Seeking the Key

Wall Street continued its weekly losing streak, as fears grew that inflation was causing consumers to pull back on discretionary spending, setting the stage for recession. At its low point on Friday, the S&P 500 Index was down roughly 20.9% from its January intraday high, exceeding the 20% threshold for a bear market and placing it at levels last seen in February 2021. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. Market activity was surprisingly subdued, however, with trading volumes more than 10% below recent 20-day averages and below every day of the previous week.

Disappointing earnings results from several of the nation’s major retailers appeared to spill over into broader negative sentiment. Most dramatically, shares in Target fell roughly 25% after earnings fell short of estimates by nearly a third of what was anticipated—despite higher revenue. The company attributed results to a combination of reduced sales of discretionary items, which often have larger margins, as well as higher costs. Results from Walmart and Lowe’s also fell short of expectations, while Costco shares appeared to tumble in sympathy as investors await its upcoming earnings report. Home Depot beat expectations on both earnings and revenue but, after initially rising, also saw their stock price decline. Aside from the hit to profit margins, investors seemed to worry that major retailers would be forced to pass along more of their input costs to customers in coming months, keeping inflation elevated.

Comments from Federal Reserve officials during the week did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers wouldn’t hesitate to raise rates as much as necessary, even if it meant that some pain would be involved. On Thursday, Kansas City Fed President Esther George acknowledged the rough week in equity markets, but seemed to welcome it as one of the avenues through which tighter financial conditions will emerge.

The week’s economic data offered mixed signals about whether a recession was imminent, and Wall Street’s reaction to the data was also arguably hard to decipher. On Tuesday, investors seemed to welcome news that retail sales, excluding the volatile auto segment, had risen more than expected in April, and March’s gain was revised upward to 2.1%. Meanwhile, industrial production, manufacturing production, and capacity utilization figures in April also surprised on the upside.

Despite that good news, a gauge of manufacturing activity in the Mid-Atlantic region fell short of expectations by a wide margin, and weekly jobless claims rose more than expected. Housing starts and existing home sales also came in lower than expected, reflecting the pressure from higher mortgage rates. The downside surprises appeared to actually spark brief rallies in stock prices, because they drove a sharp decline in longer-term interest rate expectations.

The continuing search for short-term clarity often creates opportunities for long-term investors. Our team works diligently with a far-sighted focus, applying the mindset of Matthew 7:8, which tells us, “(f)or everyone who asks receives, and the one who seeks finds, and to the one who knocks it will be opened.” In environments such as this, we continue seeking out Proud to Own companies, knowing that those who have prepared well for volatility are a key to open the door to long-term success.

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