As Robespierre discovered in the summer of 1794, it’s hard to keep a cool head when everyone else is losing theirs. After seven weeks of crushing gloom, the stock market found itself in the throes of euphoria as we stumbled towards Memorial Day. The major indices all broke their losing streaks to rise more than 6% over the week. The S&P 500 and the Dow Jones Industrial Average both had their best weeks since November 2020.
Investors were encouraged by better-than-expected results from Dollar Tree, Ross Stores and Costco, which seemed to show that consumers had not been hiding despite their extremely gloomy mood. The earnings were so good that they overcame any memory of the miseries summoned the previous week by Walmart and Target. Walmart, once recently reviled, found favor with investors, rising 7% on the week, as did Target, which climbed 8.2%.
As much as we hate to spoil this era of good feelings, we feel compelled to point out that this was truly what Wall Street calls a “bear market rally.” Even after this week’s gains, Walmart shares were down 29.29% in May. Curiously, Target shares fell by exactly the same amount. Costco shares rose nearly 12% this week, but fell 16.2% for the month. Ross Stores jumped 20.8% this week and is still down 16.9% in May. Dollar Tree shares have climbed 28.4% this week but still could not climb into positive territory for the month.
The rally in stocks could have unintended consequences. As we have pointed out a few times, lower equity valuations lead to tighter financial conditions. This helps and comforts the Federal Reserve’s campaign against inflation. Stock market rallies as we have seen this week do the opposite. Financial conditions are easing and require more concrete tightening from central bankers. “You can’t fight the Fed” is an old Wall Street maxim, and this week’s rally was definitely a Fed fight.
The newfound confidence in the strength of the consumer dovetails oddly with the still-declining consumer sentiment numbers. On Friday, the University of Michigan reported that its consumer confidence indicator fell further in the second half of May. Since it had already fallen to its lowest level in ten years in the middle of the month, Wall Street had convinced itself that it was touching bottom. As we warned on Thursday, this view ignored the effect that two weeks of setting new records for gasoline prices was likely to have on consumer confidence. Oil prices are expected to climb further this summer as demand rises with increased summer travel, dragging gasoline prices down with them, further weakening consumer confidence.
The masters of the universe don’t care about democracy
Twitter investors voted against the re-election of Silver Lake co-CEO Egon Durban to the company’s board at this week’s shareholder meeting. Durban had been criticized by shareholder advisers Institutional Shareholder Services and Glass Lewis for serving on too many boards, and Twitter shareholders agreed. Still, it looks like Durban won’t leave the board. In a regulatory filing, Twitter said Durban was staying. The company said he had promised not to serve on more than five boards by May next year.
“The Board views Mr. Durban as a highly effective member and believes that he brings to the Board unrivaled operational knowledge of the industry, a unique perspective, and an invaluable skill set and experience in mergers and acquisitions. “, said the company.
Just as Twitter thinks it knows better than its users who can safely follow them and whose point of view can be trusted, its board of directors thinks it knows better than its shareholders who should represent them in the room. of meeting.