A Stock Market Malaise With the Shadow of ’70s-Style Stagflation

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 released Wednesday, the Consumer Price Index, climbed 5.4 percent in September when compared with the prior year — more than expected in a Bloomberg survey of economists and faster than its 5.3 percent 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 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 the surprising, and durable, 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 such as Vietnam — there’s little sign that the upward pressure on prices is going away anytime soon.

A report this month showed that the Fed’s preferred gauge of inflation rose at the quickest pace in 30 years in August, and this week a measure of wholesale used car prices — an increasingly important factor in calculating inflation — hit a historic high.

The rise in prices worries investors for a couple reasons. For one thing, climbing costs can cut into corporate profits, a key driver of stock prices. Traders also worry that if inflation rises too fast, the Fed may lift interest rates to try to control it. At times in the past, rate increases from the Fed have tanked the market. Higher rates make owning stocks less attractive compared with owning bonds, prompting some investors to dump shares.

“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.

If anything, the upward pressure on prices seems to be growing.

In another echo of the 1970s — when stagflation dynamics were set off by the Arab oil embargo of 1973 — Russia has resisted increasing shipments of natural gas to Europe in recent months despite surging demand. That has sent prices up sharply, halting some industrial activity and producing painful energy bills in continental Europe and Britain.

Oil prices climbed to their highest level in seven years in recent weeks, after the powerful Organization of the Petroleum Exporting Countries moved to lift production only gradually. In Britain — where the term “stagflation” is generally thought to have originated — a fuel shortage last month that grew out of a shortage of truck drivers prompted panic buying and long lines at gas stations, another strange echo of the disorderly 1970s.

“Historically, stagflation has often been accompanied by oil shocks,” said Jill Carey Hall, a stock market analyst at BofA Securities. “There’s definitely a rising concern that we could be in that type of environment.”

The effects of the rise in oil prices have been less dire in the United States, but prices are also up for a variety of major commodities. The S&P GSCI Commodity Index, which tracks 24 traded commodities — like aluminum, copper and soybeans — rose to its highest level since late 2014 in recent days. That suggests inflationary pressures will pinch for a while longer.

The comparison between today and the 1970s seems to break down with the “stag” component of stagflation. By almost every measure, economic growth is expected to be remarkably strong this year.

Analysts polled by Bloomberg forecast that gross domestic product will grow 5.9 percent this year — a number that would be the best mark since 1984.

But predictions for growth are being dialed back. On Sunday, analysts at Goldman Sachs trimmed their 2021 growth forecast for the United States to 5.6 percent. It had been as high as 7.2 percent in March.

And on Tuesday, the International Monetary Fund lowered its 2021 global growth forecast to 5.9 percent, down from the 6 percent projected in July, while warning of the risks of supply chain disruptions feeding inflation. Its forecast for the United States was pared back to 6 percent, from the 7 percent growth projected three months ago.

Even so, Kristalina Georgieva, the managing director of the I.M.F., brushed off any talk of stagflation in an interview on Tuesday. Ms. Georgieva said that the world was experiencing a “stop and go” recovery, and that even if the United States was losing some of its considerable momentum, other areas — including Europe — were gaining it.

“We are not seeing the world economy stagnating,” she said. “We are seeing it not moving in sync across the globe.”

Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA, said the breakneck growth of the first half of the year was never going to be sustainable. “Expectations have gotten out of line with reality,” he said.

But any sense of disappointment — despite numbers that are objectively good — may weigh on the market over the next few weeks, as major corporations begin to report their financial results for the third quarter.

G.D.P. growth is a key driver of revenues for major corporations. A slightly weaker economy could translate into lower sales numbers than expected, just as inflationary pressures mean climbing costs.

That has already been an ugly combination for some companies’ corporate profits. The share prices of several notable corporations — FedEx, Nike, CarMax and Bed Bath & Beyond among them — have been clobbered over the past few weeks after the release of disappointing quarterly reports.

Shares of Lamb Weston, an Idaho-based maker of frozen potato products, tumbled after it fell short of earnings expectations because everything from potatoes to cooking oils to packaging is more expensive. The company’s shares are down nearly 12 percent since it reported its results and revised its outlook last week, saying its profits would remain under pressure for the rest of the fiscal year.

“We had previously assumed these costs would begin to gradually ease,” said Bernadette Madarieta, the company’s chief financial officer, told analysts.

Other stocks could suffer a similar fate.

“People are going to be further disappointed,” said Mike Wilson, chief U.S. equity strategist at Morgan Stanley. “Even if the economy is OK, it may not translate into the kinds of earnings that people are expecting.”

Alan Rappeport contributed reporting.



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