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Barely recovering after Wednesday’s rout, markets suffer eighth losing week

Positive economic data was no match for poor retail earnings and the Federal Reserve's promise of interest rate hikes as Wall Street closes in on a bear market.

MANHATTAN (CN) — It has been eight weeks since the last winning week on Wall Street, with investors this time hammered by horrible earnings reports from leading retailers.

Markets mostly treaded water earlier in the week, but a huge decline on Wednesday sent investors into panic mode as the Dow Jones Industrial Average plunged a headline-making 1,164, its biggest loss since 2020. The Nasdaq and S&P 500 fared just as poorly, with the former dropping 566 points and the latter seeing a 165-point decline.

The losses continued early Friday, though markets recovered by the closing bell, with the Dow gaining 7 points and the S&P increasing 1 point. The Nasdaq lost 33 points for the day. With the losses, this marks the eighth week in a row that the U.S. indices have fallen, and the S&P is now teetering around 20% lower than at the beginning of the year.

Investors were largely spooked by poor earnings from a couple of leading retailers. In its quarterly report, Target posted a stunning 52% drop in its pre-tax earnings during the first quarter of 2022 and a 43% decline in operating income. That resulted in shareholders bolting on the company, and, by the open of markets on Wednesday, Target suffered its worst sell-off since 1987, losing about $50 per share.

Fellow big-box store Walmart on Wednesday also had its worst outing since 1987 after it noted a 25% drop in profit. “Bottom-line results were unexpected and reflect the unusual environment,” Walmart CEO Doug McMillon said in a statement. “U.S. inflation levels, particularly in food and fuel, created more pressure.”

In its earnings report, Cisco noted its revenue was flat year over year, which resulted in the company’s stock dropping 13%, the company’s worst performance on Wall Street since early 2011. Company CEO Chuck Robbins blamed the poor performance on supply-chain issues related to the newly instituted Covid-related lockdowns in China and the ongoing conflict in Ukraine.

Experts believe the poor retail earnings portend markets have further to fall. “We think the latest fall highlights earnings expectations are set to become a growing headwind to equities,” Capital Economics markets economist Thomas Mathews wrote, noting many analysts had expected almost double-digit earnings growth for the S&P 500 over the next few years. “Anything that challenges these rosy expectations, therefore, could spell trouble for the stock market.”

The week’s dismal retail earnings stood in contrast to a positive retail sales report showing that retail sales rose by $677 billion. The 1% jump in retail sales was a bit more than many analysts expected and runs counter to similar data from other countries, most notably the United Kingdom, where retail sales have declined for three months straight.

According to the U.S. Census Bureau, the most significant increases are in the hospitality space, with restaurants and bars seeing a 21% year-over-year increase in sales. Online sales also saw a notable increase of 2.1% last month and 11% year over year. Core spending, which excludes volatile products such as food, gasoline and building materials, also gained by about 1%.

Some sectors saw a decrease, with motor vehicle, furniture, and electronics sales falling slightly in April. Year-over-year, electronics are still down from April 2021, but analysts say such a dip would be expected with lockdowns no longer a thing.

“Never bet against the U.S. consumer has always been a good adage to bear in mind throughout my 20-plus years in the markets,” Paul Ashworth, chief North America economist at Capital Economics, wrote in an investor’s note. “Despite the surge in prices weighing on their purchasing power, the U.S. consumer now appears to be single-handedly keeping the global economy afloat again.”

Ashworth noted that, even better, the March retail sales data was revised up from 0.5% to 1.4%, while core spending in March was revised from -0.1% to a 1.1% increase. “Given this show of strength from consumers, speculation that the U.S. economy is in danger of an imminent plunge into recession look badly misplaced,” he wrote. “Together with the surprising strength of core inflation last month, this is another reason to expect the Fed to continue hiking rates by 50 [basis points] per meeting, despite the recent swoon in stock markets.”

Federal Reserve Chair Jerome Powell assured the public Tuesday that further interest rate hikes are coming and said the central bank would “keep pushing” until inflation comes down, noting that markets have been pricing in significant rate hikes in the future.

The Fed has already raised rates twice, first by 0.25% and then again by 0.5%. It is expected the central bank could raise rates by 0.5% during each of its next several meetings until inflation reaches 2.5%, considered by the Fed to be the neutral inflation level. The Fed meets next in mid-June.

“In hindsight, it would have been better to raise rates earlier,” Powell said during an interview at a Wall Street Journal conference. “I don’t know that financial conditions tightened more quickly than this in a very long time.”

Analysts are not entirely sold on the Fed keeping its foot on the pedal for the rest of the year, though, particularly if inflation begins to settle down.

“Getting inflation under control is clearly top of mind at the Fed, but ultimately we think the Fed’s bark is going to be stronger than the bite,” Cliff Hodge, chief investment officer at Cornerstone Wealth, said in a comment earlier in the week. “The market has already done a lot of heavy lifting tightening financial conditions. Once we get evidence that inflation cools, allowing the Fed to pivot dovishly, conditions will be ripe for a risk-on rebound.”

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