The economy’s “normalization process” after the COVID-19 crisis was never going to be “orderly,” as retailers’ inventories had dwindled in the pandemic amid excessive consumer demand for goods, according to Morgan Stanley Wealth Management.
Formerly soaring profits are now taking a hit.
“As inventories have recovered and consumer spending shifts toward services and away from merchandise goods, retailers’ operating margins have begun to plummet,” wrote Lisa Shalett, chief investment officer, in a note Tuesday. “This double-whammy may have further to run but this should not be a reason to fear a recession.”
Shalett pointed to the chart below to show how “even a little bit of inventory hits profits” in retail.
“The economic slowdown that we are experiencing should have been anticipated given one of the most spectacular V-shaped recoveries since World War II,” Shalett said. “Even so, it has led to negative economic surprises, a downward recalibration of corporate earnings and a decline in stock prices.”
Shares of Target Corp.
plunged 29% in May, their worst month since October 1987 and second worst monthly performance on record, according to Dow Jones Market Data. Walmart Inc.’s stock
saw a 16% drop in May, its worst month since January 2009.
The S&P 500 index’s consumer discretionary
and consumer staples
sectors each fell almost 5% in May, according to FactSet data. Only real estate fared worse, with losses of more than 5% for the month.
“Like the rest of the economy, retailing is reverting to trend from excessive stimulus and overshoots,” Shalett said. “This normalization process may be lumpy but likely provides opportunities for stock pickers.”
The U.S. stock market ended lower Tuesday, with the S&P 500
falling 0.6%, the Dow Jones Industrial Average
declining 0.7% and the Nasdaq Composite
sliding 0.4%. For the month, the S&P 500 and Dow each eked out gains of less than 0.1% while the Nasdaq fell about 2.1%.