Retailers see excess inventory amid high inflation

Yahoo Finance's Rick Newman breaks down how retailers are approaching pricing when dealing with excess inventories and high inflation costs and how consumers are responding to recession worries and volatile markets.

Video transcript

DAVE BRIGGS: All three indices down today, the Dow and the S&P fresh off their worst day in two years. Just yesterday, Target and Walmart, their worst day since the '87 crash. 136 S&P companies traded at 52-week lows on one day last week. You get the point here. There's a lot of bad news as the market volatility continues. Yahoo Finance senior columnist Rick Newman is Mr. Sunshine, as I call you, Rick. There's some good news out there. I am desperate to hear it, my friend.

RICK NEWMAN: No, I am not Mr. Sunshine. I'm always angry about something, Dave. I just stop-- every now and then, I take a break from complaining, and I guess that's what I'm doing now. So when I watch what happened with the retailers yesterday, I mean, I couldn't believe that the CEO of Target was saying we have excess inventory that consumers don't really want to buy, so we're going to have to discount it.

This is great news. You remember, like, yesterday, when all we had were shortages of everything? There weren't enough computer chips. There weren't enough appliances. Everything was going up in price. You had to wait to get ordinary stuff delivered to the store. We're seeing signs from retailers that these goods shortages are ending. And what seems to be happening is exactly what economists have been waiting for, for more than a year, which is consumers are shifting some of their spending away from goods and over to services, which is what normal spending pattern looks like.

And we're actually seeing that in some of the economic data, for example. We saw more spending on restaurants in April and a little less spending on food at home. We know that travel bookings over the summer are very strong. That's good news. So I realize that earnings below estimates for companies like Target and Walmart, of course, that's bad news for those stocks.

But they're going to iron out their inventories. And if we really are seeing what you might call counter inflationary, or holy moly, could it be anti deflationary trends, that is going to be good for the economy, and that will be good for the retailers as a whole. And as the prior guests were saying, that might eventually help the Fed ease up on tightening.

SEANA SMITH: So Rick, why isn't the market seeing any of this? Why did the market react, do you think, so-- we saw such intense selling yesterday, another down day today, although nothing like the losses yesterday. But it doesn't seem like the market is seeing your silver lining.

RICK NEWMAN: Right, because the market cares most about earnings. And the market's also short circuiting, as it tries to figure out quantitative tightening, which we really have never had at this scale before. And the market just doesn't have a mechanism for figuring this out. We got a little bit of quantitative tightening after all the loosening that occurred during the Great Recession. But it only lasted for a couple of months. And then the Fed started loosening again. And then, of course, the Fed brought out the bazookas in 2020 with this.

So we've never seen the kind of tightening that's happening right now, which is the balance sheet's drawdown. At the same time, we're seeing not 25 basis point hikes, but 50 basis point hikes. So the market clearly is mostly worried about, are we heading into a recession? But if we actually get a moderation in prices, the Fed is probably looking at this, and the Fed probably feels a lot better about seeing retailers saying they have to lower prices, or they're going to have to do that in the future. It probably feels a lot better about that than investors do.

RACHELLE AKUFFO: And what about the consumers? Obviously, when we have high inflation, that tends to hit the poorest the first and the hardest. Do we see any end in sight there in terms of a domino effect of when this might actually-- some of this good news might start trickling down to the actual consumer?

RICK NEWMAN: You know, I get an earful from people all the time, if I dare say consumers are in pretty good shape because, of course, there are a lot of people hurting, and rising gas prices and rising food prices do hurt a lot of people. But on the whole, the consumer is still in relatively good shape. And again, even though retailers say their first quarter kind of stunk, the retail sales numbers at the economic level for March and April were very good.

One of the things people are spending a lot of money on is automobiles, which Target and Walmart don't sell. So if people are willing to spend money on cars, which now cost an average of something like $40,000, they're not worried about a recession.