The US market crashed significantly in Wednesday’s trading, with echoes of the fall reverberating across Asian exchanges on Thursday morning. The US S&P500 is down more than 4 per cent for the day, the biggest fall since June 2020. The Nasdaq is now 5.5% lower than it was at the start of the day on Wednesday. Both indices have rolled back to the lows reached a week ago.
Behind investors, pessimism was caused by disappointing reports from major US retailers. Giants such as Walmart, Target, and Amazon suffer from rising costs due to a spike in purchasing prices and energy combined with increasing labour costs.
April’s latest retail sales report showed that Americans are spending commensurately with rising inflation. This transition for retailers from a boom to a pace barely keeping up with increasing prices raises fears that an economic slowdown awaits the economy going forward.
However, this simplistic extrapolation risks being a mistake. The major retail players have not kept up with the price surge, as we can see in the latest reports from Walmart and Target and the following market reaction. But history suggests that stopping the acceleration of inflation is enough for retailers to find the ground beneath their feet.
The slowdown in price growth is a golden time for retailers and the overall stock market. This trend can easily be traced back to both the shock waves of price surges in the 1970s and 1980s and the chronically low inflation of the 2010s.
As a result, investors have little choice but to wait for reliable signs that inflation has turned around. We may have to be patient for a few months. But it also cannot be ruled out that the rate of price increases is near or past its peak.
That’s hard to believe when looking at price rises in shops but much easier to consider when looking at declining volatility in the energy market and a 15% fall in the base metals’ basket.
The Chinese renminbi, which lost 6.4% over the month, also acts as a significant suppressor of inflation in the USA and elsewhere via lower imported inflation.
Thus, yesterday’s panic selloff in the markets and the persistence of investor anxiety on Thursday heralds the approach of a panic peak. And with it, perhaps a local low preceding a rebound.
