According to a well-known Robert Frost line, ‘the world will end either in fire or ice.’ Investors are feeling glum due to the dismal mood that will result in the seventh consecutive week of stock market losses.
It’s difficult to express the sense of foreboding that investors feel regarding the economy and inflation in particular, but there are very few buyers that balance out the gloom. However, while there are few places to hide if stagnation and inflation collide, this economic adjustment does not seem like the beginning of long-term disease. Instead, it has the possibility of being a short-term shock that will soon restore the economy to balance.
In the last six months of stock market SPX, -1.70% declines certainly haven’t relieved the pain, but it doesn’t validate grim warnings of a looming U.S. recession. The recent spike in food and energy prices has dented consumer sentiment, making the Fed’s mission to keep prices stable much simpler. However, it’s difficult to picture a huge drop in demand, given that consumers and businesses are more flush than ever.
While growth will undoubtedly slow down, it’s hard to picture such a sharp decline in demand when consumers and companies have rarely been so hot. Do you think you can use the Fed’s 2% inflation forecast even though you just spent $60 on petrol? Can the Fed successfully boost the economy to its targeted 2.0%-2.9% expansion in 2019? The chair of the Federal Reserve board of governors, Jerome Powell, recently commented that a ‘soft landing’ is achievable.
Despite these concerns, stocks have fallen because no one gets through an investment committee with optimistic inflation forecasts or economic development. It’s also difficult to ascertain if anything is cheap due to uncertainty over both sets of figures.
When rates dropped reliably, and earnings were predictable, it was simple to convince oneself that stocks were inexpensive, especially when they had multiples in the high 20s. Now, investors are uncertain if stocks are bargains now that the S&P 500 multiples are in the high teens.
In addition to domestic risks, several global risks could hurt the U.S. economy. Europeans have reacted to sanctions on Russia by sharply rising energy prices. Furthermore, wheat and fertilizer are in higher demand due to food-importing countries’ sanctions on Russia.
China’s industrial production dropped a stunning 2.9% last month, threatening further disruptions in global supply chains. COVID restrictions have undermined Chinese industrial production.
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