Stock market malaise echoes stagflation seen in the 1970s
Vaccine mandates seem to be working, younger children may be approved for shots by Halloween, and the coronavirus appears to be in retreat. But those hopeful signs herald a messy new phase for the country’s economic recovery — and that’s putting Wall Street on edge.
The Federal Reserve has signaled it will begin dialing back programs that have helped prop up the markets for the past 18 months, while the breakneck pace of economic growth seems to be slowing, a fact underscored by last week’s disappointing jobs report.
And price increases that grew out of pandemic-related shutdowns and supply chain disruptions have been persistent. A key measure of inflation released Wednesday, the Consumer Price Index, climbed 5.4% in September when compared with the prior year — more than expected in a Bloomberg survey of economists and faster than its 5.3% increase through August.
“There’s a lot for the market to digest at one point in time and a lot of unknowns, frankly, that investors are grappling with,” said Matt Fruhan, who manages the nearly $3 billion Large Cap Stock Fund, as well as others, for Fidelity.
The update on the American job market last week almost perfectly encapsulated the confusing economic backdrop investors face: The number of new jobs fell far short of expectations, but wage growth rocketed higher.
“The rate of growth is moderating, yet the rate of inflation is increasing,” said Paul Meggyesi, a currency analyst with JPMorgan in London. “It’s an unusual decoupling.”
Many are looking to history, which is why Wall Street is chattering about the chances of a return of an economic specter from the 1970s: a mix of sluggish economic growth and high inflation known as stagflation. The comparison isn’t perfect. Back then, inflation hit double digits, and unemployment sat at nearly 9%. Neither figure is anywhere near that high now.
Meggyesi, who described the current situation as “stagflation lite” in a recent note to clients, is part of that surge of analysts reconsidering the idea, along with the risks it could pose to markets.
The most obvious echo is the rise in prices. As costs for things like lumber, microchips and steel climbed this spring, officials from the Federal Reserve took pains to say the rise would prove “transitory.” Once companies returned to normal, officials said, production would increase, supply lines and inventories would be replenished, and prices would fall.
But after a renewed round of economic disruptions caused by the delta variant of the coronavirus — including many in key Asian manufacturing hubs — there’s little sign that the upward pressure on prices is going away.
“I think the reason we’ve gotten more volatile is the market is starting to warm up to the belief that inflation is not as transitory as the head of the Federal Reserve keeps on telling us,” said John Bailer, a portfolio manager at Newton Investment Management, where he oversees mutual funds with more than $4 billion in client assets.