Throw the Baby Out with the Bath Water

Today’s sharp selloff can be traced to Walmart and Target, and maybe to a lesser extent, Powell’s hawkish tone on Tuesday.

Yesterday, Walmart topped on sales, but missed on the bottom line by a wide margin. The same happened to Target today. It’s two major retailers, and investors took notice in today’s skittish environment.

But they weren’t macro events. The consumer is strong, as evidenced by a solid April retail sales report on Tuesday.
 
Instead, cost pressures and higher fuel costs took a big bite out of the bottom line. Conversely, TJ Maxx posted upbeat results, and it was among the few winners today.

For now, consumers are weathering inflation, but retailers are struggling over rising input costs. Might margins take a hit in unexpected ways in Q2? Skittish short-term investors aren’t taking any chances.

In addition, yesterday’s hawkish message from Powell added to the negative backdrop. 

“If that involves moving past broadly understood levels of neutral, we won’t hesitate to do that,” Powell said. He’s signaling the Fed won’t back down until it sees strong evidence inflation is coming down.

The Fed’s policy U-turn may be adding to market jitters. In 1994, Orange County was using cheap leverage to boost returns. It worked until Greenspan started jacking up rates.

Last year, Powell was promising low rates through at least the end of 2023. Today, a fed funds rate of 3.0% at year-end isn’t out of the question. 

Questions: Who might have bet on low rates? Who might be getting squeezed right now?

Uncertainty led to crypto volatility and problems with stablecoin last week.

What do investors want? Currently, they are looking for signs that inflation has peaked and is coming down. They are looking for the narrow path to a soft landing.

April’s CPI report failed to deliver.

However, as we’ve seen before, investors attempt to discount future events. When the news finally gets better, stocks have usually bottomed.