Investors Shrug Off Inventory and Stagflation Risks as Stocks Close Higher
Last Updated 4:15PM EST
Stocks finished Tuesday’s trading session higher, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 gaining 0.8%, 0.95%, and 0.89%, respectively.
The energy sector was today’s top performer, closing the day with a gain of 3.08%, followed by the industrial sector (XLI), which saw a gain of 1.35%. The consumer discretionary sector was the laggard today, as it finished down 0.3%.
Investors appeared to shrug off the possibility of higher inventory than needed from retailers, which could lead to lower profits for retailers. In addition, they also appeared to be unfazed by the World Bank’s stagflation risk warning.
The bank lowered its initial forecast for global growth from 4.1% to 2.9% in 2022. It also expects the growth rate to remain similar throughout 2023 and 2024. The World Bank attributed this decrease in expected growth to the war in Ukraine, along with the withdrawal of fiscal and monetary support from governments around the world.
Moreover, it also expects inflation to remain above average for several years, which, when coupled with below-average growth, translates to stagflation. Thus, investors should keep the possibility of this scenario in mind when choosing which companies to invest in.
Indeed, highly-speculative companies that are not profitable will likely perform poorly in such an environment. On the other hand, high-quality companies with strong competitive advantages and pricing power could potentially benefit in a stagflationary scenario.
Stocks are Positive Heading into the Final Hour of Trading
Last Updated 3:00PM EST
Stocks are in the green heading into the final hour of Tuesday’s trading session. As of 3:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 0.42%, 0.54%, and 0.52%, respectively.
Energy continues to lead the market, followed by the technology sector (XLK). The consumer discretionary sector is the only sector that’s in the red, but it is well off its lows of the day.
In addition, crude oil is trading above $120 per barrel and shows very little signs of slowing down its longer-term trend. Bonds also continue to rise as the U.S 10-year Treasury yield has fallen to 2.972% from its recent high of 3.062%.
Despite the lower bond yields and potential of bloated inventories among retailers, the rising stock prices indicate that fear has subsided among investors heading into the close. Indeed, the retail industry has turned flat on the day.
When fear isn’t the cause of rising bond prices, a falling 10-year U.S. Treasury yield can act as a catalyst for higher stock prices, as it lowers the discount rate when performing valuations. A lower discount rate equates to a higher valuation.
Nonetheless, it would take a sustained downward trend in U.S. Treasury yields to materially impact the market’s valuation of stocks.
Stocks are off Their Lows Halfway into the Trading Session
Last Updated 12:30PM EST
Stocks are off their lows halfway into Tuesday’s trading session. However, as of 12:30 a.m. EST, they remain in the red, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 being down 0.11%, 0.13%, and 0.1%, respectively.
The decline is still being led by the consumer discretionary sector, which is down 1.5%, whereas energy continued today’s upward momentum, gaining over 2%. The same can be said for crude oil, which is now up 0.8% and hovering around the mid $119 range.
Bonds continue to rally as the U.S 10-year Treasury Yield has fallen to 2.974% from its recent high of 3.062%. This combination of declining stock prices with rising bond yields suggests that there is fear in the market as investors flock to the risk-free safety of government bonds.
Today’s fear is likely attributed to the inventory woes announced by Target in the section below, which investors likely believe will spread to other retailers.
If most retailers ordered too much inventory, it means that profit margins will be squeezed in the coming quarters. This would result in higher forward valuation multiples that would lead to further declines in stock prices.
As of this writing, Target is down 4%, while the retail sector (XRT) declined 0.86%.
Inventory Woes Could Help Lower Inflation
Last Updated 10:15AM EST
Stocks are seeing a weak start to Tuesday’s session, with major indices in the red after 45 minutes of trading. As of 10:15 a.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 0.69%, 0.63%, and 0.59%, respectively.
The decline is being led by the consumer discretionary sector (XLY), which was yesterday’s top-performing sector. XLY is down 1.55%, whereas energy (XLE), today’s top-performing sector, is up 1.4%. Not surprisingly, crude oil is in the green, up 0.48%, while the U.S 10-year Treasury Yield decreased 5.8 basis points to 2.986%.
Target (TGT) stock fell more than 7% in pre-market trading but has since recovered half its losses after cutting guidance in an attempt to reduce its high inventory levels. TGT’s downward revision comes less than a month after its previous guidance. This move from Target could be a sign of things to come from other retailers.
It’s likely that a lot of companies ordered too many products in an attempt to overcome supply-chain shortages and are now forced to reduce prices to normalize inventory. This may be a sign that inflation has peaked, as these price reductions are a deflationary event.
It’s possible that these inventory woes could be reflected in the upcoming CPI report, which may lead to a lower-than-expected result.
Pre-Market Update
Traders anticipate a slightly cooler inflation data for May, due out on Friday. Nonetheless, Stock futures moved lower in the early hours of Tuesday after the Reserve Bank of Australia’s higher-than-expected interest rate hike made investors nervous in the U.S. Australia’s central bank raised its benchmark rates by 0.5 percentage points, reminding investors that central banks can surprise at any time with their monetary policies.
Futures on the Dow Jones Industrial Average (DJIA) were down 0.41%, while those on the S&P 500 (SPX) inched 0.44% lower, as of 5:23 a.m. EST, Tuesday. Meanwhile, the Nasdaq 100 (NDX) futures fell short of the flatline by 0.56%.
At the end of Monday’s normal trading session, the Dow inched up about 0.05%, after a sharp rise at one point during the day. The S&P 500 ended 0.31% higher, while the Nasdaq 100 settled 0.41% higher.
The regular session of Monday was dynamic, with the indexes climbing significantly before shedding off most of their gains after the 10-year Treasury yield hit 3%. But mostly, the day was uneventful with no major data or earnings release.
Key inflation data for May — the consumer price index (CPI) —is still three days away from releasing. The CPI will give investors a better look at the situation of inflation and whether the interest rate hike in May has had any effect on it. Most experts are expecting slightly lower inflation compared to April.
Given that investors are still struggling to understand whether Monday was a bear market rally or if the markets are settling after finding a bottom, the expected May CPI could lead them to think that inflation has peaked.
Meanwhile, The Securities and Exchange Commission is expected to change the blueprint of stock market operations by this fall. These changes could be beneficial for small investors in the coming months.
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