Why Stock Markets Are Falling So Hard

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wall street bull

The time of dreams

Last week was another brutal one for the markets. Investors had plenty to worry about, from the Fed to inflation and retail sales.

The


Dow Jones Industrial Average

lost 4.6% last week. It has fallen 10 of the past 11 weeks and suffered its biggest two-week percentage decline since the end of October 2020. That puts it down 13.6% year-to-date.

Other indices haven’t fared much better. The


S&P500

lost 5.1% last week, recording its worst two-week percentage decline since late March 2020, just after the pandemic began to wreak havoc in the United States. Since the beginning of the year, it has fallen by 18.6%. The


Nasdaq Compound

had its worst, dropping 5.6% for the week, pushing it down 27.5% for 2022.

Skittish investors didn’t have to look far for reasons to confirm their fears.

Retail trade again had a difficult week, with


SPDR S&P Retail Exchange Traded Fund

(symbol: XRT) down nearly 5%. Tuesday,

Target

(TGT) lowered its forecast just three weeks after initially resetting expectations lower as the big-box store warned it will have to offer more discounts to move merchandise. It raised fears that margin-squeezing promotions could become more commonplace elsewhere, after two years of relatively sparse sales.

As Barrons noted, there are many pockets of strength in retail, and indeed there are other sectors of the industry, from beauty to supermarkets and high-end retailers, that are still seeing strong demand. Still, some stores may be more exposed to uneven spending in the consumer discretionary space, and they would rather raise prices than lower them for the time being, to pass on rising input costs.

Indeed, costs seem to be rising everywhere. Markets fell on Friday after data showed a further rise in inflation: the latest consumer price index rose 8.6% in May, ahead of expectations, hitting a new high in 40 year.

The reading dashed hopes that we have already peaked in inflation, and adjusting hourly earnings to reflect the latest CPI means real average hourly earnings fell for the eighth consecutive month in May.

The worry is that with necessities like food, fuel and shelter taking an ever-growing share of Americans’ budgets, they will have less left to spend elsewhere. And that’s more than just a problem for retailers, as consumer spending accounts for more than two-thirds of US gross domestic product. Thus, fears that a slowdown will turn into a recession are growing.

On this point, the market is unlikely to get much help from the Federal Reserve. The central bank appears set to keep raising rates to curb demand as it grapples with high inflation, a strategy echoed by the European Union on Thursday.

Technology, one of the hardest hit sectors, has also seen no relief. Investors haven’t gotten much more clarity on the continuing saga of Elon Musk’s potential purchase of

Twitter

(TWTR). Sales of

Apple
it is

(AAPL) hardware can slow down, and it and Google parent

Alphabet

(GOOGL) face new regulatory hurdles in the UK


Tech Select ETFs

(XLK) lost 7.5% in the past five days.

Perhaps the best news from the past week is that it’s over.

Write to Teresa Rivas at [email protected]

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