Market Insights

Investors are freaking out about the stock market as inflation pummels major retailers like Walmart and Target.

The S&P 500 fell 3 percent last week. At one point on Friday it slipped below 3855, representing a 20 percent drop from the high of 4819 on January 4. That’s the traditional line where a “bear market” officially begins.

Prices clawed back to close back above 3900, but it was enough to drive plenty of conversation and headlines. As the Google Trends chart below illustrates, “bear market” had its highest reading since the crash of mid-March 2020. It’s near levels from late 2018. (Interestingly, rebounds followed both spikes.)

Most of the news was bearish — especially for consumer stocks like Walmart (WMT) and Target (TGT). Both retailers had their biggest selloffs in decades as higher costs weakened profitability. Inflation prompted others like Bath & Body Works (BBWI) and Ross Stores (ROST) to lower guidance.

There was also poor economic data. While April’s retail-sales report surprised to the upside, more recent numbers showed weakness spreading in May. For example, initial jobless claims unexpectedly rose to highest level since late January. The jump in mortgage rates dragged on homebuilder sentiment. Industrial reports from the New York and Philadelphia Federal Reserve lagged estimates by wide margins.

The economy and inflation may remain in focus this week, especially with minutes from the last Fed meeting on Wednesday afternoon. (See below for more key events.)

Damage in Discretionaries

The Consumer Discretionary sector fell 7.8 percent last week. While that didn’t set records in absolute terms, it was the biggest drop relative to the broader market since October 2008. The sector is now the worst-performing major group in 2022, pushing Communications from the bottom of the rankings.

Consumer staples and industrials also fell sharply last week. Gold miners rebounded and energy rose more than 1 percent. Health-care stocks gained after the CDC recommended children get booster shots of Pfizer’s (PFE) Covid vaccine. Solar-energy companies gained as the European Commission outlined a plan to use more alternate energy.

Paramount Global (PARA) also jumped after Berkshire Hathaway (BRK.K) disclosed a stake in the media company, previously known as ViacomCBS.

Charting the Market

The S&P 500 is down seven straight weeks, its longest losing streak since March 2001. (The Dow Jones Industrial Averages is in its worst funk since 1923.)

The S&P is trying to hold a price zone from from March 2021, when it bottomed at 3723. Is the inflation problem easing, or will more companies be forced to cut guidance like WMT? Once investors have more clarity on such questions, they may look for a rebound or a drop to new lows.

Last week saw a rally attempt fail around 4091. That was near the May 2 low, which could make some chart watchers view the level as potential resistance.

Another potential pattern to watch is the falling trendline along the highs of April and early May. Prices have yet to approach this line. Traders could be looking for it to trigger more downside, or a bullish reversal (like happened in mid-March).

Two other charts may be giving the bulls some glimmers of hope: 10-year Treasury yields and the U.S. dollar index. Both surged as the market fell earlier this year but have gone more than a week without hitting new highs. Drops in those could signal less anxiety about interest rates and the Fed.

The Week Ahead

Speaking of the Fed, minutes from the central bank’s last meeting are due this Wednesday, May 25. It could be the most important event this week as investors look for more clarity on interest rates and balance-sheet reduction.

There are also several more quarterly results, including retailers.

Tomorrow brings new-home sales and earnings from Best Buy (BBY).

Wednesday morning features crude-oil inventories and results from Dick’s Sporting Goods (DKS). Fed minutes are due at 2 p.m. ET. Nvidia (NVDA), Snowflake (SNOW) and Splunk (SPLK) are due in the postmarket.

Thursday’s big names are Costco (COST), Dollar Tree (DLTR), Macy’s (M), Dollar General (DG) and Gap (GPS). Revised gross domestic product and initial jobless claims are also due.

Friday morning brings personal income and spending. This report could matter because it includes the personal consumption expenditures (PCE) deflator, one of the Fed’s key inflation measures.

Activity could also slow late in the week because of Memorial Day weekend. (Markets are closed Monday, May 30, in observance.)