
Many analysts tout Consumer Defensive stocks as being “recession-proof.” But the fact is, no sector is truly recession proof, there are some that are more recession-resistant, though. And typically, that’s where Consumer Defensive stocks fall.
What Are Consumer Defensive Stocks?
Consumer defensive stocks are those companies that manufacture food, beverages, household and personal products, packaging, and tobacco. They manufacture products that people need on a regular basis. Even with inflation surging to 40+ year highs, people still need toilet paper.
Or that used to be the general wisdom. Consumer defensive stocks have been one of the biggest winners since the coronavirus-fuelled stock market crash. From its bottom in March until the end of 2021, the index rallied more than 60%.
That momentum was expected to continue into 2022. Analysts have been touting defensive sector stocks as shelters from the rising interest rate and inflationary storm that took tech and other growth stocks down. As recently as early May, investment banking firm Baird declared Walmart its top “recessionary playbook” idea.
What’s Happening with Target and Walmart Stocks?
But disappointing financials from big defensive discount stores are now stoking fears of a recession. In the third week of May, both Target Corporation and Walmart, two of the biggest constituents of the discount store industry and a bellwether of consumer spending, missed their quarterly earnings estimates and provided weak guidance.
Investors responded swiftly to the news. On Wednesday, May 18, U.S. stocks posted their largest daily drop in roughly two years, with the S&P 500 falling four percent. The S&P 500 Consumer Staples Index tumbled 5.6%.
Target’s share price cratered more than 20%, its biggest rout since 1987. In the following days Target stock fell even further and is, as of this writing, down 30% since reporting disappointing first quarter results. Walmart stock is following a similar trajectory. It’s down more than 20% since reporting an earning miss. These represent their steepest stock market drops since Black Monday in 1987.
On Friday, May 20, Ross Stores, Inc, another big discount chain, fell 20% after its first quarter earnings, revenue, and same-store sales came in below Wall Street expectations.
These dire results raise three recessionary warning flags: consumers cannot keep pace with inflationary price hikes, discount retailers are finding it difficult to contain their own costs, and fickle demand and supply chain disruptions are forcing retailers to maintain costly inventory.
The fact is that inflation is taking a big bite out of consumer household expenses and the Federal Reserve and Bank of Canada have only just started to hike their rates. It’s going to get worse.
In March, the Federal Reserve raised its interest rate for the first time since 2018, by 25 basis points. It followed that upward trend in May with a 50-basis point move—the sharpest increase in over 20-years—to a range of 0.75% and 1%.
More interest rate hikes are on the way. The Economist Intelligence Unit expects the Federal Reserve to raise rates seven times in 2022, totalling an increase of 2.25%, and reaching 2.9% by early 2023.
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The stock market is taking a beating but the financial results of so-called recession-proof discount retail stocks like Walmart and Target are raising the spectre of a recession. Despite the massive double-digit losses, history is on the side of investors.
During the biggest sell-offs, including 1987 and 2009, stocks made strong recoveries over the ensuing two years. There’s no reason for investors to wait two years, though. The trading experts at Learn-To-Trade.com can teach investors how to profit no matter where we are in the economic cycle or what the markets are doing.
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