After climbing higher during the summer , markets are nervous about rising prices, growing growls and a number of other threats.
Vaccination mandates seem to be working, young children can be approved for injections by Halloween, and the coronavirus seems to be retreating . But these encouraging signs announce a noAnother messy phase for the country's economic recovery - and it puts Wall Street more on edge than it has been in months.
The Federal Reserve has signaled that it will start cutting programs that have helped support markets over the past 18 months, as the frantic pace of economic growth appears to be slowing, a fact highlighted by the disappointing employment report .
And the price increases resulting from Closures and supply chain disruptions have been stubbornly persistent. A key measure of inflation, the Consumer Price Index, will be updated.on Wednesday morning - and investors will be watching closely.
"There is a lot for the market to digest at any given time and a lot of unknowns, frankly that investors are grappling with, ”said Matt Fruhan, who manages the nearly $ 3 billion large-cap equity fund and other funds for Fidelity.
This uncertainty has halted the momentum that propelled stocks to a series of records over the summer. Last month, the S&P 500 suffered its biggest drop - 4.8% - since the start of the pandemic. Investors gained ground in October, pushing stocks up 1%.
By any objective measure, it has been a good year for stocks, with the S&P 500up nearly 16% through trade close on Tuesday. But the bumpy reflects growing uncertainty about the next chapter in the recovery-driven recovery, with stock prices swinging more from day to day - and even hour to hour - than ever before. 'they hadn't done it for months.
The US labor market update on Friday almost perfectly summed up the confusing economic backdrop to which investors are faced: the number of new jobs is well below expectations, but wage growth has exploded.
"The growth rate is moderating, but the inflation rate is rising, "said Paul Meggyesi, currency analyst at JPMorgan in London. "This is an unusual decoupling.
Many look to history to try and make sense of it, which is why Wall Street talks about the chances of un return of an economic specter of the 1970s: the toxic mix of sluggish economic growth and high inflation known as stagflation.
The comparison is not perfect. At the time, inflation was in double digits and unemployment was almost 9%. Neither inflation nor unemployment is near that level now.
But on Wall Street, the level of attention on stagflation is Last week, the volume of articles mentioning the term "stagflation " published by financial reporting service Bloomberg hit an all-time high, the company reported.
Mr. Meggyesi, who called the current situation "lean stagflation" in a recent note to clients, is part of this wave of analysts who are reconsidering the idea, as well as the risks it could present to the markets.
The most obvious echo is the surprising and lasting rise in prices. As costs for things like wood, microchips and steel soared this spring, Federal Reserve officials have found it hard to say the hike will prove to be "transient." . Once businesses returned to normal, officials said, production would increase, supply lines and inventories would be replenished, and prices would fall.
But after a new round of economic crisis disruptions caused by the Delta variant of the coronavirus - many of which in the data key Asian manufacturing centers such as Vietnam - there There is little sign that the upward pressure on prices will go away soon.
A report this month showed that the Fed's preferred inflation indicator rose at the fastest rate in 30 years in August, and this week a measurement of wholesale car prices 'occasion - an increasingly important factor in calculating inflation ulation - reached an all-time high .
The rise in prices worries investors for several reasons. On the one hand, rising costs may reduce company profits, a key factor in stock prices. Traders also fear that if inflation rises too quickly, the Fed could raiseer interest rates to try to control it. At times in the past, Fed rate hikes have brought the market down. Higher rates make owning stocks less attractive compared to holding bonds, leading some investors to get rid of stocks.
" I think the reason we have become more volatile if the market starts to heat up is the belief that inflation is not as transient as the head of the Federal Reserve keeps telling us " said John Bailer, portfolio manager at Newton Investment Management, where he oversees mutual funds with over $ 4 billion in client assets.
On the contrary, the upward pressure on prices seems to be increasing.
In another echo of the 1970s - when the dynamics of stagflation took off been triggeredheaved by the Arab oil embargo of 1973 - Russia resisted the increase natural gas shipments to Europe in recent months despite growing demand. This has skyrocketed the prices, stop an industrial activity and produce painful energy bills in continental Europe and in Great Britain. Image A 1973 oil embargo caused severe gas shortages in the United States. Credit ... Allan Tannenbaum / Images figcaption>
Oil prices hit their highest level in seven years in recent weeks, after the powerful Organization of the Petroleum Exporting Countries decided to increase production only gradually. In Britain - where the term "stagflation " is commonly thought to originate - a fuel shortage last month which resulted from a shortage of truck drivers caused panic shopping and long queues at gas stations, another odd echo of the mess of the 1970s.
"Historically, the stagflation has often been accompanied by oil shocks, ”said Jill Carey Hall, Stock Market Analyst at BofA Securities. "There is certainly growing concern that we might be in this type of environment.
The effects of rising oil prices have been less severe in the United States, but prices are also rising for a variety of important commodities. The S&P GSCI Commodities Index, which tracks 24 traded commodities - including aluminum, copper and soybeans - hit its highest level since late 2014 in recent days. This suggests that inflationary pressures will tighten for a while.
The comparison between now and the 1970s seems to fall apart with the component "Stag" of stagflation. By almost every measure, economic growth is expected to be remarkably strong this year.
Analysts polled byBloomberg forecast gross domestic product to grow 5.9% this year - a figure that would be the best score since 1984.
But forecast Sunday, analysts of Goldman Sachs lowered their 2021 growth forecast in the United States to 5.6%. It had reached 7.2% in March.
And on Tuesday, the International Monetary Fund has lowered its global growth forecast for 2021 to 5.9%, down from 6% projected in July , while warning of the risks of supply chain disruptions fueling inflation. Its forecast for the United States was lowered to 6 percent, from 7 percent ofhe projected growth three months ago.
Despite this, Kristalina Georgieva, the IMF 's CEO, brushed aside any discussion of stagflation in an interview on Tuesday. Ms Georgieva said the world was experiencing a "stop and go" recovery, and that while the United States was losing some of its considerable momentum, other regions - including Europe - were gaining it.
"We do not see the world economy stagnating," she said. "We see it is not moving in sync across the world.
Steven Ricchiuto, Chief US Economist at Mizuho Securities USA said the meteoric growth in the first half of the year was never going to be sustainable. "Expectations no longer match reality," he said.
But any sense of disappointment, despite figures objectreally good, can weigh on the market. the next few weeks, as large companies gin to release their financial results for the third quarter.
GDP Growth is one of the main drivers of revenue large companies. A slightly weaker economy could translate into lower than expected sales figures, just as inflationary pressures mean higher costs.
This has already been done an ugly combination for the companies of some companies. profits. The stock prices of several notable companies - FedEx, Nike, CarMax and Bed Bath & Beyond among them - have been beaten in recent weeks after the release of disappointing quarterly reports.
Shares of Lamb Weston, an Idaho-based maker of frozen potato products, fell after falling short of attents when it comes to profits, because everything from potatoes to cooking oils to packaging is more expensive. The company 's shares are down nearly 12% since it released its earnings and revised its outlook last week, saying earnings will remain under pressure for the remainder of the year.
"We had previously assumed that these costs would start to gradually decrease ", Bernadette Madarieta, chief financial officer of the company, told analysts.
Other actions might suffer. a similar fate.
"People are going to be even more disappointed " said Mike Wilson, chief US equities strategist at Morgan Stanley. "Even if the economy is doing well, this may not translate into the types of income people expect.
Alan Rappeport contributed reports.