What happened
Broader market indexes all traded lower Friday, as the Federal Reserve Bank's ongoing mission to rein in historically high inflation appeared to hit a speed bump. The latest U.S. government data revealed that inflation spiked unexpectedly last month, which could affect the Fed's long-running campaign of interest rate hikes, which are intended to control rising prices.
With that as a backdrop, shares of Amazon (AMZN 3.43%) fell 3%, Shopify (SHOP 1.11%) tumbled 4.7%, and Roku (ROKU -10.29%) slumped 5.8% as of 11:47 a.m. ET today.
A check of all the usual sources -- press releases, earnings reports, and regulatory filings -- found very little company-specific news driving the downturn, and the news related to one company was decidedly positive. This suggests investors were squarely focused on the worsening economic situation.
Image source: Getty Images.
So what
The U.S. Bureau of Economic Analysis released its monthly report of personal consumption expenditures (PCE) -- the Fed's preferred measure of inflation -- revealing a surge that caught investors off guard. The PCE index spiked 5.4% year over year in January, higher than 5.3% in December. The gauge also jumped 0.6% sequentially, its biggest month-over-month increase since June.
Excluding volatile food and energy prices, the PCE increased 4.7% year over year, accelerating from a 4.6% increase in December. Economists had expected a 4.3% increase, continuing three successive months of moderating prices.
Perhaps as troubling was an increase in consumer spending, which -- when adjusted for price changes -- increased 1.1% compared with December. This marked the largest increase in nearly two years, which is particularly problematic after two consecutive months of declines.
The stubbornly high prices suggest that the Fed's campaign to control inflation appeared to lose traction after several months of improvements.
The central bank uses interest rates as its primary tool for reining in persistent inflation. When interest rates are higher, borrowing money is more expensive.
When this is the case, consumers and businesses cut back on spending. This results in a domino effect, slowing demand, which pushes prices lower -- at least in theory.
It's important to remember that there's no silver bullet. The economy is a complex mechanism, so bringing rising prices under control takes time and tinkering by the Fed. Furthermore, if interest rate hikes are implemented too quickly, it could wind up pushing the economy into recession.
Now what
The increase in January was a disappointment after three successive months of lessening inflation, so the report had a chilling effect on fair-weather investors. Some view the data as further proof that persistent inflation could remain in play for some time, dispelling any notion that the Fed would be able to slow the pace and tenor of interest rates sooner than planned.
Furthermore, each of these companies got a boost during the pandemic-induced lockdowns, but have since faltered and are struggling to regain their footing. A tough economic picture presents additional challenges:
- Amazon endured a slowdown in e-commerce spending over the past 18 months. Rising prices as signified by higher inflation will likely continue to weigh on consumer spending while also decreasing buying power.
- Shopify's digital retail platform provides merchants with the tools they need to sell their products online, but the company has been hit by the same factors as Amazon. While people will likely still make e-commerce purchases, many consumers are trading down to less-costly products, which will also take a toll on growth.
- Roku is best known for its namesake set-top boxes, dongles, and connected TVs that aggregate streaming video services. However, the lion's share of its revenue comes from the digital advertising shown on its platform. Marketers continue to cut ad spending in the face of economic uncertainty because when prices are higher, consumers are less open to the siren song of advertising, making it harder for Roku to make a profit.
There was one bit of company-specific news tht didn't seem to move the needle. DZ bank analyst Axel Herlinghaus reportedly upgraded Shopify stock to hold from sell, according to The Fly, though there wasn't any further information that explained his reasoning.
It's also worth noting this followed a downgrade less than three weeks ago, and we don't put much stock in rapid changes in analyst sentiment -- particularly without additional information.
If there's good news, it's this: Shopify, Roku, and Amazon are currently selling 6 times, 2 times, and 1.5 times next year's sales, respectively. That puts Roku and Amazon squarely within the guidelines of a reasonable price-to-sales ratio of between 1 and 2. For savvy investors with a three-to-five-year outlook, this presents the opportunity to buy these disruptive businesses for a song.
