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Why Target could be the 'canary in the coal mine' for the U.S. economy, according to economists

Posted at 8:30 PM, May 18, 2022
and last updated 2022-05-19 00:25:52-04

DENVER — The stock market took a big dip Wednesday after Target reported earnings well below forecasts from analysts. The Dow Jones Industrial Average sank more than 1,100 points, and the S&P 500 dropped 4% — its biggest fall in nearly two years. The report comes just a day after Walmart similarly said its profits have taken a hit.

How can one earnings report from Target have such a broad impact on the broader market and economy? Some economic experts, including Caleb Silver, editor-in-chief at Investopedia, believe retailers like Target are the proverbial canaries in the coal mine, revealing deeper uncertainty in the near future for the economy.

“The U.S. economy is made up of 70% consumer spending,” Silver explained. “[Retailers] feel it first when consumers start to pull back… What Target was telling us today, what Walmart was telling us yesterday, is that inflation is eating away into consumer spending. Consumers are going less to stores, and they’re buying less every time they go. And if Target and Walmart are telling us this, you can expect that to be across the entire retail sector.”

In other words, our spending at stores gives economists a gauge on how we’re all feeling about the economy — and the overall message we’re sending is that we’re tightening our purse strings.

More of us notice changes in the stock market in real time now, too. Stock trading apps like Robinhood and Public saw big increases during the pandemic as young people, in particular, entered the market to make bets on stocks and cryptocurrencies.

Those who are close to retirement age could be hurting from this market hit. For others, Silver said, it presents an opportunity.

“For new investors who joined the stock market in the last couple of years, this is your first real bear market,” Silver said. “We had a very small one in March of 2020. But this is your first experience in intense volatility and dancing around a bear market, and that can be very scary. On the other hand, you’ve got to realize that these are features of the stock market, not bugs ... If you have a long-term time horizon, and you’re a younger investor, you love pullbacks like this. Why? Because you can buy stocks at a discount, and you can dollar-cost average your way in and actually really strengthen your portfolio.”

As Silver explains it, the stock market and the economy are not synonymous. In fact, they’re more akin to distant cousins. It is possible to have a bear market amid other strong economic fundamentals. Likewise, it’s possible to have a roaring market whilst other economic indicators lag.

“The economy is going to go through its dips and its cycles and its peaks,” Silver said. “You just have to stick with it over time as an investor. And you will love what you’ve done for yourself when you’re 50 or 60 years old, and you look at the wealth you’ve been able to create.”