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Inflation, rate hike fears push stocks lower in up-and-down trading

The Dow falls more than 200 points while the S&P 500 threatens to cross into a bear market

Market volatility has been closely aligned with the tech giants in recent weeks, but now attention has shifted to retailers as investors consider the myriad ways inflation can strap their businesses. (Getty Images)

U.S. stocks vacillated between positive and negative territory Thursday before ultimately ending the session lower, as investors continued to agitate over rising costs, interest rates and the growing probability of recession.

A day after suffering a more than 1,100-point drop, its worst of the year, the Dow Jones industrial average closed down 236.94 points, or 0.8 percent, at 31,253.13. The broader S&P 500 index lost 22.89 points, or 0.6 percent, to settle at 3,900.79. And the tech-heavy Nasdaq edged down 29.65 pints, or 0.3 percent, to land at 11,388.50.

Earnings season has tuned into a pileup of worries for investors, with weak performances from Target and Walmart serving as catalysts for the stunning sell-off Wednesday that shaved more than 4 percent off the S&P 500 and 4.7 percent off the Nasdaq.

Both retailers reported spikes in fuel and compensation expenses, as well as growing signs consumers are spending a little less freely. Target stock, which lost more than a quarter of its value on Wednesday, fell another 5.1 percent on Thursday. Walmart dropped another nearly 2.8 percent.

“The extent of the impact of inflation on these giants of American retailing has woken investors up, once again, to the huge impact surging prices are having on every facet of the economy,” Russ Mould, investment director at AJ Bell, said in commentary Thursday. Combined with hints from the Federal Reserve about more aggressive interest rate hikes, “and it’s little wonder that stagflation fears — a slowing economy combined with inflation running hot — are stalking the markets once more.”

The panic spread to other retailers, with competitors Costco, Dollar General and Dollar Tree racking up double-digit losses Wednesday. On Thursday, Kohl’s slashed its 2022 earnings forecast, joining the chorus of household companies to warn of inflation’s deleterious impacts to their businesses. Kohl’s is facing pressure from activists to sell itself amid weakening performance, and the company said it expects bids from potential buyers to be imminent. Its shares nonetheless swelled 4.75 percent.

BJ’s Wholesale rose 6 percent after it reported a 14 percent jump in first-quarter sales, with gasoline boosting its revenue. Bob Eddy, the company’s chief executive, said in BJ’s earnings report that its business model remains “more relevant than ever in the current inflationary environment.”

Under Armour swung 12 percent lower Thursday after it was announced that chief executive Patrik Frisk would step down from his role effective June 1. The company’s stock has gotten pounded in recent weeks after disappointing earnings results, in which Under Armour cited complications from covid-19′s impact in China and a tangled global supply chain.

Consumer spending is the primary engine of the U.S. economy, making up about 70 percent of the nation’s gross domestic product. That’s why the signs of struggle from retailers, grocers and wholesalers are troubling: Companies are facing tighter margins and swelling inventory, and they have yet to pass the costs fully onto consumers. If they do, inflation for the average household could get even worse, Mould said.

But if they don’t, “operating margins will come under pressure, and if margins crack, then so do earnings,” he said. “And that’s not good at a time when investors are still paying lofty valuation for peak profits and near-peak margins” across the U.S. stock market overall.

The shaky retail performances bring a new dynamic to the volatility investors have had to navigate in 2022, including war in Ukraine and its consequences, supply chain headaches, roaring inflation and the ongoing challenges of the pandemic. The S&P 500 is within striking distance of a bear market — defined as a 20 percent drop from the most recent peak.

U.S. may be barreling toward recession in next year, more experts say

And the economic outlook continues to dim: JPMorgan said this week that the market is pricing in a 70 percent chance of near-term recession, suggesting investors lack confidence the Fed can contain inflation without triggering a downturn. Fed Chair Jerome H. Powell himself recently said the central bank should have moved faster to raise rates and has left the door open for more aggressive action.

The Fed has raised its benchmark interest rate twice this year, including by half a percentage point on May 4, and is expected to do so five more times this year to ease inflationary pressures. Fed officials have been attempting to pace increases so as not to smother economic growth, a difficult balance to strike. If the economy cools too quickly, it could fall into a recession, generally defined as two consecutive quarters of negative economic growth.

“The outcome of the Fed’s actions is totally unpredictable, which is why markets are so volatile,” Ryan Belanger, managing principal of Claro Advisors, said in commentary Thursday. Belanger said he expects the market to trade “near or in bear market territory for the coming months.”

“It appears that we are headed toward a recession in the second half of 2023,” Belanger said, “when the current tailwinds of a strong consumer and solid corporate financial strength potentially give way to higher interest rates and a declining wealth effect.”

In times like these, “investors should become accustomed to significant downside and upside moves in stocks,” which is common in periods of uncertainty.

As it stands, the S&P 500 is down more than 18 percent for the year, and the Dow is down 14 percent. The Nasdaq, which has been heavily battered as investors rotated away from pricey tech stocks, is down more than 27 percent for the year, well into its own bear market.

European markets closed in negative territory across the board Thursday, with the benchmark Stoxx 600 index ending the session 1.4 percent lower. Britain’s FTSE100 fell 1.8 percent, a day after that nation reported the highest inflation in 40 years. Asian markets also sustained heavy losses, with the Hang Seng Index in Hong Kong losing more than 2.5 percent and Japan’s Nikkei falling 1.9 percent.

Gas prices hit a fresh record high Thursday, with the national average climbing to $4.58 a gallon, according to data tracked by AAA. Soaring energy prices present one of the biggest challenges for Group of Seven finance ministers at their upcoming meetings, as well as potentially deepening sanctions on Russia over its invasion of Ukraine. Europeans have discussed new measures to cut into Russia’s oil and gas revenues — the United States has already banned energy imports from Russia — but any such move could push prices up even further.

Investor unease was reflected in bond markets, a safe haven in times of turmoil. The yield on the 10-year U.S. Treasury note edged down 0.4 percent to 2.85 percent. Yields move inversely to prices. Gold, another haven, climbed 1.3 percent to trade around $1,840.30 per troy ounce.