Retailers hit with ‘double-whammy’ as inventories rise, consumer sector stocks punished in May

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According to Morgan Stanley Wealth Management, the “normalization process” of the economy after the COVID-19 crisis would never be “ordered”, as retailers’ inventories had shrunk during the pandemic amid excessive demand for consumer goods.

The benefits that were once raised are now getting a hit.

“As inventories have recovered and consumer spending is shifting to services and moving away from commodity goods, retailers’ operating margins have begun to plummet,” wrote Lisa Shalett, director of investments, in a note Tuesday. “This double impact may be more steep, but that shouldn’t be a reason to fear a recession.”

Shalett pointed to the chart below to show how “even a little inventory gets the profits” at retail.


“The economic downturn we are experiencing should have been predicted given one of the most spectacular V-shaped recoveries since World War II,” Shalett said. “However, it has led to negative economic surprises, a downward recalibration of corporate earnings and a fall in stock prices.”

The shares of Target Corp. TGT,
they are down about 28% in May, at the rate of their worst month since October 1987 and the second worst month on record, according to Dow Jones Market Data. WMT of Walmart Inc.,
+ 0.17%
The 15% drop in May puts the company’s shares on track for the worst month since February 2018.

SP500.25 discretionary consumption of the S&P 500 index,
+ 1.26%
and consumer goods SP500.30,
the sectors are heading for a fall of around 4.5% in May, according to FactSet data, in the latest check. Only the real estate sector is at a worse pace, with a 5% loss on Tuesday afternoon, the last trading session of the month.

“Like the rest of the economy, retail is returning to the trend of over-stimulus and overflows,” Shalett said. “This standardization process may be uneven, but it probably offers opportunities for stock selectors.”

The US stock market was trading mostly lower on Tuesday afternoon, with the S&P 500 SPX,
and the Dow Jones Industrial Average DJIA,
each shows declines while the Nasdaq Composite COMP,
it was roughly flat.

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