Investors shudder at the evidence of ferocious inflation seeping into the economy after major US retailers showed that the more people tried to make ends meet, the more they stopped buying bigger tickets.
Investors wiped out almost 25% of Target shares on Wednesday after profits fell in half as they had to discount larger items, and they’re down more than 17% since Walmart reported weak results earlier Tuesday.
Target’s earnings showed consumers were spending more on groceries and household essentials rather than high-margin on-demand items, while Walmart showed shoppers were more likely to buy lower-margin essentials.
Investors will focus on Thursday’s earnings from Kohl’s, which fell 11% on Wednesday, and BJ’s Wholesale Club, which fell 16%.
The turmoil came a day after Federal Reserve Chairman Jerome Powell promised the US central bank would keep interest rates as high as necessary to stem the rise in inflation.
“Retailers are starting to reveal the impact of the erosion of consumer purchasing power,” said Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, on the same day that his firm is forecasting a mild recession around year-end until the beginning of 2023.
“The consumer’s ability to spend is eroding faster than a month or two ago. We think that pace will increase,” he said.
Wednesday’s sales saw the S&P 500 close the day 4%, 17.7% year-over-year, and 18.2% lower than its record close on Jan. [.N]
The benchmark index’s discretionary consumer index has lost 6.6% for the deepest one-day sale since March 2020 and is down 30.8% so far for 2022, heading for its weakest year since 2008.
Cantor Fitzgerald said he had loosened the prospect of a short-term bounce in equities and that if there were to rise, it would likely be shallow and “not worth playing” on.
“(Wal-Mart/Target) figures are very worrying as they show consumer reduced discretionary purchases and company margins returning to pre-pandemic levels,” said Eric Johnston, head of equity derivatives and cross-assets at Cantor Fitzgerald.
LPL Financial chief market strategist Ryan Detrick said although investors have been worried about inflation for some time, the latest results raise concerns about the impact of inflation on the consumer.
But the sales came the day after data that showed US retail sales rose strongly in April as consumers bought more motor vehicles amid improvements in supply and higher spending at restaurants, worsening consumer sentiment and rising interest rates despite improved supply and higher inflation.
Cliff Hodge, Cornerstone Wealth’s chief investment officer, said the narrative “shifted from fear of inflation to fear of recession.”
Chuck Carlson, CEO of Horizon Investment Services, said retailer results appear to potentially be “another indicator of a slowdown in the economy.”
“I just wonder if people are really starting to get stuck with fuel costs—businesses and consumers alike… If you’re paying north of $5 for a gallon of gas, that’s a hammer and that’s a hammer for everybody,” Carlson said.