The stock markets struggled again this week, posting its biggest one-day drop since 2020. The dramatic sell-off was sparked by Target’s earnings, which showed that soaring costs are putting the squeeze on margins (it didn’t help that Walmart said the same thing the day before). Target’s price suffered its worst drop since the market meltdown of 1987. While these announcements tend to shake up the markets, it might be a hopeful sign for the Federal Reserve. Both Target and Walmart executives said that consumers were spending less on merchandise and big-ticket items, which is the type of demand slowdown that could indicate inflation has peaked.
The economic data is a mixed bag, although if one looks closely at the periods that are being measured there are signs of things slowing. Many of the economic releases this week were for the month of March, with a handful representing data from April. Looking at the calendar, I see we’re almost into June, so the data being released may not be as relevant as upon first glance. For example, retail sales were strong in April, as was industrial production. Retail inventories grew sharply in March which indicates supply chain issues might be abating. Mind you, these are data points just released this week. However more recently, the leading indicators index is sliding as are existing home sales. Additionally, subprime consumer borrowing delinquency rates are rising to pre-pandemic levels. Inflation is starting to take a bite out of consumptions and shifting where and how money is being spent. One doesn’t have to look further than Target, Walmart, and Ross Stores which all reported weak Q1 earnings this week. Except for Ross Stores, revenue was up y/y, however, they all missed consensus earnings estimates. In the case of Target, its gross margin fell to 25.7% of sales from 30% a year ago due to higher costs related to freight, supply chain disruptions, and increased compensation and headcount. Oddly, both Amazon and Walmart, America’s two largest retailers, announced this week they have too many employees. Walmart CEO Doug McMillon said that due to a late 2021 hiring surge to cover Omicron-related staffing shortages, the company was significantly overstaffed in Q1. Amazon, which hired 270,000 workers in the second half of 2021, also stated it was overstaffed but is unlikely to resort to layoffs instead allowing attrition to occur. What this could signal is that the 11 million plus job openings, which have plagued economists for the better part of the past year, will slowly evaporate as companies decide not to fill open positions. In the end, the employment gap between those looking for work and job openings will likely close substantially by the end of this year.
Switching topics, the baby formula shortage has been in the spotlight this week as hearings in Congress ramp up regarding who knew what and when. Abbott Labs is in the hot seat as it is one of only three baby formula producers allowed by the FDA in the United States. I won’t go into the debate regarding who is to blame, but I do want to propose something to think about. The last two years have shown the downsides of globalization as the COVID pandemic and geopolitical threats upended the global supply chain. On the other hand, there are also risks associated with protectionism, like in the case of U.S. baby formula, of which 98% is produced domestically by only three companies. Import duties and restrictions have eliminated competition from Canada and Europe, while nearly two-thirds of all formula is purchased through federally-funded WIC, which only does business with these three domestic manufacturers. While I’d like to see manufacturing and production brought back to the United States, it is worth noting that it doesn’t come without its risks.
In closing, I turn to a survey I came across this week which asked 2,000 people (admittedly a small sample size) when do we start to consider ourselves “adults”? It seems only half of those polled felt like an “adult” when they turned 18 – for those who didn’t, it took until just before they hit 30! While defining adulthood by age may be arbitrary, 79% of those polled felt it has more to do with actions. What actions would cause respondents to feel more of a grown-up you ask? 30% said living on my own, 28% buying a house, 27% said getting married, 27% said having my own bank account, 26% having kids, 26% doing all my own grocery shopping, 25% doing my own taxes, 25% paying for my own phone plan, 25% getting paid on a regular schedule, and 25% voting. While some of these are harder to attain than others, it does seem some are just a matter of getting off the couch and doing it. If you have a young adult still at home, you’re not alone. Perhaps this information may help you expedite their transition to adulthood, even if in a small way. Now you know.Bruce J. Mason, MBA