A broad cross-section of stocks tumbled on Friday, as market watchers focused on the deteriorating macroeconomic conditions and whether moves by the Federal Reserve Bank to tame inflation could potentially push the country into a recession.
With that as a backdrop, e-commerce pioneer Amazon: (AMZN: -3.01%) was down as much as 4.2% on Friday morning, online used car retailer Carvana (CVNA: -2.85%) was off by as much as 6.4%, and cross-border sales facilitator Global-e Online (GLBE: -7.48%) slipped as much as 8.4%. As of 2:36 pm ET, they were still trading lower, down 4.1%, 5.9%, and 8%, respectively. These stocks followed the broader market lower, as the: S&P 500: gave up 2.7%, while the Nasdaq Composite: declined 2.8%.
There was very little in the way of company-specific news fueling the sell-offs, but investors were no doubt digesting the latest reading on the economy and didn’t like what they saw.
The Central Bank has taken a no-holds-barred approach to bringing runaway inflation under control. In fact, the Fed had telegraphed in recent weeks that another sizable rate hike was coming, so Wall Street already had that baked into stock prices. However, as is so often the case, the devil’s in the details.
Earlier this week, at the conclusion of a two-day meeting of the Federal Open Market Committee — which holds the reins on economic policy — the Fed announced an interest rate hike of 0.75%, the third such increase since June and the fifth rate hike this year. This brought the federal funds rate to a range of 3% to 3.25%, the highest level seen since early 2008.
However, it was the Fed’s aggressive expectations for future rate hikes and the corresponding decline to its projections for gross domestic product (GDP) that really put investors on edge. In its Summary of Economic Projections, the Fed said it now expects GDP to grow just 0.2% in 2022. Furthermore, the Fed is expecting to raise the federal funds rate to 4.4% by the end of this year, and as high as 4.6% in 2023.
Wall Street continued to digest the news on Friday. Even Goldman Sachs, which until now had maintained a rosy prognosis for a rebound, threw in the towel today. The investment bank slashed its stock market forecast for the remainder of the year and is now predicting that the S&P 500 will close out 2022 at 3,600, a 2% decline from its current level, and 500 points below its previous outlook.
In a report card on the current economy, Goldman warned of further pain, particularly in the event of a prolonged recession. “The outlook is unusually murky,” its strategists wrote. “The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux more than usual with a wider distribution of potential outcomes.”
So what does this all have to do with our trio of companies? The prospect of a continuing economic slump will weigh on a great many consumer discretionary stocks.
A prolonged bout with inflation will no doubt eat into purchasing power, particularly as we enter the all-important holiday season. Furthermore, the prospect of a recession could further erode consumer sentiment, which could put additional pressure on an already fragile economy. As money gets tighter, shoppers tend to choose lower-cost substitutes — or forego some spending altogether.
Over the coming months, that doesn’t bode well for companies engaged in online commerce, including Amazon, Global-e Online, and Carvana. Lower spending will pressure revenue, which in turn will pinch their stock prices, which are already down 39%, 64%, and 92%, respectively.
There is, however, an upside for investors. Economic downturns have historically been the best opportunity to buy stocks at discounted prices, as the market tends to “throw out the baby with the bath water,” so to speak. As a result, the valuations of these stocks are selling at or near historic lows, with Global-e Online, Amazon, and Carvana currently trading for 13 times, 2 times, and 1 times sales, when a reasonable price-to-sales ratio is between 1 and 2.
That doesn’t mean stock prices can’t go lower from here — in fact, it’s almost certain they will. However, for investors looking out five to 10 years, who are already sold on the potential for a long-lasting secular tailwind for e-commerce, now looks like a solid buying opportunity.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Amazon, Carvana Co., and Global-e Online Ltd. The Motley Fool has positions in and recommends Amazon, Global-e Online Ltd., and Goldman Sachs. The Motley Fool has a disclosure policy.