Investors and consumers alike have been vexed by inflation this year, and many had hoped that the latest government reading would show inflationary pressures beginning to ease. When the report dropped Tuesday morning, however, the data was worse than expected, causing a broad-based market sell off.
With that as a backdrop, shares of Alibaba (BABA -0.26%) slipped as much as 5.8%, while MercadoLibre (MELI -0.81%) and Sea Limited (SE 2.46%) each tumbled as much as 6.7%. When the market closed Tuesday, the stocks were still trading lower, down 5.5%, 5.8%, and 5.1%, respectively.
Despite a thorough search of all the usual sources -- regulatory filings, earnings, websites, etc. -- there was no company-specific news that could be found to explain the slumping stock prices. This suggests that investors were clearly spooked by the ongoing battle with inflation and how the Federal Reserve Bank will respond to it in the near future.
The U.S. Bureau of Labor Statistics released its monthly summary of inflation information, and the data told a story of persistent high prices. The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 8.3% compared to the year-ago period, while increasing 0.1% sequentially.
While the key metric was lower than the 8.5% peak it reached in July, it was also worse than the 8.1% increase economists had predicted. Even the "core" data, which strips out the highly volatile food and energy prices, climbed 6.3% year over year, a historically high measure.
The news wasn't all bad, as there was a steady decline from record-high fuel prices, sending the gasoline index down a whopping 10.6% year over year, and 5% for the month. Unfortunately, the falling gas prices weren't enough to offset higher costs for housing, medical care, and food. Prices in the grocery aisle were particularly noteworthy, up 11.6% year over year, marking the largest annual increase since 1979.
A high read on inflation wasn't particularly surprising, but the rate of the increase caught investors off guard. Wall Street had been hoping that data might have helped to stem the tide of rising interest rates.
Federal Reserve Chair Jerome Powell made it clear that inflation was public enemy No. 1 and the Central Bank would use all the tools at its disposal to clamp down on rising prices -- including additional aggressive rate hikes. "I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done," Powell said in a speech last week. Market watchers took this as a clear signal that the Fed would raise interest rates by 0.75% again when it meets next week, which would mark the third consecutive increase of that magnitude in just four months.
Higher prices have weighed on consumers for months, causing many to find ways to cut back. Recent research suggests that 88% of consumers have reduced discretionary spending in order to counter inflation and rising prices, according to data supplied by Breeze.
A survey conducted in June revealed the extent to which consumers are feeling the pinch. Seventy-three percent of those surveyed admitted to spending less on restaurants and takeout, 63% cut back on electronics and luxury goods, and 62% said they were spending less at bars, concerts, and golfing.
In fact, 75% are worried about providing food for themselves or their families. That's particularly noteworthy given the recent increase in food prices. Since consumer spending is the foundation of the economy, this suggests further pain may lie ahead as people make more tough decisions in order to make ends meet. There's little doubt that this could have a continued negative impact on e-commerce spending, further weighing on this trio of companies.
E-commerce stocks have already taken it on the chin over the past year. Alibaba and MercadoLibre have each declined 50%, while Sea Limited is down a whopping 83%. However, investors with a long-term outlook should consider the big picture. The global e-commerce market is expected to grow from $3.3 trillion today to $5.4 trillion by 2026. This suggests that the death of online retail has been greatly exaggerated.
Finally, each of these stocks sits at or near all-time low valuations on a forward price-to-sales basis. MercadoLibre, Sea Limited, and Alibaba are currently trading at four, three, and two times forward sales. This creates a compelling opportunity for forward-thinking investors. Five to 10 years from now, these prices may look like a steal.