What goes up must eventually come down as investors are beginning to realize. Following a dizzying rally after the initial impact of the COVID-19 crisis, the equities sector is finally showing signs of buckling. The Friday, May 20 session gave optimists hope that the downfall can be mitigated, with the day ending flat amid wild trading between the bulls and bears. Still, the overall picture does not look enticing.
Technically speaking, the benchmark S&P 500 barely avoided slipping into correction territory, commonly defined as shedding 20% of market value from the peak. On a year-to-date basis, the index is down nearly 19%, meaning that Wall Street must rally -- robustly and quickly -- to avoid further erosion in trading sentiment. However, that’s easier said than done considering the awful impact of inflation.
Though the Federal Reserve has expressed concerns about rising costs, the harsh reality is that the wave of monetary and fiscal support dramatically boosted the money stock. While these actions helped navigate the country through the COVID-19 pandemic, it’s now time to pay the piper. In other words, to really get a grip on escalating costs, the Fed must raise the benchmark interest rate above the rate of inflation.
That’s not politically palatable although it might be the only feasible solution; hence, the volatility in the equities market. Moving forward, below are the five themes to watch for the upcoming week.
Retail Disaster
Last Tuesday, big-box retailer Walmart (WMT) disclosed its results for its fiscal first quarter and the print was not pretty. Although the company reported better-than-expected revenue ($141.57 billion reported versus the consensus target of $138.94 billion), its earnings per share dipped significantly, posting $1.30 adjusted against an expected $1.48.
To no one’s surprise, cost pressure from inflationary forces -- mainly rising fuel prices -- ate into the profits, as did higher inventory levels and overstaffing issues stemming from a quicker-than-expected return of employees from COVID-related leave. As well, severe obstacles tied to the global supply chain crisis imposed a substantial burden on Walmart.
However, the company wasn’t alone as retailers across the spectrum suffered from disappointing fiscal results. From Target (TGT) to Big Lots (BIG) to Bed Bath & Beyond (BBBY), the sector suffered from familiar themes such as bulging inventories and logistics pain from searing fuel charges.
Unfortunately, the shared struggles point to consumers closing their wallets on discretionary purchases, which can ripple down to many other industries.
Heightened Geopolitical Stakes
Due to Russia’s unprovoked and unsettling decision to invade Ukraine and thus disrupt the modern global order, Finland and Sweden have decided that their historical neutrality is no longer a tenable situation given the paradigm shift. Thus, their application to become NATO member states was not exactly shocking per the context. However, it risks heightening already simmering geopolitical tensions.
To be fair, Russian President Vladimir Putin is playing the evolving circumstances coolly, stating publicly that he has no problems with the aforementioned countries joining NATO. However, this disclosure is more than likely political gamesmanship. In reality, the eastward expansion of NATO, particularly that of Finland, is incredibly problematic for the Russians.
According to information provided by the Congressional Research Service, Russia in recent years has focused on revamping its nuclear arsenal. However, neighboring Finland’s potential NATO entry poses a severe threat to the Russians, mainly because their military assets in Murmansk is connected to St. Petersburg (and the rest of Russia) via a narrow strip of land that runs parallel to Finland.
Therefore, investors will want to keep a sharp eye on Finland for potential clues as to any off-ramping of military tensions.
Cryptocurrency Madness
While the cryptocurrency sector represented one of the biggest developments in the broader investing field last year, this year, the circumstances are much different. Indeed, it was only a few days following the popping of champagne bottles that digital assets began steadily declining. Unfortunately, those hoping for another rebound rally could be disappointed.
First, we can’t ignore the technical argument. From November 2020 to the present juncture, the chart representing the total market capitalization of all cryptos appears to have formed a head-and-shoulders pattern, a development that technical analysts consider significantly bearish. Further confirming the negative implications is declining volume levels.
Second, on a more fundamental note, it’s important to realize that throughout the post-COVID boom in global capital markets, young and novice investors have generally participated recklessly, with some putting in their entire life savings into cryptos and other speculative asset classes. Further, reports are coming in that -- amid the volatility -- these same young investors are regretting their all-or-nothing wagers.
By logical deduction, then, the retail investment community may be tapped out in crypto and unable to “buy the dips.”
Real Estate Under Question
Among the most vexing shifts in the post-pandemic paradigm has been the real estate market. Simply put, this sector has been unrelenting in its meteoric ascent. Further, many analysts suggested doing the unintuitive: buying homes now before prices really escalate due to inflationary pressures.
Though the logic here was understandable, it was also reckless. Before the global health crisis, financial advisors consistently warned their clients not to be house poor; that is, overstretching one’s budget to buy a home, only to discover later that there are more costs involved in homeownership other than the down payment and monthly mortgage bills.
Suddenly, these same experts contradicted themselves, which was the first clue that overexuberance hit the segment.
Now, data has come in that existing home sales fell in April to the lowest level since the beginning of the COVID-19 crisis. While real estate experts are still putting a positive spin on this news item, it may be a sign that the almighty housing boom is about to correct. If we suffer a recession, the ridiculous valuations in real estate would not be sustainable.
Earnings to Watch
After a dramatic earnings showdown last week, investors should prepare themselves for another week of intriguing and possibly eventful disclosures. First up on Monday is Advance Auto Parts (AAP), with investors likely to look for clues regarding the source of its demand profile. In other words, consumers may be purchasing more parts to fix their vehicles rather than to replace them.
Next up is Nordstrom (JWN), which has been surprisingly robust this year up until the second half of April. Since then, JWN has suffered volatility, leading to a 12% YTD loss. With its earnings disclosure, investors should note if the department store giant has incurred the same headwinds as other brick-and-mortar retailers. Chances are, the answer is yes.
Finally, all eyes will arguably be on Dollar General (DG) on Thursday. A discount dollar store, DG should theoretically be a winner in recessionary cycles as consumers hunker down. Therefore, an uptick in demand might spell doom for the consumer discretionary space.
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