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More evidence that surging costs are putting a tight squeeze on corporate profit margins ignited another bout of heavy selling in stock markets Wednesday, with the S&P 500 tumbling 4% to its lowest level in more than a year.

It was the biggest one-day loss since June 2020 for both the benchmark stock index and the Dow Jones Industrial Average, further rattling investors who have become increasingly worried that central bank efforts to control inflation may tip economies into recession.

One day after Walmart Inc. cut its profit forecast, rival Target Corp. said its earnings in the first quarter fell by half and the retailer warned of a bigger margin hit on rising fuel and freight costs. Its shares fell about 25%, losing about US$25 billion in market capitalization, in their worst session since the Black Monday crash on Oct. 19, 1987.

That pressured other retailing stocks lower on Wednesday, with the SPDR S&P Retail ETF - made up of more than two dozen U.S. retailers - dropping 8.3%. The selling spilled over into the Canadian market as well. Dollarama fell 7.3% and Canada Goose Holdings nearly 8%. The consumers staples sector on the TSX lost 3.8% overall.

“It was Walmart yesterday and everybody thought it was a one-off,” said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading LLC in Las Vegas. “Now that Target misses earnings [expectations] a lot more than Walmart even did, they’re scared that consumer is not as strong as everybody think it is.”

Retailers are having to balance how much of the higher inflation to pass on to consumers, “so that goes into questions about profitability on the part of companies and that gets to some of these lingering valuation questions for the market,” said Willie Delwiche, investment strategist at All Star Charts.

Concerns about rising costs was underscored by a 9% surge in British consumer prices and a faster-than-expected acceleration in Canada.

British inflation surged to its highest annual rate since 1982 as energy bills soared, government data showed Wednesday, while Canadian inflation rose to 6.8% last month, largely driven by rising food and shelter prices. It was the biggest climb in Canadian inflation in 31 years. Canadian bond and forex markets largely shrugged off the latest inflation reading.

Overall, Canada’s S&P/TSX Composite Index lost 389.63 points, or 1.9%, to 20,101.38. The selloff was broad, with materials down 2.5%, financials 1.9%, and technology 1.6%.

During Wednesday’s selloff, Magnet Forensics, a developer of digital investigation software, dipped below its initial public offering issue price for the first time. With that move, every single one of the 16 technology companies that went public last year on the TSX have now traded below their IPO price at some point since issue.

Few analysts are willing to predict the end to selling after a bruising first five months of the year for risk assets given the magnitude of macroeconomic uncertainty, with many anticipating market volatility will be the norm for some time.

“The market is fearful of the next six months. We may find out that it doesn’t need to be as fearful as this, and markets do tend to overreact on the downside,” said Liz Young, head of investment strategy at SoFi.

In addition to inflation and prolonged supply chain snarls, the conflict in Ukraine and pandemic-related lockdowns in China and monetary policy tightening by central banks have weighed on financial markets, stoking concerns about a global economic slowdown.

Wells Fargo Investment Institute on Wednesday said it expects a mild U.S. recession at the end of 2022 and early 2023. The United Nations is significantly lowering its forecast for global economic growth this year from 4% to 3.1%. The downgrade is broad-based, which includes the world’s largest economies such as the U.S., China and the European Union.

Federal Reserve Chair Jerome Powell vowed on Tuesday that the U.S central bank will raise rates as high as needed to kill a surge in inflation that he said threatened the foundation of the economy.

Traders are pricing in 50-basis point interest rate hikes by the Fed in June and July. Canada’s central bank makes its next rate decision on June 1, and economists expect another outsized rate hike of half a percentage point, matching the move in April.

The S&P 500 ended the session at 3,923.68 points. The Nasdaq declined 4.73% to 11,418.15 points, while Dow Jones Industrial Average declined 3.57% - or 1,164.52 points, to 31,490.07 points.

The S&P 500 is down about 18% so far in 2022 and the Nasdaq has fallen about 27%, hit by tumbling growth stocks. Almost two-thirds of S&P 500 stocks are down 20% or more from their 52-week highs, according to Refinitiv data.

Wall Street’s recent sell-off has left the S&P 500 trading at around 17 times expected earnings, its lowest PE valuation since the 2020 sell-off caused by the coronavirus pandemic, according to Refinitiv data.

Bond yields fell Wednesday as investors shifted money into lower-risk investments. The yield on the 10-year U.S. Treasury fell to 2.88% from 2.97% late Tuesday.

The CBOE volatility index, also known as Wall Street’s fear gauge, rose to 31 points after falling for six straight sessions.

Volume on U.S. exchanges was 12.5 billion shares, compared with a 13.4 billion average over the last 20 trading days. Declining issues outnumbered advancing ones on the NYSE by a 5.09-to-1 ratio; on Nasdaq, a 3.52-to-1 ratio favored decliners. The S&P 500 posted one new 52-week high and 37 new lows; the Nasdaq Composite recorded 25 new highs and 242 new lows.

With files from Reuters, The Associated Press, and Sean Silcoff

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