Medicare Agent News: Target's Inflation Lesson

Tuesday, June 7, 2022

Target's Inflation Lesson

By Alex Eule | Tuesday, June 7

Tracking the Peak. For the second time in three weeks, Target poured cold water on the state of the economy, the consumer, and retail. The big-box retailer greeted financial markets this morning with a profit warning and a plan to "to right-size its inventory for the balance of the year and create additional flexibility to focus on serving guests in a rapidly changing environment."

But unlike's Target's earnings miss on May 18, this time investors mostly took the news in stride. Target stock still fell 2.3% but several other retailers actually rallied, while the broader market had a solid day. The S&P 500 and Nasdaq Composite traded in lockstep, with both indexes rising almost 1%.

Optimistic investors chose to see Target's inventory glut as a positive sign for inflation. If the retailer has stacks of unused inventory in its warehouses it will be forced to cut prices -- a pattern that could repeat throughout retail. And that could help to reduce prices and tame inflation. The reality is likely more complicated but more on that below.

In the meantime, we can have another conversation about peak inflation and the possibility that Friday's consumer price index could indicate price gains are finally easing. (For Friday's CPI report, economists currently forecast year-over-year gains of 8.2%, down slightly from April's 8.3% rate. Core CPI, which excludes more volatile food and energy costs, is seen rising 0.5% in the last month, down from 0.6% in the April report.)

Those numbers -- and any surprises to the downside -- could be enough to keep the peak inflation hopes alive. Investors have good reason to track the trajectory of inflation. According to data from Jim Paulsen, chief investment strategist at The Leuthold Group, inflation peaks have signaled a clear buying opportunity for stocks. Here's a highlight from Paulsen's note to clients today:

The good news about inflationary spikes is how the stock market has typically performed once the inflation rate topped out. Regardless of how fast inflation moderated from its peak and whether or not a reces- sion developed—most often, the stock market rose in the coming year! On average, among the 17 inflationary episodes shown, the S&P 500 gained 13.2% in the twelve months following the inflation peak.

To be sure, it's possible the market has already begun to price in inflation's peak. The S&P 500 is up nearly 7% since its 2022 low on May 19.