Weak earnings, inflation fears send Dow skidding more than 1,100 points

Wall Street recoiled Wednesday as Target and other national retailers got swept into a staggering sell-off — slashing more than 1,100 points off the Dow — as rising costs eat into business performances and spark fears of a broader economic downturn.

Market volatility has been closely aligned with the tech giants in recent weeks, but now attention has shifted to retailers as investors consider the myriad ways inflation can strap their businesses, from soaring fuel expenses to swelling payrolls.

Target’s shares slumped more than 25% after it reported that net profit shrank 52% in the first quarter. The retail giant cited supply chain pressures and soaring expenses, echoing concerns voiced by rival Walmart, which on Tuesday suffered its worst day of trading in more than three decades after it recorded weaker-than-expected earnings and warned that its customers were paring back amid budgetary pressures.

Other retailers followed suit: Dollar Tree shares swung 14.4% lower, while Costco’s shares cratered 12.5% and Dollar General’s fell 11.1%.

The Dow Jones industrial average skidded 1,164.52 points, or 3.6%, to close at 31,490.07. The S&P 500 index gave up more than 4%, or 165.17 points, to end at 3,923.68, while the tech-heavy Nasdaq shed 4.7%, or 566.37 points, to end the session at 11,418.15.

Neil Saunders, managing director of GlobalData Retail, said that investors are getting spooked as evidence mounts that the economy is heading into a more challenging growth environment.

“Retail results clearly show that we’re moving from an era of high growth into a more constrained consumer economy,” Saunders said. “Ultimately, that squeezes the bottom line. Investors are concerned because they don’t see the issues resolving anytime soon so the growth prospects are weaker going forward.”

The shaky retail performances added to the sea of volatility investors have been navigating in 2022, including war in Ukraine and its myriad consequences, supply chain headaches, roaring inflation and the pandemic’s continuing challenges.

Retail sales edged up 0.9% in April according to the Commerce Department, suggesting inflationary concerns aren’t sidelining consumers just yet, even as staples like gas and groceries become more costly.

The national average for a gallon of gas hit $4.56 on Wednesday, a fresh all-time high according to data tracked by AAA. This time last year, it was $3.04. Meanwhile, this week, every U.S. state posted averages above $4 for the first time.

On Wednesday, Treasury Secretary Janet L. Yellen cautioned that immediate relief for gas prices remained elusive. She also warned of the potential for slower growth to combine with inflation worldwide: “Higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world,” Yellen told reporters.

European markets were also lower across the board Wednesday, with the benchmark Stoxx 600 index slipping 1% after the United Kingdom reported inflation had hit a 40-year high of 9%.

“The one thing consumers really need — price drops — aren’t likely for many months to come,” Danni Hewson, financial analyst with AJ Bell, noted in commentary Wednesday. “Pressure has been building for businesses to protect consumers from the worst of the hikes and in some cases that has been possible, but not all businesses have the kind of cushion which will allow them to nibble away at margins.”

Much of the recent unease has come from lack of investor confidence that the Fed can bring down prices without sparking a recession. On Tuesday, Fed Chair Jerome H. Powell said that the central bank may have to move more aggressively to curb inflation if there is not “clear and convincing evidence” that pressures are abating.

Tech behemoths that had been pandemic darlings have been spiraling as investors offload costly stocks: Amazon is down more than 26% for the year; Meta, 42%; Peloton, 60%; and Netflix, 70%. (Amazon founder Jeff Bezos owns The Washington Post).

“The rising interest rates and low earnings reports have caused many investors to brace themselves for the future by getting out of the market,” Nick Foulks of Great Waters Financial told The Washington Post on Wednesday. “This however could prove to be an unwise move in light of the current volatility that can quickly shift based on the nature of a global stock market.”

Cboe’s volatility index climbed nearly 7% Wednesday. Known as Wall Street’s “fear gauge,” the index is up 62% for the year according to MarketWatch.

The Dow is now down more than 12.7% for the year according to MarketWatch, while the S&P is down more than 17%, edging closer to a bear market. The Nasdaq is down a whopping 26%, well into its own bear market, which is defined as a 20% from a recent peak.

Bear markets are a natural part of the life cycle — stocks go up, they go back down — but if one takes hold now it would put an end (at least temporarily) to the frenetic rally that followed Wall Street’s sudden plunge after the coronavirus first rattled the global economy. The broad index has already suffered through its worst first four months of the year since 1939, and the pain may continue.

Since World War II, there have 17 bear markets lasting an average of roughly a year according to Ryan Detrick, chief market strategist for LPL Financial. But when bear markets coincide with a recession, losses are steeper — nearly 35%, on average — and the downspells longer, an average of 15 months, he said Wednesday in commentary.

If the economy should avoid recession, the outcome brightens, with losses easing and the bear market lasting an average of seven months.