Stock market selloff has 401(k) investors on edge
Are the nervous shoppers who growl at the grocery store ready to give up?
Is inflation causing them to reconsider how often they open their wallets? If so, are we closer to a recession than some might have imagined several months ago?
Or are consumers in good shape and just spending more now on vacations, home renovations and a variety of services and spending less on most things they bought during the pandemic at retailers like Target, Walmart and Amazon?
It’s been a brutal week for 401(k) plans as Wall Street grappled with worryingly steep losses fueled by inflation concerns and recession worries.
We’re looking at the eighth straight week for the Dow Jones Industrial Average to post losses — the longest weekly losing streak since 1923.
How long will consumers continue to spend?
The fear of a recession in the next six to 12 months has clearly increased lately.
The Dow Jones Industrial Average closed Friday at 31,261.90 points, up 8.77 or 0.03% after an incredible last-minute turnaround. At one point on Friday, the Dow was down over 600 points.
Saying the phrase “Thank God it’s Friday” doesn’t nearly describe how investors feel after one bad day after another. The Dow closed at 32,654.59 on Tuesday but fell 1,164.52 points on Wednesday and fell 3.56%.
It wasn’t the first 1,000-point drop in May either. On May 5, the Dow Jones fell 1,063.09 points, down 3.1%, to close at 32,997.97.
“I had almost no phone calls from concerned customers until two days ago,” Sam Huszczo, chartered financial analyst at Southfield, said in an interview Friday morning.
Many investors, he said, seemed to shake off some of the previous declines when the Dow Jones regained ground last week.
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But this week’s market sell-off has become harder to ignore. Many investors are increasingly worried about the risks of recession and further declines in stock prices.
“The stock market’s reaction was somewhat surprising,” Huszczo said, “as the economic data does not match the fear in trading happening today.”
Much of the economic data, he said, remains quite strong – retail sales rose 0.9% to a record $677.7 billion in April, consumers sit on 2 trillion dollars in savings, manufacturing is strong and the US unemployment rate remains exceptionally low at 3.6% in April.
Huszczo falls into the camp that says the consumer stays in good shape and is able to keep spending.
“The fact that the US consumer hasn’t slowed down yet, puts the backdrop to just how bad this market could get from here,” Huszczo said.
“I don’t see anyone cutting their lifestyle for fear of an economic recession.”
Higher interest rates and inflation create problems for buyers
Yet fear is the driving force. Wall Street remains obsessed with any sign that high inflation will cause consumers to cut back much of their discretionary spending as soaring food and gas prices take an even bigger chunk out of their budget.
As interest rates rise, it becomes more expensive for consumers to borrow, especially to buy big-ticket items like cars.
Ford Motor closed at $12.50 per share on Friday, down 35 cents or 2.72%.
General Motors closed at $35.40 per share on Friday, down 72 cents or 1.99%.
Stellantis closed at $14.46 per share on Friday, up 20 cents or 1.4%.
Walmart reported this week that its price-sensitive customers are turning to lower-priced private label products, especially for deli meats, bacon and dairy.
Target shares fell nearly 25% on Wednesday after Wall Street was disappointed with earnings.
Target CEO Brian Cornell blamed inflationary pressures, as well as supply chain disruptions that caused some inventory to arrive too early and some too late to meet demand.
The Target CEO also noted shoppers are shifting spending as kids’ birthday parties resume, driving toy sales; and more and more people are planning to travel, driving up luggage sales.
Stocks and bonds have been ugly
Investors are having tough times for stocks and bonds, which is not typical.
David Kudla, CEO of Mainstay Capital Management in Grand Blanc, noted that stock and bond markets have reacted negatively since the start of this year, as investors anticipate how aggressively the Federal Reserve will have to raise short-term interest rates. term to lower inflation.
The extent and speed of inflation’s decline, Kudla said, will determine whether the Fed can ease its tightening policy.
“And that will determine the direction of the markets through the end of 2022,” Kudla said.
He noted that tech companies generally suffer more from the market sell-off triggered by rising rates and that has happened this year already.
“Value stocks and commodity companies that perform well in times of high inflation obviously hold up very well,” he said.
Some investors face huge losses
The amount of money you have lost in the past year largely depends on where you have invested.
David Sowerby, Bloomfield Hills-based managing director and portfolio manager for Ancora Advisors, noted that bitcoin was down 54% as of May 9 from its 52-week high in November 2021.
GameStop was down 67% as of May 9 from its 52-week high set in June 2021. Netflix was down 75% from its 52-week high set in November 2021. And Peloton was down 89 % from its 52-week high at the end of June 2021.
The Standard & Poor’s 500 index, on the other hand, was down 17% through May 9 from its 52-week high reached on January 3.
While things may balance out a bit in the coming days, some analysts say the ride may also continue to be volatile in the summer.
Companies that sell discretionary goods to consumers — and let’s face it, a lot of what we put in those shopping carts at Target and Walmart are things we really don’t need — have a lot less certainty about what concerns sales prospects if consumers start to dwell on every dollar they spend now that inflation is so high.