Stocks tumble amid disappointing retail sales, inflation fears

Spooked investors forced a stock sell-off on Thursday as worry spread that central bankers are raising interest rates in a weakening consumer market, pushing the economy toward a recession.

The Federal Reserve on Wednesday increased interest rates an additional 0.5 percentage points in an attempt to tame inflation, followed Thursday by equivalent rate hikes by the European Central Bank, the Bank of England and the central bank of Switzerland.

But those increases were met with souring retail spending numbers, indicating that persistently high prices on consumer goods are bumping up against expensive credit and slowing economic growth.

The Dow Jones industrial average ended Thursday’s trading down about more than 764 points, or 2.3%. The S&P 500 lost almost 100 points, or 2.5%, and the Nasdaq dropped around 360 points, or more than 3.2%.

“Our main message to investors is to be cautious,” said James Demmert, chief investment officer at New York wealth management firm Main Street Research. “The Fed is trying to engineer a soft economic landing that in our view has a high likelihood of failing and causing a recession in 2023.”

Fed Chair Jerome H. Powell has said the central bank’s main goal is fighting inflation and pushing it down to a sustainable 2% from the 40-year high of 9.1% reached over the summer.

Data released on Tuesday showed inflation to be slowing – down to 7.1% in November from 7.7% the month prior – leading some economists to project prices may have reached their high-water mark.

But Powell sounded a cautionary note at his Wednesday news conference.

“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases,” he said. “But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

He said it was “just not knowable” whether the United States is headed into a recession or how severe an economic downturn could be.

That outlook, along with worse-than-expected retail sales numbers, appeared to shake investors’ confidence. Government data released Thursday showed retail sales dropped 0.6% in November, a sharper decline than expected during the year’s busiest shopping month.

The data is compared with October, which saw a 1.3% surge in sales. Some experts attributed the increase to stores rolling out earlier discounts to ease their inventory glut and to cater to consumers looking to spread out their holiday spending.

In November, consumers pulled back spending at stores that specialize in furniture and home furnishing (2.6%), electronics and appliances (1.5%), motors and car parts (2.3%) and home improvement and gardening materials (2.5%), according to the Census Bureau’s report.

Still, there was a more positive picture on Black Friday weekend, which saw a historic number of shoppers online. Consumers spent $35.4 billion online over the five-day period, according to data from Adobe Analytics. On Cyber Monday – the biggest shopping day of the long weekend – sales hit a record $11.3 billion, a 5.3%jump from last year, while online Black Friday sales ticked up 2.3% to $9.12 billion. The National Retail Federation reported that 130 million people shopped online that weekend, a modest increase from last year’s 128 million.

Shopify, which tracks online and in-store data using its commerce platform, reported record sales from Thanksgiving Day through Cyber Monday – 52 million consumers globally spent $7.5 billion with Shopify merchants, a 19% increase over last year.

But the report from Census Bureau highlighted warnings from industry experts that inflation is weighing more and more on consumers, who are growing weary of paying more for less. The resilience of shoppers that has marked much of the year is wearing off.

“A note of caution is starting to sound in consumer behavior as shoppers become more discerning and cut back on the number of things they buy,” said Neil Saunders, managing director at the analytics company GlobalData.

Major retail stocks almost uniformly fell Thursday. Walmart fared the best, with a 0.9% loss. Costco’s shares fell 4%, Target’s 3.2% and Home Depot’s 1.8%.

Declines in the tech sector cemented an already dreary year for many Silicon Valley giants. After a usage boom during the pandemic, tech companies have seen their growth rates wane this year. Shares of Apple, Amazon, Facebook parent Meta, Google parent Alphabet and Microsoft all fell more than 3% Thursday.

Bucking the trend were shares in Tesla, which saw a small gain of more than 0.5%. That follows days of falling share prices amid investor concern about chief executive Elon Musk’s increased focus on his new company, Twitter. Musk sold about $3.5 billion worth of Tesla stock in recent days.

More broadly, the markets are reacting to a “hawkish” announcement from the Fed, said Wedbush Securities analyst Dan Ives, including projections that show the Fed is on track to hike rates past 5% next year.

“The fear,” he said, “is that the Fed is the straw that breaks the camel’s back and the economy goes into a much more severe recession if the Fed continues to keep the foot on the accelerator.”