Wall Street Is in Denial Over the Economy

And while the Dow Jones Industrial Average, in nominal terms, oscillated around the 1,000 level from the late 1960s to the late 1970s, in real terms it plunged 73.1% from January 1966 to July 1982.

Retail Issues

Despite today’s high inflation, some stockholders are also in a state of denial. On Aug. 16, Walmart Inc., the nation’s largest retailer by volume, reported 8.4% revenue growth in the quarter ended July 31 from a year earlier, less than the 8.5% surge in the consumer price index.

Grocery sales volume at the retailer dropped during the quarter and operating income fell 6.8% amid higher discounts and selling more thin-margin grocery items. Still, investors bid up Walmart shares 5.1% the day of that announcement.

On August 23, Macy’s Inc., the biggest US department store chain, cut its forecasts for this year due to the economic downturn, the slowdown in consumer spending and markdowns and promotions to get rid of excess inventories. Sales in stores that were open at least a year fell 1.5% in its second quarter from a year earlier. Still, shares of Macy’s closed 3.8% higher that day.

Today’s high inflation is clearly eroding corporate results. From the second quarter of 2021 through the second quarter of this year, gross value-added of corporate business (in effect, corporate sales) rose 12.7% nominally but just 5.1% in real terms. After-tax corporate profits did worse, rising 7.4% but only 0.1% when corrected for inflation.

Inflation may have reached its peak, but will no doubt recede slowly. So, the 5% increase in S&P 500 earnings that Wall Street analysts forecast for 2022, as reported by S&P Global, will amount to a real decline.

Investors, no doubt, will pierce the veil of inflation and shift their emphasis to the growing weakness in real corporate revenues and earnings. That, in part, may be behind the recent renewed sell-off in equities.

My earlier forecast of a 40% total drop in the S&P 500 from the early January peak is still relevant.