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Retailers, Inflation, and Fed in Focus – May 22, 2022

Fears of high inflation impacting corporate profits heightened last week. Walmart and Target reported quarterly earnings short of analysts’ forecasts. The retailers warned of continued cost pressures. Fed Chairman Powell said the central bank would not hesitate to lift rates beyond neutral to curb high inflation. Investors worried the Fed’s efforts to control inflation would derail the economy.

Subpar quarterly profits and profit forecasts from leading retailers raised concern over the ability of U. S. companies to deal with inflation and the willingness of consumers to pay higher prices.

Walmart and Target rattled market sentiment. They warned of rising fuel costs, wages, and freight costs crimping margins in the future. The retailers also saw lower-than-expected sales for discretionary merchandise like TVs.

The Federal Reserve signaled a tough stance on monetary policy. Chairman Powell said the central bank would continue to raise interest rates to temper the recent surge in inflation. He added the Fed would do so until inflation declines.

While retailer earnings stoked concerns of inflation jeopardizing corporate earnings growth and profit margins, the Fed’s stand on inflation fueled worries that the Fed’s actions could tip the economy into a recession.

For the week ending May 20, the S&P 500 (SPY) fell 3.0%. Three of the 11 sectors advanced.

Leading and lagging sectors for the week ending May 20, 2022, as retailers and Fed drive stocks lower

Leading and lagging sectors for the week ending May 20, 2022, as retailers and Fed drive stocks lower.

Market breadth was negative. The number of advancing stocks in the S&P 500 lagged the number of decliners by a 3-to-8 ratio.

Energy (XLE), health care (XLV), and utilities (XLU) bucked the S&P 500, gaining 0.4% or more.

Consumer staples (XLP), consumer discretionary (XLY), and industrials (XLI) lagged the S&P 500.

The S&P 500’s top 10 winners included the following:

1. Communication Services Sector

  • Paramount Global (PARA) +15% – The week’s top performer in the S&P 500.

2. Information Technology Sector

  • Synopsys (SNPS) +11%
  • SolarEdge Technologies (SEDG) +11%
  • Enphase Energy (ENPH) +7%

3. Utilities Sector

  • NRG Energy (NRG) +8%

4. Healthcare Sector

  • Organon & Co. (OGN) +8%
  • Viatris (VTRS) +7%

5. Materials Sector

  • Corteva (CTVA) +7%
  • Celanese Corp. (CE) +6%

6. Financial Sector

  • MarketAxess Holdings (MKTX) +6%

Top ETFs for the week

The following ETFs themes worked well: solar energy, rare earth metals, copper mining, clean energy, and silver mining. The top ETFs for the week include:

  • Invesco Solar ETF (TAN) +8.9%
  • VanEck Rare Earth/Strategic Metals ETF (REMX) +8.4%
  • Global X Copper Miners ETF (COPX) +7.7%
  • iShares Global Clean Energy ETF (ICLN) +7.5%
  • Global X Silver Miners ETF (SIL) +6.0%

Top Fidelity Fund for the week

  • Fidelity Latin America (FLATX) +4.5%

Will Retailer Earnings, Inflation Data, and Fed Minutes Rescue Stocks?

Earnings from discount and specialty retailers, data on personal consumption expenditures, and minutes of the Fed’s May meeting on interest rate policy hold the keys to how stocks fare this week.

* Earnings reports from several mid-sized and smaller retailers are in store after reports from Walmart and Target crushed their stocks and took the broad market lower last week. Reporting retailers include discounters Costco, Dollar General, and Dollar Tree. Department store Macy’s and specialty retailers Ulta Beauty and Dick’s Sporting Goods also report.

* The Bureau of Economic Analysis reports the personal consumption expenditures (PCE) data for April this Friday. The report includes data on the Federal Reserve’s preferred inflation measure, the core PCE, which excludes food and energy prices. Economists surveyed by Dow Jones expect the core PCE to rise by 0.3% and 4.9%, respectively, on a month-over-month and year-over-year basis. The PCE report includes data on consumer spending and consumer income, providing investors with insights into the state of the consumer.

* The minutes from the Federal Reserve’s May 3-4 meeting on interest rate policy are due on Wednesday.

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