Walmart stock and Target stock are collapsing in response to higher inflationary pressures.
Could this mean we're entering an imminent RECESSION? Why is HIGH INFLATION so bad for stocks?
First, as food & oil prices sky-rocket, consumers are increasingly being forced to choose between what they NEED and what they WANT. This is putting pressure on HIGHER MARGIN, NON-ESSENTIAL goods. Target and Walmart won't be the only companies facing this challenge.
But are we in a RECESSION?
So far Walmart & Target are NOT seeing a recession as store traffic and purchases are still growing. So why are their stocks dropping?
Walmart and Target have seen their profit margins COLLAPSE as they haven't raised prices enough to keep up with rising labor, shipping costs, and materials costs. In the 1Q 2022 Target's operating margins declined by 43%!
So what will they do? They're going to RAISE PRICES. This means that during 1Q 2022, Walmart and Target effectively SUBSIDIZED consumer shopping with lower margins. Now, they're going to push back. This means inflation could go EVEN HIGHER.
Higher inflation spells more TROUBLE for risk assets, like stocks, as the Federal Reserve is committed to "Price Stability." This means the Federal Reserve will continue to have a mandate to aggressively raise interest rates in the months and quarters ahead. As interest rates move higher, the cost for transacting goes up, demand shrivels and a recession becomes increasingly likely.
Whether or not there's a recession, one should expect higher interest rates, and possibly even lower valuations in the months and years ahead.
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