The Selloff Resumes

By Alex Eule  |  Thursday, September 29

New Warning Signs. After a one day reprieve, pessimism returned to the stock market Thursday. The S&P 500 fell 2.1%, setting a new 2022 low, while the Nasdaq Composite fell 2.8%. The tech-heavy index has all but wiped out its summer rally and is now less than 1% above its June low. 

The blame spread wide on the day, which began with a downbeat earnings report from CarMax. The nationwide used-car dealer posted a 50% decline in quarterly profit, with sales essentially flat from a year ago. The stock fell 24.6%, its worst day in more than 22 years. Here's what CEO William Nash told investors during the company's earnings call: 

This quarter reflects widespread pressure the used car industry is facing. Macro factors, including vehicle affordability that stem from persistent and broad inflation, climbing interest rates and low consumer confidence, all led to a market-wide decline in used auto sales.

The results are reminiscent of the surprises seen earlier this year by Target and Walmart. Retailers continue to grapple with rapidly changing consumer habits in the wake of Covid-19 and amid stubborn inflation. Nash added: 

We believe industry sales were also impacted by a shift in consumer spending prioritization from large purchases to smaller discretionary items. In response to the current environment and consumer demand, we have continued to offer a higher mix of lower-priced vehicles.

 Obviously, consumers are having to make decisions," Nash said.
"Groceries are higher than ever."

CarMax's fiscal quarter reflects results through the end of August, which could spell trouble for other consumer-facing companies that are scheduled to begin reporting results for their own September-ended quarters in the coming weeks. Until then, a trickle of earnings reports could get extra attention.

Nike reported its August-quarter results after the closing bell today, and they brought more worries. Its gross profit margin was down 2.2 percentage points during the quarter, to 44.3%. The company blamed "elevated freight and logistics costs" along with higher markdowns in the its direct-to-consumer unit, which were intended to "liquidate excess inventory." 

Shares of Nike were down 9% in late trading tonight.

There was also a downgrade of Apple from BofA Securities, which said that earnings estimates are likely too high given softening demand for new iPhones. Apple fell 4.9% on the day. The stock's slide is a major headwind for the indexes; Apple and it's $2-trillion-plus market value represents roughly 7% of the S&P 500.

Meanwhile, bond yields were rising again after yesterday's decline, one more headwind for stocks. The 10-year Treasury yield was up four basis points, or 0.04 percentage point, to 3.75%, while the 2-year yield rose eight basis points to 4.17%. 

The good news is that the economy remains strong, with jobless claims hitting a five-month low today. If you're an equity investor, though, that's also the bad news. A strong economy gives cover to the Federal Reserve as it tries to rein in inflation with additional rate increases. 

Oanda strategist Edward Moya writes: "Risky assets don’t stand a chance of a meaningful rally if the economy continues to show resilience while inflation continues to be significantly above the Fed’s Funds rate."

DJIA: -1.54% to 29,225.61
S&P 500: -2.11% to 3,640.47
Nasdaq: -2.84% to 10,737.51

The Hot Stock: Everest Re Group +3.1%
The Biggest Loser: CarMax -24.6%  

Best Sector: Energy +0.0%
Worst Sector: Utilities -4.0