It’s set to be a bad day at the office in Australia’s stock market with a 100 point drop prompted by futures markets as investors and speculators on Wall Street and other global stock markets panicked at inflation news released overnight. Not only does inflation threaten higher interest rates that could trigger a recession, but higher prices can eat away at corporate earnings, which means these companies’ share prices must fall.
And that’s exactly what happened to major U.S. retailer Target overnight when it released its March quarterly earnings results, well below what veteran analysts were tipping. The cause was an increase in fuel costs, higher wages and even lower sales of consumer goods such as televisions, furniture and the like.
When inflation hits consumers’ wallets, they need to buy basic necessities, but an old lounge can last another year, so purchases of essentials can be put on hold.
Target’s share price plummeted 27%, and what really hurt the market was that this poor report followed Walmart’s, which also had poor numbers due to the impact of inflation.
Interestingly, Home Depot, which is like our Bunnings, reported very well, suggesting consumers were selective about what they spent their money on — and DIY was a higher priority.
Walmart’s number didn’t rock Wall Street, but Target’s did. “The consumer is challenged,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “We started seeing late in the year consumers turning to credit cards to pay for the rise in food prices and the rise in energy prices, and it’s actually gotten a lot worse… It’s going to hurt these leading retail outlets and Walmart is in the usually one of them”.
At times like these, doomsday traders who have had some right decisions in the past but countless wrong ones (which the media seem to have forgotten) come out of the woodwork to predict the worst.
Jeremy Grantham, who has been pointing to a property crash in Australia for decades, told CNBC that more big falls for stocks are on the way.
“Recently we were down about 19.9% on the S&P 500 and down about 27% on the Nasdaq. At a minimum, I would say we’ll probably do twice as much,” Grantham said. “If we’re unlucky, which is quite possible, we’d do three legs like that and it could take a couple of years like it did in the 2000s.”
Just a week ago, I revealed how Coolabah Capital’s Chris Joye has also been making big sell-off forecasts for stock markets, but he conceded that it will depend on how central banks proceed with their rate hikes. If they go too hard, they will trigger a recession and Grantham will look like a genius again after being hopelessly wrong for a while.
On the other hand, if central banks play cautiously, the war in Ukraine ends and China comes out of lockdown on June 1st, inflationary forces, which see UK inflation rising to 9%, could start to ease.
Three-quarters of the rise in UK inflation was due to higher energy bills not being helped by rising oil and gas prices because Vladmir Putin’s aim was to be a land grab!
The Nasdaq is already in a bear market and the S&P 500 is poised for an 18% drop after falling 4% overnight. A 4% drop is huge and comes as the Dow has fallen for seven straight weeks and is now down 14% in a notable correction.
A bear market occurs when the decline is 20% or more.
Locally, our market did well with the S&P/ASX 200 index down 5.4%, but we should be able to absorb a major sell-off today.
The US market is notorious for overreacting and I would avoid panicking. Some pundits, who may be wrong, believe these sell-offs are creating a “generational buying opportunity” on Wall Street.
Again, this might be overkill, but as long as you buy quality companies and are willing to wait, there are definitely good buying opportunities, particularly in the tech sector and US markets.
Look at one of the greatest companies of all time – Apple.
Year-to-date, Apple’s stock price is down 22.6% to $140, but it was only trading at $180 in December.
I was expecting this negative volatility although given the broader economic data there I would be surprised if US stocks saw any significant declines from here.
In September or October the market could bounce back with lower inflation, China out of lockdown and the hopefully over Ukraine war. That’s my best guess, which historically has had a pretty good record, but these are historically unique times.
Timely quote of the day? “Be greedy when others are afraid.” Warren Buffett.