Capitalizing on Recession Talk
Contributed by Doug Walters, Max Berkovich, David Lemire
This week brought to bear talk of a potential recession as retail stocks fell sharply on earnings. A recession is certainly one possibility but far from guaranteed. There is a silver lining for stock investors in the recent market weakness.
Recession. This week, the word was heard despite the US economy still being relatively strong. The typical definition of a recession is two successive quarters with declining Gross Domestic Product (GDP). We’re not there yet. But with the Fed raising rates and inflation running high, investors are concerned. Those concerns are reflected in US stocks, which at one point during the week were down about 20% from the January 3rd peak.
The good news for investors today is that stocks have already experienced declines approaching those of the average recession. According to analysts at Goldman Sachs, of the past 12 recessions, the average peak-to-trough decline of the S&P 500 was 24%. In fact, the average return during the actual recession (the quarters when growth is negative) is positive. Why? Because stocks are forward-looking. So even if a recession is pending, it may not mean more pain for stockholders.
Disciplined, evidence-based investors know these dynamics. Rather than speculate about whether or not a recession is pending, patient investors see declines like these as opportunities. Smart decisions at times like these are the building blocks of long-term wealth creation.
Stocks declined once again this week, with the S&P 500 falling around 3%. Recession concerns were top of mind, but the drag of the big box retailers provides our headline of the week.
Big Box, Big Trouble
Major retailers like Target (TGT) and Walmart (WMT) reported earnings this week and raised the antennae of economy watchers.
- On Tuesday, Walmart reported earnings that fell well short of expectations despite beating on revenue.
- On Wednesday, Target followed with an even worse miss on earnings despite good revenue growth.
- The companies highlighted challenges in managing escalating costs and supply issues.
- Investors were unimpressed and sent the shares reeling. Walmart ended the week down around 20% and Target 30%.
This week’s retail stock drama is a good reminder of the benefits of diversification. Walmart and Target are great companies and great operators on many measures, but that did not insulate them from this challenging environment.
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