Are Companies Signaling Recession Preparation?

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(Thursday Market Open) Wednesday’s sell-off may continue as equity index futures point to a lower open. The Dow Jones Industrial Average ($DJI) is on track for its 8th negative week in a row. However, there’s some hope for Thursday as the Cboe Market Volatility Index (VIX) jumped to 33 but pulled back premarket.  

Potential Market Movers

A couple of important economic announcements came out before the opening bell. First, jobless claims were higher than expected at 218,000, compared to the forecasted 200,000 and higher than the previous week’s 197,000. Next, the Philadelphia Fed Manufacturing Index came in much weaker than expected despite an increase in new orders. However, that index also reported a slowdown in capital expenditures.

After the open, investors will see the existing home sales report. Housing market stocks took a hit on Wednesday after homebuilding data and mortgage applications declined.

However, many companies seem to be gearing up for recession as they cut earnings outlooks as Walmart WMT and Target TGT have. Some employers are also changing hiring plans like Coinbase COIN and Uber UBER by revising hiring criteria or announcing hiring freezes. Others like Netflix NFLX and Meta FB have announced layoffs. Fortune is reporting that several tech companies, particularly tech startups, have already done layoffs as they find it more difficult to get additional funding. In fact, Cisco CSCO announced plans to reduce its capital expenditures during its earnings announcement late Wednesday.

In the commodity markets, crude oil futures and RBOB gasoline futures were respectively trading 1.75% and 3.50% lower before the opening bell. Traders are concerned that China may be purchasing oil from Russia at a much lower price. Despite being down two days in a row, both commodities are trading within their recent ranges.

Higher petroleum prices are a large contributor to the inflation problem squeezing corporate profit margins and consumers’ wallets. This week, the average gas price in the United States reached $4.59 per gallon, up 11 cents from the previous week.  

More major retailers joined this week’s earnings parade:  

• Kohl’s KSS reported a big miss on earnings estimates despite higher revenues due to weaker sales. Sales were weaker due to lapping government stimulus and inflationary pressures. KSS was down 5.96% in premarket trading.
• BJ’s Wholesale Club BJ beat on top- and bottom-line numbers and sparked a premarket rally of 4.92%. The company attributed its success to controlling costs and its business model.
• Construction supplier Eagle Materials EXP also beat on top- and bottom-line numbers but fell 2.28% before the opening bell despite a positive 2022 fiscal year outlook.
• After Wednesday’s close, Cisco (NASDAQ: CSCO
  ) beat on earnings but missed on revenues and cut its full-year earnings guidance. The stock dropped 12.47% in extended hours trading.  

Reviewing the Market Minutes

Stocks fell hard on Wednesday as earnings from large retailers including Target (TGT) and Walmart (WMT) missed due to inflation. Target plunged 24.93% in reaction to its earnings announcement Wednesday while Walmart has now fallen nearly 18% since releasing results on Monday. These two companies at the top of the retail business appeared to be caught off guard by their results and didn’t forecast improvement anytime soon.

Other retailers plunged on the news, leading the Dow Jones U.S. Retail Index down 7.69% on the day. Within that group were Amazon (AMZN) losing 7.16% and Kroger (KR), falling 6.5%. Deep-discount stores with the smallest of profit margins also felt the pain as Dollar Tree (DLTR) tumbled 14.42% and Five Below (FIVE) slid 11.54%.

Fresh housing data showed the Fed’s rate strategy is taking a toll on the housing market. Building permits fell 3.2% in April and housing starts fell 0.2%. Additionally, mortgage applications fell 11% in the last week. The PHLX Housing Sector Index fell 4.64%.

The market selloff was broad and severe, sending the Dow Jones Industrial Average ($DJI) down 1,164 points for a daily loss of 3.57%, while the Nasdaq Composite ($COMP) plunged 4.72% while the S&P 500 (SPX) plummeted 4.4%. The S&P 500 closed below 4,000 and may not see support until the 3,700 level. The Cboe Market Volatility Index (VIX) spiked back above 31 as investor fears over inflation and profit margins rose.

All sectors were lower on the day, but the Consumer Discretionary Select Sector Index and the Consumer Staples Select Sector Index were the weakest, falling 6.59% and 6.48% respectively. Consumer goods are getting pinched with rising inflation as producers are struggling to pass on higher input costs to consumers. While some are putting up record sales, the numbers were skewed by rising inflation because stores are selling few units. This is the scenario of stagflation where the economy is slow, but inflation is still high.

Selling wasn’t just in the stock market—commodities lost ground too. The WTI crude oil futures fell 2.5% and RBOB gasoline futures slid 6.58% despite the news that Finland and Sweden are taking steps to join NATO. Russian president Vladimir Putin warned the two countries against making the move and promised repercussions. However, oil and gasoline prices fell in trading though rising costs at the pump that could slow down the summer travel season. The Dow Jones U.S. Travel & Leisure Index fell 4.63% and is trading back below its late-2020 highs.

Investors fled to the safety of bonds, pushing prices higher and yields lower. The 10-year Treasury yield (TNX) fell 82 basis points to 2.886%.  

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.