Stocks fell again this morning as recession fears lingered from yesterday’s major selloff. The S&P is now roughly 2% away from officially entering a bear market, which is defined as a 20% drop from the all-time high.
The Dow sunk as well today opposite the Nasdaq Composite, which eked out a small gain.
Overall, though, investors still appear timid following a bad pair of earnings reports from Target (NYSE: TGT) and Walmart (NYSE: WMT), revealed over the past two days. Big-box retailers have often served as “canaries in the coalmine” for the US economy. When they start to revise earnings projections lower, recessions tend to follow.
Investors seemed to realize that after the two companies slashed growth projections for Q2.
“The sharp sell-off in these companies (as well as other goods/consumer companies this quarter) shows that inflationary pressures are finally having an impact on earnings,” wrote Maneesh S. Deshpande, Barclays’ chief US equity strategist, in a note.
“Despite heightened inflation for a better part of a year, [S&P 500] margins and forward earnings have remained resilient, which no longer seems to be the case.”
Neither Walmart nor Target passed on their rising costs to consumers as much as they should have in order to maintain healthy margins. Based on comments made by Walmart leadership, the company didn’t quite realize how much inflation had eaten into profits until it was too late to adjust.
“Today’s broad-based market sell-off concerns the ability of companies to pass along higher costs, something that was questioned but which found somewhat of an answer with the retailer’s earnings reports,” said LPL Financial chief equity strategist Quincy Krosby in an email yesterday.
“To be sure, consumers continue to spend, but many of the top retailers are unable to pass along the higher labor costs and higher prices wrought by a still constrained supply chain.”
It looks like other value stocks experienced similar problems in Q1, which complicates matters for traders seeking greener pastures.
“The issue now is there really appears to be nowhere to hide,” explained BTIG’s Jonathan Krinsky.
“They came for consumer names, but they still sold beaten down growth. In other words, money is rotating into cash instead of between different sectors.”
Krinsky continued:
“While it won’t be a straight line, [this] is confirmation that selling rallies in bear markets is much easier than buying dips.”
We’ve mentioned in the past that there’s nothing quite like a bear market rally. When one comes to an end, however, the selloff can often times be just as impressive as the sharp runup that preceded it.
In 2020 and 2021, dip-buying was a winning strategy. Now, rally-selling (or really, rally-shorting) should outperform.
And while that kind of behavior would have been portfolio suicide in the past, these days, it makes perfect sense.
Why?
Because the Federal Reserve is hiking rates, reducing its balance sheet, and otherwise kicking bulls squarely “where the sun don’t shine.” 2009-2021 was one heck of a bull run.
When the S&P falls a few more percentage points, thus dropping 20% from its all-time high, the bull market will officially be over, though.
For long-term, buy-and-hold investors, that’s terrible news. But for short-term traders willing to take bearish positions, it’s business as usual, just in the opposite direction (down, not up) as they follow the predominant trend.
Which, again, looks as though it will take stocks lower until the Fed starts to ease its monetary policy in response to a recession.
