May 19, 2022 05:00AM ET
Evidence that red-hot inflation is seeping into the economy is making investors nervous after major US retailers revealed that people are cutting back on purchases of major goods to try to get by.
Investors took off nearly 25% of Target (NYSE:TGT) shares on Wednesday after profits were cut in half as the company was forced to discount larger items, and Walmart (NYSE:WMT) has fallen more than 17% since it reported weak results early Tuesday.
Target's results showed that consumers spent more on food and household items instead of high-margin discretionary items, while Walmart showed that shoppers switched to buying lower-margin staples.
Investors on Thursday will focus on results from Kohl's (NYSE:KSS), which fell 11% on Wednesday, and BJ's Wholesale Club, which fell 16%.
The turmoil came a day after Federal Reserve Chairman Jerome Powell promised that the U.S. central bank would raise interest rates as much as needed to halt a sharp rise in inflation.
Wednesday's sell-off led the S&P 500 to close down 4% on the day, 17.7% for the past year and 18.2% from its record close on January 3
The benchmark consumer discretionary index dropped 6.6% for the deepest one-day sell-off since March 2020 and is down 30.8% so far for 2022, putting it on track for the weakest year since 2008.
Cantor Fitzgerald said it was winding down its expectations for a short-term rally in equities and that if there is a lift it would likely be shallow and "not worth playing".
Investors have been worried about inflation for some time, but the latest results increase concerns about inflation's impact on the consumer, said Ryan Detrick, chief market strategist at LPL Financial.
However, the sell-off came the day after data showed that US retail sales rose sharply in April as consumers bought more motor vehicles due to improvements in supply along with increased spending at restaurants despite high inflation, buoyed by consumer sentiment and rising interest rates.
Cliff Hodge, chief investment officer at Cornerstone Wealth, said the narrative is changing from inflation fears to recession fears.
Chuck Carlson, managing director at Horizon Investment Services, said the retail sales results appeared to be potentially "another indication of perhaps a slowdown in the economy".