What to Buy Now

Written by Jason Simpkins
Posted May 20, 2022

The bear is stirring. 

And why not? The scent of blood is in the air, after all.

The Nasdaq tripped out of the gate to start the year. More than a bear market, tech stocks are down 28% YTD. Now the Dow and S&P are faltering, too, on the brink of bear territory with respective declines of 14% and 18%.

It’s hard to watch. No one likes to see their stocks go down. 

But on the other hand, we all knew this was coming.

We’ve been writing about it for months. 

That’s how long the Fed has been telegraphing a willingness to crush economic growth in a (somewhat futile) effort to rein in inflation.

I will admit that I didn’t believe it at first. I thought it was just bluffing. But by April, even I’d wised up and realized my worst fears had come to fruition. 

That’s when I predicted a major correction was in store. It’s also when I looked at the first-quarter GDP numbers and realized consumer spending was about to crater“Some analysts (especially those working for the Biden administration) chose to focus on the silver lining, by suggesting a 0.7% increase in consumer spending is evidence of underlying strength but I don't know why they'd expect that to continue,” I wrote. 

Citing things like higher inflation, meager wage gains, fading consumer confidence, lower savings rates, and impossibly high housing costs, I could see (we all could, really) that Americans had simply hit a wall“Given all that, this rosy belief that the unflappable U.S. consumer will continue to drive economic growth with their bottomless pockets seems pretty crazy,” I concluded.

And this week, we learned that, unfortunately, I was right.

First-quarter earnings from numerous retailers, including two of the nation’s biggest — Walmart (NYS: WMT) and Target (NYSE: TGT) — fell short of expectations and forecasts are getting gloomier.

Target said net income in the quarter fell to $1.01 billion, or $2.16 per share, from $2.1 billion, or $4.17 per share, a year earlier. And the company’s adjusted earnings per share of $2.19 fell well short of the $3.07 that was expected.

Walmart’s net income for the quarter fell to $2.05 billion, or $0.74 per share, compared with $2.73 billion, or $0.97 per share a year ago. And its adjusted earnings were $1.30 per share, which was $0.18 per share less than what analysts expected.

Kohl’s (NYSE: KSS) saw its same-store sales fall 5.2%, and cut its guidance for the fiscal year. It, too, missed analysts estimates posting adjusted earnings of just $0.11 per share.

“The year has started out below our expectations,” said CEO Michelle Gass. “Following a strong start to the quarter with positive low-single digits comps through late March, sales considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment.”

Two other major retailers, Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD), also reported weak results. Lowe’s comparable sales fell 4% in its first quarter, and Home Depot said fewer people are coming into its stores. 

This not only tracks with the overall slump in spending, but a cooling interest in the housing market, which we all know to be overpriced.

This is our new reality. And unfortunately, it’s going to get worse — primarily because inflation isn’t going anywhere. 

Prices are going to stay high and even continue to rise for reasons that are beyond the Fed’s control.

At the same time, the Fed is going to keep bludgeoning the economy with rate hikes until the economic consequences become too much to bear.

As with inflation, the central bank will be slow to recognize what’s happening. 

It won’t be until companies start laying off workers to protect their profit margins that the Fed realizes it’s gone too far.

That’s when the FOMC will second-guess its hawkish monetary policy, and ultimately, start unwinding the rate hikes it’s suddenly gotten so gung-ho about

The question is then, what do we do? How does one invest in this market?

Well, first, I’d look at discount retailers. 

Companies like TJX Co. (NYSE: TJX) that specialize in sellin

Costco (NASDAQ: COST) might also be worth a look. It’s been absolutely hammered lately, but it could turn things around if more consumers return to bulk bargains.

I also don’t mind telling you that just yesterday I recommended Kroger Co. (NYSE: KR) to my Wall Street’s Proving Ground subscribers.

Kroger is the biggest pure-play grocery company there is.

It’s the largest U.S. supermarket chain by revenue and the third-largest overall retailer behind Amazon and Walmart.

Kroger has been around since 1883, and in its 139-year history it’s outlasted a wide-ranging multitude of recessions, depressions, wars, and pandemics.

It’s like a weathered lighthouse, never ceding a single brick or wobble to the many waves that have washed over it.

It’s not the sexiest recommendation I’ve ever made, but that’s the environment we’re in right now.

It might also be time to revisit gold. I gave up on gold when it went unmoved by inflation, but now, its reputation as a time-honored safe haven could serve it well.

If that’s a direction you want to go, then you should definitely check out Luke Burgess’s latest report on one of the richest gold discoveries of the past several decades. That could do quite well. 

In any case, despite all of the bloodshed, it’s actually not a bad time to add to any long-term holdings you might have, including companies like Target and Walmart. 

I wouldn’t panic-sell those. Just stay patient

That’s the best advice I can give right now. 

Fight on,

Jason Simpkins Signature

Jason Simpkins

follow basic@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

*Follow Outsider Club on Facebook and Twitter.

Heal Your Ailing Portfolio Body