This past week, two dominant market trends were the crypto crash and the retail stock crash. The crypto crash was far more severe than the retail stock crash and arguably exposed some traders to risks they did not expect.

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Along these lines, the crypto crash reminded me of the dot-com crash and sub-prime mortgage crises, and the parallels make it a worthwhile topic. Next, the crypto crash likely caused secondary effects on the stock market as investors moved money to cover losses.

However, the retail stock crash impact on stock market investors is far more severe for dividend growth investors. The drop in stock prices started with Walmart (WMT) but accelerated with abysmal results from Target (TGT).

Specifics on the Crypto Crash

Luna (LUNA-X) and the algorithmic stable coin Terra-USD (UST-X) collapsed, wiping out billions. However, the challenges in the crypto market also extend to the stable coin, UST, that deviated from its peg and collapsed. Other cryptocurrencies have declined too. Overall, the crypto crash wiped out more than $2 trillion in value, or roughly two-thirds of the total market value.

That being said, investors or traders that specific cryptocurrencies early enough are still sitting on massive paper gains. 

However, the crypto crash is exposing weakness in the underlying basis for some cryptocurrencies. Stable coins not backed by actual dollar reserves may not be stable, after all. A recent report describes the inherent fragility of algorithmic stable coins.

The chart below shows the value of some cryptocurrencies from about November 2021 to May 20^th, 2022.

Source: Coindesk (some numbers rounded)

Clearly, this kind of volatility limits crypto’s use as a store of value, a common argument, unlike gold that has held its value. For example, gold’s spot price was $1,794 on November 1, and it was $1,834 on May 20.

Specifics on Retail Stock Crash

The retail crash arguably started when Walmart reported higher sales, but lower margins affected earnings. In addition, the company is struggling with higher labor and logistics costs. Investors responded by selling Walmart stock. The stock price fell from about $148 to $135 and fell further when Target reported earnings on May 18^th.

Target reported poor results and missing top and bottom-line estimates. The stock price fell from $215.28 to $160.55 in response and has trended down since then. Despite higher sales, operating income fell off a cliff to $1.3 billion from $2.4 billion because gross margins declined during the quarter. Gross margins fell to 25.7% from 30.0% in comparable periods due to higher markdown rates, freight costs, supply chain disruptions, and higher labor costs. Target’s CEO stated,

Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time.

The damage was widespread as the Dow 30 fell 1,200 points and the Nasdaq and S&P 500 Index both declined 4%+. The carnage in retail stocks was even worse because investors thought Walmart’s poor results were a one-off but realized the problem was more widespread.

The chart below shows the decline in prices from May 17^th to May 20^th. Besides these retailers, many others and retail ETFs experienced a price decline.

Source: Stock Rover*

The chart below is from Stock Rover*.

What to Do Now?

Investors long retail stocks were punished. Even favorites like Costco struggled (long COST). However, demand is now declining after a tailwind from the pandemic. As a result, stock prices are adjusting downward for lower future expectations.

In addition, investors should expect continued volatility in response to the US Federal Reserve’s tightening. Their stated goal is full employment and low inflation. The US has an unemployment rate of 3.6% but is near a 40-year high for inflation. Therefore, investors should expect another 0.50% rate increase in June.

However, as a buy-and-hold dividend growth investor, I am staying the course. Market corrections and bear markets are a normal part of investing. As John Bogle said,

"If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks."