending, such as Harley Davidson and Tiffany.

"They represent products that aren't a necessity," he said. "People still need to drive their Ford back and forth to work, but having a Harley isn't a must so stocks like those are going to be negatively impacted."

Starbucks could also be victim to more conservative spending, says Matt Maley, equity strategist at Miller Tabak. Its share performance already has the company's stock at risk.

"The stock has been stuck in this range for quite some time," Maley said on "Trading Nation." "It made a double top here in 2015 and 2017, so if it breaks below that into that range it would confirm a double top is in place and it would be quite negative for the stock."

Starbucks, Harley-Davidson and Tiffany's have already underperformed the broader sector in the year to date. Since the beginning of 2018, Starbucks has added 2 percent, while Harley-Davidson has dropped 14 percent and Tiffany's 3 percent. The XLY Consumer Discretionary ETF is up 7 percent.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect