The economy’s “normalization process” after the COVID-19 crisis was never going to be “orderly,” as retailers’ inventories had dwindled in the pandemic amid excessive consumer demand for goods, according to Morgan Stanley Wealth Management.
Formerly soaring profits are now taking a hit.
“As inventories have recovered and consumer spending shifts toward services and away from merchandise goods, retailers’ operating margins have begun to plummet,” wrote Lisa Shalett, chief investment officer, in a note Tuesday. “This double-whammy may have further to run but this should not be a reason to fear a recession.”
Shalett pointed to the chart below to show how “even a little bit of inventory hits profits” in retail.
“The economic slowdown that we are experiencing should have been anticipated given one of the most spectacular V-shaped recoveries since World War II,” Shalett said. “Even so, it has led to negative economic surprises, a downward recalibration of corporate earnings and a decline in stock prices.”
Shares of Target Corp. TGT,
The S&P 500 index’s consumer discretionary SP500.25,
“Like the rest of the economy, retailing is reverting to trend from excessive stimulus and overshoots,” Shalett said. “This normalization process may be lumpy but likely provides opportunities for stock pickers.”
The U.S. stock market was trading mostly down Tuesday afternoon, with the S&P 500 SPX,