What happened
If there's one issue that has characterized 2022, it's no doubt runaway inflation. Many had hoped that the latest government data would show inflationary pressures starting to ease. When the report dropped Thursday morning, it was exactly what investors had hoped for, sparking a broad market rally.
With that as a backdrop, shares of e-commerce stocks surged. Sea Limited (SE 2.03%) popped 10.9%, Etsy (ETSY -2.17%) soared 15%, and Wayfair (W -8.36%) rocketed 28.1% higher as of 3:38 p.m. ET.
Despite my thorough review of all the usual sources -- regulatory filings, earnings, company websites, etc. -- there was no company-specific news to support the runaway stocks. This suggests that the rally was driven by the positive read on inflation that suggested that the Federal Reserve Bank's campaign of rising interest rates might be bearing fruit.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly inflation report. While inflation remained historically high, the numbers were lower than anticipated.
For October, the Consumer Price Index (CPI) -- the most widely followed measure of inflation -- climbed 7.7% year over year while increasing 0.4% sequentially, marking its smallest increase so far this year. For context, the CPI rose 8.3% last month.
The key inflation indicator has been steadily declining since its 8.5% peak that was notched in July. It was also below the 7.9% increase expected by economists. Even the "core" data -- which excludes highly volatile energy and food prices -- came in lower than expected, up 6.3% year over year, compared with expectations for an increase of 6.5%.
The biggest issue driving inflation last month was housing. The shelter index was responsible for more than half the monthly increase, while food and energy also contributed to the rise.
The Fed has taken a no-holds-barred approach to combatting inflation and recently raised the key lending rate to a range of 3.75% to 4%, its highest level in more than 14 years. It also marks the sixth increase so far in 2022.
There's little question that these macroeconomic conditions will continue to weigh on the overall market indexes. The S&P 500 remains in correction territory, down 18%, while the Nasdaq Composite remains deep in bear market domain, down 31%.
Now what
While the current read on inflation is a step in the right direction, challenges remain. Higher prices have plagued consumers for months, forcing them to make tough decisions both at the gas pump and in the grocery aisle. In fact, a massive 88% of people have cut back on spending in the face of inflation and rising prices, according to a recent survey by Breeze.
Additional data from the June questionnaire shows how far consumers are going in order to make ends meet. Of those surveyed, 73% 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.
Perhaps most concerning, 75% are concerned about providing food for themselves and their families. It's also worrisome because consumer spending is the bedrock of the economy, which suggests the upcoming holiday season may be a little less merry. That will, in turn, continue to weigh on e-commerce spending, which is bad news for this trio of digital retailers -- at least over the short term.
E-commerce stocks have been punished over the past year as Etsy has crumpled 63%, while Sea Limited and Wayfair have each cratered 87%. However, investors with a long-term outlook should step back and look at the big picture.
While estimates vary, the global e-commerce market is expected to grow from $14 trillion in 2021 to $59 trillion by 2028, according to SkyQuest Technology. This represents a vast, untapped opportunity for digital retailers, which will play out over years, rather than months.
Finally, each of these stocks sits at or near all-time low valuations on a forward price-to-sales basis. Etsy, Sea Limited, and Wayfair are currently trading at 5, 2, and 0.3 times next-year's sales. Five to 10 years from now, these prices will likely look like a steal.
