Telemus Weekly Market Review May 16th - May 20th, 2022
Stocks dropped again this week continuing the downward trend of 2022. The S&P 500 lost -3.1%, with Friday’s strong rally late in the session easing what could have been a more painful week. From our vantage point the week’s notable story came out of first quarter earnings reports from a few top retailers.
On Tuesday, Walmart stated that it saw an elevated rise in costs over the past quarter driven by significantly higher freight costs and continued wage pressures. They also noted that inventory levels are elevated, a phenomenon that came as a shock to many given the supply chain shortages experienced during the COVID-19 era. A day later, Target reported similarly disappointing cost pressures and stated that their profit margin was going to be significantly lower in all of 2022 as a result. Target’s shares lost a quarter of their value on Wednesday alone.
What is transpiring in the retail space is a culmination of the heightened inflationary pressures we are seeing in 2022 colliding with a rapid shift in consumer consumption behavior. Retailer’s expense structure sits at the crosshairs of this year’s inflationary pressures. First, they are impacted by sizable labor forces that are pushing for wage increases. Second, they rely on trucking networks that have been severely impeded by higher gas prices. Lastly, like all business they have also had to endure higher prices from their suppliers. On the demand front, consumers are clearly starting to spend more on services, versus goods, as they return to pre-pandemic spending patterns. In April, American Airlines commented that demand for air travel was the strongest they had ever seen. Hotel occupancy is on the rise, and restaurant traffic is now back to pre-pandemic levels. As consumers are spending more on services, they are beginning to pull back on discretionary consumable items. And that’s exactly what Target called out stating that sales among their staple items, such as food and personal care, remain strong. However, they experienced a rapid slowdown in sales of discretionary items such as clothing and home furnishings.
The combination of what appears to be a quick pivot in consumer behavior away from goods toward services, along with a sizable drop in margins created a negative and swift reaction from the market. We have been concerned that expectations around margins are too high, and this week’s results called that out. The magnitude of margin decline may be more isolated to retail companies given the shift in consumer behavior. As we get further into the summer, we expect to see more indications of whether margin pressures will be more broad based.
From a stock perspective, declines in share prices was more acute to U.S. stocks. International stocks posted a positive week. Retailers outside of the U.S. do not appear to be facing as extreme of challenges. Among U.S. equities, the worst performing sectors within the S&P 500 were consumer staples and consumer discretionary, which dropped -8.6% and -7.4% respectively. Energy, health care and utilities all posted positive gains on the week. While markets are down, we are seeing greater dispersion in returns across stocks.
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