Stocks head for more pain as inflation fears rage

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It’s shaping up to be another painful day for Wall Street, with the Dow Jones slipping 450 points as investors continue to fret over rising costs weighing on businesses and consumers.

A day after suffering its worst fall of the year, the Dow Jones industrial average fell nearly 1.5% before regaining ground. The broader S&P 500 index slid 0.6% and the tech-heavy Nasdaq swung between positive and negative territory.

The S&P 500 is within striking distance of a bear market – defined as a 20% decline from its most recent high – after Wednesday’s selloff wiped out more than 4% of its value. It marked the index’s worst day since 2020 and came after it had already recorded its worst first four months of the year since 1939, and the outlook isn’t much better.

Earnings season has been an accumulation of worrying news for investors, with weak performances from Target and Walmart serving as catalysts for Wednesday’s selloff. The retail giants have both reported rising spending on fuel and compensation and mounting evidence that consumers are starting to cut spending, and their stocks suffered their worst day of trading in decades. .

“The magnitude of the impact of inflation on these US retail giants has awakened investors, once again, to the enormous impact that soaring prices are having on all facets of the economy” , Russ Mould, chief investment officer at AJ Bell, said in a comment. Thusday. Combined with hints from the Federal Reserve of more aggressive interest rate hikes, “and it’s no wonder fears of stagflation – a slowing economy combined with runaway inflation – are once again stalking markets “.

The panic spread to other retailers, with competitors Costco, Dollar General and Dollar Tree racking up double-digit losses on Wednesday. Other retailers are expected to report Thursday, including Kohl’s and Ross Stores.

Shares of BJ’s Wholesale rose 6% after reporting sales up 14% year-over-year in the first quarter as gasoline sales boosted its revenue. Bob Eddy, the company’s chief executive, said in BJ’s earnings report that its business model remains “more relevant than ever in the current inflationary environment.”

Consumer spending is the main driver of the US economy, accounting for about 70% of the country’s gross domestic product. That’s why the signs of struggle from retailers, grocers and wholesalers are troubling: Companies are facing tighter margins and ballooning inventory, and they haven’t yet fully passed the costs on to consumers. If they do, inflation for the average household could get even worse, Mr Mold said.

But if they don’t, “operating margins will be under pressure and if margins crack, so will profits,” he said. “And that’s not good at a time when investors are still paying high valuation for maximum profits and margins near highs across the entire US stock market.”

Staggering retail performance brings new momentum to the sea of ​​volatility investors have had to navigate in 2022, including the war in Ukraine and its myriad aftermath, supply chain headaches, inflation rampant and the ongoing challenges of the pandemic.

US could be heading for recession next year, other experts say

It now appears the outlook is darkening: JPMorgan said on Wednesday the market was pricing a 70% chance of a near-term recession, suggesting investors lack confidence in the Fed’s ability to rein in inflation without triggering a kind of slowdown. Fed Chairman Jerome H. Powell himself said the central bank should have moved more quickly to raise interest rates, and he said he did not rule out more aggressive action if convincing evidence of a slowdown in inflation did not appear.

The Fed has raised its benchmark interest rate twice this year, including by half a percentage point on May 4, and is expected to do so five more times this year to ease inflationary pressures. Fed officials are trying to pace the hikes so as not to stifle economic growth, a difficult balance to strike. If the economy cools too quickly, it could slide into a recession, generally defined as two consecutive quarters of negative economic growth.

“The outcome of Fed actions is completely unpredictable, which is why markets are so volatile,” Ryan Belanger, managing director of Claro Advisors, said in a comment Thursday. Bélanger said he expects the market to trade “near or in bearish territory over the next few months.”

“It looks like we’re headed for a recession in the second half of 2023,” Belanger said, “when the current tailwinds of a strong consumer and solid business financial strength potentially give way to rates of higher interest and a declining wealth effect”.

At times like these, “investors should get used to large bearish and bullish moves in stocks,” which is common in times of uncertainty.

As it stands, the S&P 500 is down more than 18% for the year and the Dow is down almost 14%. The Nasdaq, which was hit hard as investors turned away from expensive tech stocks, is down nearly 28% for the year, well into its own bear market.

European markets also fell on Thursday, with the benchmark Stoxx 600 index dropping 2% at midday. Britain’s FTSE100 fell 2.4%, a day after that country recorded the highest inflation in 40 years.

The unease was reflected in bond markets, a safe haven for investors in turbulent times. The yield on the 10-year US Treasury note edged down nearly 0.05% to 2.842%. Yields move inversely to prices.

Gold, another safe haven, rose 1.5% to trade around $1,842.70 per troy ounce.

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