Stock market's deep sell-off puts 401(k) investors on edge

Are nervous consumers who are grumbling all the way to the grocery ready to call it quits? 

Is inflation driving them to reconsider how often they open their wallets? If so, are we closer to a recession than some might have imagined several months ago? 

Or are consumers in good shape and simply spending more now on vacations, home renovations and a variety of services and spending less on much of the things they were buying during the pandemic at retailers like Target, Walmart and Amazon? 

It's been a brutal week for 401(k) plans as Wall Street faced troubling, steep losses fueled by inflation woes and recession worries.

We are looking at the eighth week in a row for the Dow Jones Industrial Average to post losses — the longest weekly losing streak since 1923. 

How long will consumers keep spending? 

Fear of a recession in the next six months to 12 months has clearly been mounting lately. 

The Dow Jones Industrial Average closed Friday at 31,261.90 points, up 8.77 or 0.03% after an incredible last minute turnaround. At one point Friday, the Dow was down more than 600 points. 

Uttering the phrase "Thank Goodness It's Friday" doesn't come close to describing how investors feel after one bad day after another. The Dow closed at 32,654.59 on Tuesday but tumbled 1,164.52 points Wednesday and declined by 3.56%. 

It wasn't the first 1,000-point drop in May, either. On May 5, the Dow tumbled by 1,063.09 points, down 3.1%, to close at 32,997.97. 

"I had almost no concerned client phone calls until up to two days ago," said Sam Huszczo, a chartered financial analyst in Southfield, told me in an interview Friday morning. 

Many investors, he said, seemed to shake off some of the earlier declines when the Dow regained some ground last week.

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But this week's market sell-off became harder to ignore. Many investors are increasingly nervous about the risks of a recession and further declines in stock prices. 

"The stock market’s reaction has been somewhat surprising," Huszczo said, "as the economic data does not match the fear trading that is happening today." 

Much of the economic data, he said, remains quite strong — retail sales grew 0.9% to a record $677.7 billion in April, consumers are sitting on $2 trillion in savings, manufacturing is strong, and the U.S. unemployment rate remains exceptionally low at 3.6% in April. 

Huszczo falls into the camp that says the consumer remains in good shape and is able to keep spending. 

"The fact that the American consumer hasn’t slowed down yet, puts a backdrop on how bad this market could get from here," Huszczo said. 

"I don't see anybody cutting their lifestyles out of fears of an economic recession." 

Higher interest rates and inflation create problems for buyers 

Yet fear is the driving force. Wall Street remains fixated on any sign that indicates that high inflation will drive consumers to cut back on much of their discretionary spending as skyrocketing food and gas prices take an even bigger chunk out of their budgets. 

As interest rates go up, it becomes more expensive for consumers to borrow, especially to buy big ticket items, such as cars. 

Ford Motor closed at $12.50 a share on Friday, down 35 cents or 2.72%.

General Motors closed at $35.40 a share on Friday, down 72 cents or 1.99%.

Stellantis closed at $14.46 a share on Friday, up 20 cents or 1.4%.

Walmart indicated this week that its price-sensitive customers are trading down to lower-priced private label products, particularly for deli meat, bacon and dairy. 

Target's stock tumbled nearly 25% Wednesday after Wall Street was disappointed by earnings. 

Target CEO Brian Cornell blamed inflationary pressures, as well as supply-chain disruptions that caused some inventory to arrive too early and some to arrive to late to meet demand. 

Target's CEO also noted that shoppers are shifting their spending some as birthday parties for children resume, driving up toy sales; and more people plan to travel, driving up luggage sales. 

Both stocks and bonds have been ugly

Investors are seeing tough times for both stocks and bonds, which isn't typical. 

David Kudla, CEO of Mainstay Capital Management in Grand Blanc, noted that both the stock and bond markets have reacted adversely since early this year, as investors anticipate how aggressively the Federal Reserve will need to raise short-term interest rates to drive inflation lower.

How much and how fast inflation comes down, Kudla said, will determine whether the Fed can ease up on its tightening policy. 

"And this will determine the direction for markets through the remainder of 2022," Kudla said.

He noted that technology companies typically suffer more in market sell-offs that are triggered by rising rates and that has already happened this year.

"Value stocks and commodities companies that perform well during times of high inflation are obviously holding up very well," he said. 

Some investors face huge losses

How much money you've lost in the past year depends greatly on where you've invested.

David Sowerby, Bloomfield Hills-based managing director and portfolio manager for Ancora Advisors, noted that bitcoin was down 54% as of May 9 from its 52-week high hit in November 2021.  

GameStop was down 67% as of May 9 from its 52-week high set in June 2021. Netflix was down 75% from its 52-week high set in November 2021. And Peloton was down 89% from its 52-week high hit in late June 2021. 

The Standard & Poor's 500 index, by contrast, was down 17% through May 9 from its 52-week high that was hit on Jan. 3. 

While things can even  out a bit in the days ahead, according to some analysts, the ride could continue to be volatile in the summer, too. 

Companies that sell discretionary goods to consumers — and let's face it, a lot of what we put in those carts at Target and Walmart is stuff we really don't need — have far less certainty when it comes to sales outlooks if consumers start dwelling on every dollar they're spending now that inflation is so high.

ContactSusan Tompor: stompor@freepress.com. Follow her on Twitter@tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.