Here is something you likely already know: Stocks had another rough week.​

There were lots of catalysts, as usual but one of the biggest headlines was Walmart's earnings followed a day later by its peer, Target.

Both companies shocked markets with dramatically weaker numbers and their stocks plummeted by historic proportions.

Walmart nearly had its worst day ever. That includes anything related to Covid, the 2008 Great Financial Crisis, 9/11 had to serve up.

Everything but the infamous single day crash of 1987, in fact:

Impressive.

The reason was pretty simple:

• Earnings expectations missed by a large amount and, even worse, profit expectations fell and future earnings guidance was lowered.

• The iconic US retailer now sees profit falling by about 1% this year, versus a prior view of mid-single-digit gains. Their margins were squeezed from higher labor costs and supply-chain disruptions right as demand suddenly vanished.

• This meant that Walmart's inventories exploded. They have gone from perpetually struggling to get a steady supply of goods to now being awash in inventory.

Here is the CEO, Doug McMillon, with impressive understatement:​

"U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected"

High costs and less demand is a tough place to be if you are a mass market retailer that relays on volume and keeping costs low to make a profit.

All of this seems pretty familiar though. After all, high inflation, rising wages and supply chain disruptions are hardly new so why should it have been so shocking?!

The issue is that, previously, retailers like Walmart were able to:

• a) manage the disruptions well because they are logistical experts and retailing powerhouses

• b) and pass along the higher costs to consumers

• c) and profit significantly because there was tremendous demand for goods of all types.

But now both those things are coming to an end. The historically unprecedented wave demand has finally begun to ebb. You might not have believed it but even the legendary American shopper has a limit to their appetite for "stuff."

Further, wages and costs are still rising which means margins are being compressed from two directions right as there is less overall sales growth.

It couldn't last forever and, well, it didn't!

​Target's earnings were similar and suddenly everyone was convinced that this will be true across the retailing space and companies big and small were punished accordingly.

Two final points to make here:

1. This is the downside of the bullwhip effect! We have written about this recently (found here) whereby swells in demand lead to over ordering and eventually a crash as inventories unexpectedly pile up. Learn more here.

2. We may have discussed the bullwhip effect as it pertains to the trucking industry and why trucking rates have fallen but we didn't do a great job connecting it to the likely impact on retailers. In hindsight it seems obvious and we feel really dumb.

We argued that the decline in trucking shares was more related to changes in the economy rather than a downturn in the economy. We still believe this to be correct but the shift away from pandemic type buying will still be significant.

This painful lesson in humility has encouraged us to revisit some of our other priors, namely could this collapse in demand signal that perhaps our belief that a recession was not yet in the cards?

Despite the falling bond yields and increase in VERY negative talk in the markets and online we still feel reasonably confident that a recession isn't yet on the near term cards or even a certain guarantee.

Just because something may happen doesn't suggest it necessarily will.

Yes, demand is falling for important US companies. But the economy is still very strong. For evidence of that you can see that April saw solid growth in jobs, production and retail sales.

Want some more evidence?

Here is the breakdown of the retail sales numbers looking at services of food and drink places. After months and months of disappointments the percent change is finally growing and gathering momentum.

One possible conclusion from all of the above is that people are buying less stuff and going out more. Nature is healing, as the kids say.

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