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 more on edge than it’s been in months.
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 stubbornly persistent. A key measure of inflation, the Consumer Price Index, will be updated Wednesday morning — and investors will be watching closely.
“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 other funds, for Fidelity.
That uncertainty has halted the momentum that propelled stocks to a series of record highs over the summer. Last month, the S&P 500 endured its deepest drop — 4.8 percent — since the start of the pandemic. Investors have regained some ground in October, pushing shares up 1 percent.
By any objective measure, it has been a good year for stocks, with the S&P 500 up nearly 16 percent through the end of trading on Tuesday. But the bumpiness reflects a growing uncertainty about the next chapter of the recovery-driven rally, with share prices swinging more from day to day — and even hour to hour — than they had in months.
The update on the American job market on Friday almost perfectly encapsulated the confusing economic backdrop that 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 to try to make sense of it, which is why Wall Street is chattering about the chances of a return of an economic specter from the 1970s: the toxic mix of sluggish economic growth and high inflation that came to be known as stagflation.
The comparison isn’t perfect. Back then, inflation hit double digits, and unemployment sat at nearly 9 percent. Neither inflation nor unemployment is anywhere near that high now.
But on Wall Street, the level of attention on stagflation is soaring. Last week, the volume of articles mentioning the term “stagflation” published by the financial news service Bloomberg hit a record, the company reported.
Mr. 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…
Read More: A Stock Market Malaise With the Shadow of ’70s-Style Stagflation