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  • Writer's pictureAlpesh Patel

Is the Cost of Living Crisis Killing the Stock Market?

Updated: Nov 15, 2023

2022 has been the year of inflation. We are only halfway through the year, but the UK's inflation rate has soared to 9%, a level not seen since the early 1980s. The United States has fared marginally better, with an inflation rate of 8.6%.

As a result of this rampant inflation, consumers everywhere are looking to cut back on spending wherever they can. Consumer spending cutbacks don't just impact the retail sector. They hit the stock market too.

Retail Sales Woes Lead to Retail Stock Woes

As retailers have been watching their sales tumble, skittish investors have been liquidating their holdings in retailers at fire-sale prices. Some share prices have dropped 40% to 60% of their pre-crisis value as investors see lower profits in retailers' futures, especially those selling luxury goods. Other retailers who had been exploring initial public offerings (IPO) have put those plans on hold until things hopefully stabilize.

Discretionary Spending Also Affected

It's not just retailers who are feeling the crunch. Industries that rely on discretionary income like tourism and entertainment have also seen falling share prices. Last week, cruise ship operators Royal Caribbean saw a share price loss of 7.2, while American casino titan Caesars Entertainment saw a nearly 10% drop in valuation.

Pessimism Driving the Drop

Investors everywhere are looking at the drop in retail sales and consumer spending and the rampant inflation and the looming signs of what could be a recession and have drawn their conclusions: get out while you can.

Investors are expecting interest rates to rise in the future, which could negatively affect share prices. Some economists are even predicting that the pound sterling will drop to parity with the Euro and the US Dollar. This sell-off has led to a cascading effect as other investors sell their holdings to avoid getting left behind.

Is the Recession Coming?

Many prominent CEOs such as Elon Musk have openly stated that amid this cost of living crisis, signs point to a recession. On the other hand, CEOs of companies such as Uber and United Airlines believe this is a storm that will come to pass, pointing to an increased appetite for travel after two long years of Covid-related travel industry shutdowns. Perhaps Cisco CEO Chuck Robbins said it best when he described the recession fears as potentially being a self-fulfilling prophecy. Speaking to CNBC in the US, back in May 2022, he said, "I have this idea that we talk so much about a recession we may actually create one on our own"

Finding Stocks to Buy in a Storm

While less exciting than their dynamic cousins, the growth stock, in recession value stocks, have a lot to offer. As interest rates rise, the future earnings of growth stocks can suffer in value, while a value stock with lower earnings and less volatility can weather the storm. While many growth stocks have seen noticeable drops, value stocks tend to hold steady amid the panic.

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Alpesh Patel OBE


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