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Hi. Welcome back to the MSI newsletter!
The week that was:
As I mentioned in the previous newsletter, the earning season is over, and for the next few weeks, there is probably not going to be much bad news. This earning season was very eventful. Important companies like AMZN announced they will stop hiring new employees, while some companies like Tesla have even started laying off employees. Many companies also gave uncertain forecasts for the next quarter. For example, ROST reported poor results, while also reporting an uncertain forecast, causing the price to dive underwater by 27%.
Some companies such as SPGI reported a decent forecast a month ago, but they announced this week they have withdrawn the forecast. They are no longer sure if they can meet what they had predicted. It is rare for blue chip companies like SPGI and Ross to report uncertainty.
The possible reason for this is, companies are observing a big change in consumer behavior in the month of May. It appears up until April, consumer behavior was on predictable lines. But in the last few weeks, the economy has taken a turn for the worse.
The most likely reason for this is inflation. Now that people are starting to go back to their daily lives, they have to go back out, fill gas in their cars, and buy essential items like food. The prices of everything are much higher than it was before (thank inflation for that), and now people have to start cutting off the non essential items. Inflation is especially hitting lower income people, because most of their income goes towards basic essentials like food, gas, mortgage, and utilities. They have less money for non-essential expenses like vacations or restaurants. People who are already struggling to pay their bills now have to struggle even more.
It must also be noted that many people used free Covid money from the Government to buy expensive and questionable items like Peloton bikes. They don't have that free money any more.
The Fed is trying to control inflation by destroying demand by raising interest rates. It makes it harder for people to borrow money. However, that would take a very long time. The only other way is if the Ukraine war ends tomorrow which will bring down oil prices. In other words, inflation is not going away anytime soon.
As mentioned earlier, inflation is currently hitting the lower income people the worst. The lower income people mostly buy clothes from ROST, for example. Clothes from ROST are not essential during recessions, so ROST automatically loses customers. Because of that, ROST's results were unsatisfactory. The high income people are not hit by it yet, so luxury stores like JWN and RL reported good results. Higher income people shop in those stores. Lower income people are the first people to get hit by a recession, followed by middle class people. High income people are at the back of the line, but they will eventually get their turn.
I continue to try and target the defensive, profitable stocks, with a good dividend, and good growth. I will also look out for buying opportunities for blue chip companies, especially if they also announce uncertainty like SPGI did, and their price gets affected negatively.