by Kristen Scholer
Wal-Mart Stores Inc.’s historic plunge Wednesday has wider implications for more than its investors.
That’s at least according to John Kosar, director of research at Asbury Research. He said the stock’s collapse adds “more downside risk” to equities as Wal-Mart’s stock has had a 95% correlation with the Dow Jones Industrial Average since July.
Wal-Mart surprised investors by predicting a sharp decline in earnings next year largely due to its pledge to raise pay for most U.S. workers and its efforts to boost online sales. The company’s stock fell $6.70 Wednesday, its largest one-day point decline, and it finished down 10% for its worst daily percentage loss since 1988.
The retail giant’s warning comes amid expectations of an earnings recession for the S&P 500, as well as other headwinds, including tightening corporate bond spreads and slowing global growth. Wednesday the Dow 30 ended off 0.9%, and the large-cap S&P index shed 0.5%.
In Wal-Mart’s case, Mr. Kosar thinks the breakdown in shares, which fell below their Sept. 2008 high, could cause the stock to slide another 5%, testing support at $57.90 to $57.18. Shares finished Wednesday at $60.03.
“[Wal-Mart’s] vulnerability to an additional…decline warns of the Dow’s – and the broader US market’s – vulnerability to a coincident, similar decline during the 4th Quarter,” said Mr. Kosar. For the past two decades, he noted that Wal-Mart “has maintained a tight and relatively stable positive correlation” to the blue-chip index.
Strategists on Wall Street think stocks will rally into year end, booking a mid-single-digit percentage gain on the year. Mr. Kosar too said that, on balance, factors are tilted in stocks’ favor. Still, he wants to see stocks break through resistance – a level of 2021 for the S&P 500 – before he feels more confident that equities will move higher.
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