Markets: No safe place to hide from the bear

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In a "dismal" week for the stock market, "higher prices stunned consumers" while companies that were supposed to be safe havens drove a "broad market rout," said Andrew Edgecliffe-Johnson in the Financial Times. Last week, the S&P 500 dipped briefly into bear-market territory, down 20 percent from its most recent high. "Unexpectedly bad earnings announcements" from the retail giants Target and Walmart "led to their steepest stock market falls since Black Monday in 1987." Investors already burned by fading tech stocks had an ugly awakening. The news set off worries that price increases "have reached the limit of what consumers will tolerate," and that Americans were "holding off on big purchases as inflation soared." Meanwhile, businesses, still mired in supply chain disruptions, are "struggling to contain their own costs."

It's hard to decipher the change in consumer-spending habits, said Andrea Felsted in Bloomberg. "Some categories are clear victims of the pivot from pandemic trends," like Peloton sales, which dropped as soon as riders could return to the gym. Others, though, are more complex. It's hard to tell if consumers are cutting down on home goods because they're finished with their pandemic-era remodeling — or because they're grappling with inflation and feel that their "budgets are squeezed." Reacting to falling demand, businesses are cutting advertising, a clear warning for the economy, said Dan Gallagher and Laura Forman in The Wall Street Journal. One disturbing sign was this week's note from Snap, the social media company, that it would miss the earnings and revenue projections it made "barely a month ago." Snap's business is a fraction the size of Google's or Facebook's, but it is a bellwether for investors and "had never issued a revenue warning before." Snap's shares fell more than 40 percent in one day, and Facebook's slipped 9 percent, after Snap CEO Evan Spiegel cautioned that the economic environment "had deteriorated further and faster than we expected." 

There is "some good news in the market sell-off," said Rick Newman in Yahoo News. Not long ago at all "the biggest problem in the economy was a shortage of goods" and soaring prices. "If retailers are now telling us they've got more stuff than people want to buy," that is "a good thing for the direction of inflation." Target and Walmart reported a hit, but people are still spending — broader retail sales in March and April were robust, car sales are booming, and travel bookings are strong. 

Whatever happens with consumers, the stock market is far from out of the woods, said James Mackintosh in The Wall Street Journal. "It's tempting to start trying to call the end of the sell-off." On previous occasions when stocks have touched the 20 percent bear-market threshold, the market avoided "true panic" about half the time because the Federal Reserve came to the rescue. This time, though, the central bank is keenly focused on containing inflation. That threatens parallels with 1973–74, when the Fed kept raising rates even as a recession took hold. The result was "a horrible bear market interspersed with soul-destroying temporary rallies" that were quickly snuffed out.

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.