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May 23, 2022, 10:06 a.m. EDT

Buy the dip? Sell the ‘rip’? What’s ahead for stock investors as ‘sticky’ inflation fears heighten consumer concern.

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By Christine Idzelis

Investors, already grappling with a sinking stock market and fears that the U.S. economy may be heading for a recession, now turn their focus to the consumer. For one thing, consumer discretionary stocks are among the hardest hit.

The market’s fixation on peak inflation and how many times the Federal Reserve could hike interest rates is giving way to recession fears, according to Paul Christopher, head of global market strategy at Wells Fargo Investment Institute.

That shift was seen over the past week, as stocks sank amid investor worries over consumer spending trends, said Christopher, in a phone interview.

“The market is finally starting to price in realistically a recession,” he said.

The latest: U.S. stock futures rise early Monday after Biden hints that China tariffs could be reconsidered

For now, the mood of consumers has proven as hard to pin down as market entries and exits.

The slump has been “very difficult to sit through,” said JJ Kinahan, chief market strategist for online brokerage firm Tastytrade Inc., in a phone interview. “It’s like going in and boxing day after day, getting your butt kicked, but you haven’t been knocked out yet. So you have to go back in and box again.”

Stocks have not yet seen a “big low,” and because the market is vulnerable to a bear-market rally, sell any “rips,” advised investment strategists at BofA Global Research, in a May 19 note. 

On Friday, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.36% traded into bear-market territory yet avoided closing there as it eked out a gain in a mixed close for U.S. stocks. Still, the S&P 500 and other major benchmarks suffered another week of losses, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.23% booking an eighth straight weekly decline for its longest losing streak since April 1932 .

In a May 18 note, Wells Fargo Investment Institute said it was adjusting its equities guidance and price targets for a “likely” recession, upgrading the utilities sector to “neutral” from “most unfavorable.” Utilities are considered defensive, unlike the consumer-discretionary sector, which Wells Fargo downgraded to “unfavorable” from “neutral,” according to the note.

Consumer discretionary /zigman2/quotes/210600228/delayed XX:SP500.25 -0.24% was the worst performing sector of the S&P 500 index Friday, closing lower and booking a seventh straight week of declines for its longest losing streak since July 1996, according to Dow Jones Market Data. 

Read: Retail stock woes hit consumer sector ETFs as S&P 500 nears bear market territory

Here are Wells Fargo’s equity sector preferences, as seen in its May 18 report.

‘Sticky’ inflation

“Inflation is hitting purchasing power,” said Christopher. “It’s so sticky,” he said, “that it’s going to be with us for a while, even after the Fed raises rates.” 

Profit misses in earnings results reported by Walmart Inc. /zigman2/quotes/207374728/composite WMT +0.71% and Target Corp. /zigman2/quotes/207799045/composite TGT -0.62% last week sparked investor concern that high inflation is crimping consumer spending, while eating into companies’ profit margins. Shares of Walmart plunged more than 19% last week and Target plummeted around 29%.

Read:  Walmart says consumers are trading down to private label for items like dairy and bacon

/zigman2/quotes/210599714/realtime
US : S&P US
3,845.08
+13.69 +0.36%
Volume: 2.20B
July 6, 2022 5:43p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
31,037.68
+69.86 +0.23%
Volume: 292.71M
July 6, 2022 5:43p
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/zigman2/quotes/210600228/delayed
add Add to watchlist XX:SP500.25
XX : S&P US
1,121.30
-2.70 -0.24%
Volume: 384.22M
July 6, 2022 5:43p
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/zigman2/quotes/207374728/composite
US : U.S.: NYSE
$ 125.13
+0.88 +0.71%
Volume: 7.10M
July 6, 2022 4:00p
P/E Ratio
26.89
Dividend Yield
1.79%
Market Cap
$340.59 billion
Rev. per Employee
$250,440
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/zigman2/quotes/207799045/composite
US : U.S.: NYSE
$ 144.81
-0.90 -0.62%
Volume: 2.83M
July 6, 2022 4:03p
P/E Ratio
12.01
Dividend Yield
2.98%
Market Cap
$67.57 billion
Rev. per Employee
$237,729
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