Evidence of red-hot inflation filtering into the American economy is frightening investors after top U.S. retailers reported that people are decreasing the purchase of bigger-ticket items as they just try to get by.
Investors canceled about 25% of Target’s (TGT.N) shares on May 18 after its profit fell by 50%, and it dropped another 3.2% on Thursday morning. Walmart (WMT.N) slid 1.3% Thursday after already dropping more than 17% in the two sessions after it posted weak results early on Tuesday.
Target’s earnings displayed consumers spending more on household essentials and food rather than on high-margin discretionary items, while Walmart showed shoppers had shifted to buy lower-margin basics.
Kohl’s (KSS.N) was up 1.1% on Thursday after dropping 11% on Wednesday as the department store company lowered its full-year earnings estimate, warning that red-hot inflation has begun to destroy consumer spending and profit margins.
BJ’s Wholesale Club (BJ.N), which was down 16% on Wednesday, rose 10.7% on Thursday after it exceeded Q1 financial expectations, saying membership grew as customers searched for value due to price hikes.
Federal Reserve Chair Jerome Powell promised on Tuesday the U.S. central bank would increase interest rates as high as necessary to end the surge in inflation.
The S&P 500 (.SPX) previously dropped 0.2%, making it fall 18% year-to-date and 18.6% below its January 3 record close, after closing with a 4% drop in Wednesday’s broad sell-off.
“Retailers are starting to reveal the impact of eroding consumer purchasing power,” Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, said on May 18 after his firm predicted a slight recession around year-end into the start of 2023.
“The consumer’s ability to spend is eroding at a faster pace than it was a month or two ago. We think that pace is going to accelerate further.”
The S&P 500’s consumer discretionary index (.SPLRCD) recovered mildly, formerly up 0.9% after dropping 6.6% on Wednesday in its deepest one-day sell-off since March 2021 and was still down more than 30% year-to-date, putting it on track for its weakest year since 2008.
Cantor Fitzgerald said it was easing off its expectations for a short-term rally in equities and that if there is an increase, it would likely be weak and “not worth playing.” Eric Johnston, head of equity derivatives and cross-asset at Cantor Fitzgerald, stated:
“The (Wal-Mart/Target) numbers are very concerning as they show the consumer is reducing discretionary purchases while company margins return to pre-pandemic levels.”
While investors have been concerned for some time about inflation, the most recent results add to worries about the effect of inflation on the consumer, said chief market strategist at LPL Financial Ryan Detrick.
However, the sell-off occurred the day after data showed U.S. retail sales grew strongly in April as consumers purchased more motor vehicles amid supply boosts together with a rise in spending at restaurants despite high inflation, rising interest rates, and souring consumer sentiment.
Chief investment officer at Cornerstone Wealth, Cliff Hodge said the description was “shifting from inflation scare to recession scare.”
Chuck Carlson, chief executive officer at Horizon Investment Services, said retailer results seemed to be probably “one more indication of perhaps a slowdown in the economy.” Carlson stated:
“I just wonder if people are starting to really get pinched by fuel costs – both businesses as well as consumers. … When you are paying north of $5 for a gallon of gas, that’s a hammer and that’s a hammer on everybody.”