One of the top-ranking US retailers, Target, has reduced it sales and financial forecasts two months in a row. The stock has borne the brunt of this by losing a quarter of its price. It is not the only retailer who is hurting but the one that currently stands out because of greater losses. What is Target telling us besides the fact that it is selling less and making less money? In their most recent forecast, they noted that discretionary spending is down significantly and spending for essentials is much less affected.
How Inflation Affects Spending
When consumers and investors believe that prices will be going up there is a tendency to buy now and pay later with dollars that will be less valuable. Likewise, home buyers will move more quickly to purchase a property and lock in an interest rate before real estate prices go up more and before banks raise interest rates in order to stay ahead of inflation. That sort of strategy works if you have money. If you don’t have money, you change your spending habits. This is what Target is telling us as their customers are cutting back on discretionary spending.
Are We in a Recession Yet?
As we have previously said, a recession is when your neighbor loses their job and a depression is when you lose yours. The official definition is when the economy falls three months in a row. The first definition is useful because inflation hits people differently according to their income, spending habits, issues with debt servicing, and amount of financial risk they have taken on in their investing and their lives. In the case of long term investors, many have had a nice ride upward for the last decade since the Financial Crisis. Now they sell and pay long term capital gains or wait and hope that the hemorrhaging will stop. Here at Top Gun Options, on the other hand, we are able to potentially print money when the market is going down as well as when the market is going up. For options traders it matters little if there is a booming economy or a recession because options can be profitable in any market.
When Will Things Turn Around?
Bloomberg interviewed David Malpas, World Bank President, who said that he expects the global slowdown to affect the poorest nations the most and especially those who are in debt to China for infrastructure projects. He says that the main issue is supply from computer chip and other manufactured items to oil, natural gas, and fertilizer. The shutdowns in China are a big issue but a bigger issue is the Russian war in Ukraine. He does not expect to see inflation turn around despite Fed rate increases until the supply issues are resolved.
Which Index of Inflation Should You Watch?
Everyone watches the CPI (consumer price index) to see how inflation is going. A better measure is the PCE. Consumer spending, or personal consumption expenditures (PCE), is the value of the goods and services purchased by, or on the behalf of, U.S. residents. At the national level, the Bureau of Economic Analysis publishes annual, quarterly, and monthly estimates of consumer spending. This index is updated more frequently than the CPI in how it measures data and it takes into account changes in consumer spending habits such as with Target and how shoppers are focusing on essentials and putting of optional spending.
When times get tough it makes more of a difference how you live, spend, and invest than when times are good. Now is the time to trim excess spending and rotate your market activities to options trading. Join one of the trading squadrons at Top Gun Options and potentially print money no matter how the economy is doing and which way the market is going.