Stocks traded flat this morning as the market looked to avoid further losses. It was a miserable week for bulls as the Dow, S&P, and Nasdaq Composite all plunged in response to a surging dollar.
The Bank of England’s Wednesday bailout provided the lone bullish session of the last 8 trading days. Now, though, the fear that something will soon “break” in the US financial system has investors sitting on the sidelines.
Worrying earnings guidance from Nike (NYSE: NKE) kept a lid on stocks this morning as well. The company reported an increase in quarterly sales but a weak bottom line due to supply chain issues and an inventory eruption.
The bullwhip effect, which we predicted would cause massive markdowns for companies that had excess inventory, is still causing problems. So much so that Nike slashed its margin outlook for the year. Company executives said that Nike’s North American inventory swelled 65% year-over-year due to late deliveries, early holiday orders, and overstocking inventory to meet red-hot consumer demand earlier in the year.
“We’ve decided to take that inventory and more aggressively liquidate it so that we can put the newest and best inventory in front of the consumer in the right locations,” said Nike CFO Matthew Friend.
Get ready for deeply discounted Nike shoes this holiday season. NKE shares fell 10% last night in response to the dismal report. Other retail-linked stocks are expected to have continued difficulties as well. Rent-A-Center (NASDAQ: RCII) had a similarly bad quarter and removed guidance, too. RCII shares fell over 20%.
This did little to inspire confidence in bulls, who were happy to let stocks tread water through noon amid worsening economic conditions.
“The market stinks,” said Harris Financial Group managing partner Jamie Cox.
“But that’s basically what the Fed wants: tighten financial conditions, and they believe that that will help bring down inflation to the levels that they find acceptable. And they’re using the transmission mechanism of the market to make that happen.”
Until something goes haywire with the US financial structure, it looks like the Fed will stick to its hawkish ways. Cleveland Fed President Loretta Mester confirmed that in comments made yesterday afternoon on inflation.
Today, Fed Vice Chair Lael Brainard piled on.
“Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target,” she said.
“For these reasons, we are committed to avoiding pulling back prematurely.”
Mester added:
“Market functioning is incredibly important because you won’t be able to hit any monetary policy goals if the markets aren’t functioning. That’s different than worrying about volatility in the markets.”
In the UK, the government bond markets stopped functioning. That’s why the Bank of England chose to enact a quantitative easing (QE) “reboot.” Bulls hoping for an October rally might need something to break stateside for the Fed to follow suit – something Mester hinted at today.
Long-term, however, more QE would be bad for markets, even if it results in a major bullish reversal during a seasonally strong time for stocks.
