High Anxiety

Investors grappled with several conflicting events last week. Given the negative sentiment in today’s environment, the market latched on to the glass-half-empty scenario.

On a favorable note, retail sales compiled by the U.S. Census Bureau were strong in April. And it wasn’t simply April. Numbers have been strong this year despite rising prices. So far, the consumer hasn’t rolled over.

We don’t like higher prices. But for the most part, we complain as we buy. In fact, when the report was released on Tuesday, there was some chatter that the consumer might be too strong.

But a day later, investors were wrestling with weak numbers from two large retailers.

Walmart (WMT $119) and Target (TGT $155) released gloomy Q1 numbers last week. According to CNBC, both companies posted better-than-expected sales.

However, both companies missed analyst earnings’ forecasts by a wide margin. Part of it was supply chain, but sharply higher transportation costs played a big role.

Two large retailers couldn’t completely pass along higher costs and were forced to partially absorb high prices for fuel and freight. Moreover, investors began to fret that rising costs could force additional downside earnings surprises at other firms.

Though the economy is expanding, risks have increased, and the specter of stagflation—stagnate economic growth and higher prices—generated new jitters.

This comes on top of remarks last week from Fed Chief Powell to the Wall Street Journal that we need to see “inflation coming down in a clear and convincing way (my emphasis), and we’re going to keep pushing until we see that.”

As the graphic illustrates, pullbacks are a normal part of investing. In most years, the S&P 500 Index advances.

Volatility may be rooted in different conditions, but it is not unusual. We can’t predict a bottom, but as we’ve seen in the past, investors attempt to anticipate future events. When the news improves, stocks have usually already reacted.