What happened
The latest government inflation report did little to ease fears that prices are spiraling out of control, raising new questions about where the economy is going from here. Investors responded by selling shares of companies that would be impacted if we end up in a recession, sending United Parcel Service (UPS 1.81%) down more than 2% as of midday Tuesday.
So what
UPS' massive transportation network came in handy during the pandemic, when the economy went nearly entirely online and deliveries were prioritized, but investors are beginning to worry about whether or not demand for that network can be sustained. There are real worries that inflation, and the Federal Reserve's aggressive effort to fight it, will lead to an economic slowdown.
The latest data added fuel to those fears. The Bureau of Labor Statistics' monthly Consumer Price Index showed that prices rose 8.3% year over year in August and increased slightly from July. Economists had expected an 8.1% year-over-year gain and a slight decline from the previous month.
The numbers are a pushback to conventional wisdom that perhaps inflation peaked during the summer, and they caused a general sell-off on Wall Street. Companies like UPS that are reliant on a strong economy for growth are getting hit the hardest.
UPS investors are also likely watching reports of a potential rail strike that could occur as soon as this week. While rail issues in theory could make UPS' trucks an attractive alternative, the disruption that a strike would cause to vast supply chain networks would likely ripple to UPS and other ground-based shippers and could dent near-term results.
Now what
UPS shares have gone nowhere over the past year, up less than 1% since September 2021. But the stock is also down 15% from its early 2022 high before inflation talk dominated the headline.
The truth is we don't know what the economy will do from here, and whether the Fed will be able to orchestrate a so-called soft landing or send the United States into a deep recession. And until we have more clarity about what the coming months will bring, it will be hard for stocks like UPS to break out.
For investors with a long-term mindset, there is still a lot to like about UPS. The company has spent the past few years reorganizing its business to focus on higher-value shipments over just chasing volume, expanding into time-sensitive areas including healthcare shipping.
UPS is a steady performer with a 3% dividend yield and a solid path to long-term growth. But as long as inflation headlines dominate the news, investors need to be prepared for down days like Tuesday.
