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Last week, consumer staples dived 8.6% and consumer
discretionary tumbled 7.4%, the biggest declines of any S&P 500
sectors, with inflation hammering corporate results. Shares of
some companies fared far worse, with Walmart swooning 19.5% for
the week and Target plunging 29% after disappointing results.
Investors worry more declines could be in store if consumers cut
spending in the face of higher prices. Among earnings reports
due this week are Best Buy on Tuesday and Dollar General and
Costco Wholesale on Thursday.
“I think it has been a wake-up call to investors that the
consumer is being impacted by higher inflation ... sooner than
what I think the Street was anticipating,” said Robert Pavlik,
senior portfolio manager at Dakota Wealth Management. “We are
only at the beginning of people trading down and changing their
spending patterns.”
The latest consumer price index jumped 8.3% on an annual basis.
Prices for gasoline stand more than 50% higher than a year ago,
according to AAA.
The Fed has promised to keep raising U.S. interest rates until
inflation is squashed, a key factor hitting risk appetite for
investors and putting the S&P 500 on the cusp of a bear market,
defined as a 20% decline from its record high.
Kim Forrest, chief investment officer at Bokeh Capital Partners,
believes surging oil and gasoline prices will keep undermining
consumer spending. "I'd be very cautious of discretionary retail
at this point," she said. "So many people are affected by high
gas prices and high fuel prices."
A survey by Morgan Stanley found that more than half of
consumers plan to cut spending over the next six months due to
inflation. The bank said most cuts were expected to come from
categories such as dining out and footwear and apparel.
To be sure, the slump in share prices has made valuations more
tempting. The forward price-to-earnings ratio for the S&P 500
retailing index, for which Amazon makes up half the weight, has
come down to 25.4 times from 33.9 times at the end of 2021,
according to Refinitiv Datastream.
Peter Tuz, president of Chase Investment Counsel, said he would
likely take a closer look in coming days at whether Target
shares warrant buying after sliding 25% the day of its earnings
report. "A stock like Target, when it falls 25%, you ought to
look at it," Tuz said. "You may decide not to buy it, but it’s
one of America’s premier retailers."
Mona Mahajan, senior investment strategist at Edward Jones, said
that while the "risk/reward is certainly getting more
interesting" in retail, she wants to see evidence of ebbing
inflation.
"While we're seeing interesting opportunities forming, we'd like
to have some confirmation of the inflation story before we
really step in," Mahajan said.
(Reporting by Lewis Krauskopf and Sinead Carew; Editing by Ira
Iosebashvili and David Gregorio)
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