The stock market is still down Thursday as analysts digest new inflation data. The S&P 500 is still under 4,000 points, a key psychological level that shows the stock market is struggling with a high volume of sellers. The index is down over 17% from the start of 2022, indicating investor uncertainty in the face of global market turmoil.
Investors are also bearish on tech stocks. The Nasdaq Composite, which tracks Silicon Valley companies like Apple and Tesla, is down 1.7% this morning. Investors seem unwilling to take risks right now and are instead focusing on Treasury bonds and other “sure thing” investments. Meanwhile, the Dow Jones slipped 0.8% this morning to round out the trio of major index losses.
The Federal Reserve could respond to this worsening economic environment by ramping up further interest rate hikes and hastening its quantitative tightening program. However, this is what some investors are afraid of. Higher interest rates and a slower economy will offer fewer chances for corporations to post record-breaking earnings.
Not Priced in Yet
Some analysts think that investors haven’t fully priced in inflation yet. A year of tumbling stock prices and logistics challenges hasn’t done as much damage as it could, according to DataTrek co-founder Nicholas Colas. “At 4,000, the recession odds imbedded in S&P are close to zero,” Colas explained recently. “By our math, 50:50 odds of a recession equate to an S&P at 3,525.”
The S&P 500 is a stock index that measures some of the largest US companies. The index dipped under 4,000 points this week for the first time since March 2021, showing analysts just how serious inflation is getting.
“If we do actually get a typical economic downturn, then the S&P should trade for right around 3,000,” Colas went on. “Recent volatility simply says investors think the window of opportunity to get back on the right track is closing. [The window] is not shut yet, otherwise, the S&P would be at 3,500 (50:50 recession odds) or even lower.”
According to some economists, inflation could spark an economic recession as soon as this summer. The plunging value of the dollar is slowing the economy. Many companies are reporting worse-than-expected earnings for the first quarter of 2022. American workers are staring down soaring gas prices, unusually high grocery costs, and uncertainty about the economy.
Inflation Staying Red Hot
The Federal Reserve is implementing emergency measures to bring inflation under control. However, despite the bank’s hiking of interest rates in March, April still saw uncontrolled inflation staying red-hot throughout the US. The Consumer Price Index indicates that American workers are still facing some of the worst inflation since the 1980s. The Fed’s March interest rate hikes haven’t moved the needle.
Of course, this data doesn’t reflect the changes the Fed implemented in May. Recently, the central bank hiked interest rates again and started its quantitative tightening program, allowing assets to roll off its balance sheet. Still, investors see April’s CPI print as evidence that the Fed isn’t going to slow down its economy-arresting strategy any time soon.
Fed Chair Jerome Powell has told reporters that the Fed will continue to pursue aggressive tightening strategies to rein in inflation. This is great news for consumers, but it puts a damper on investors’ ability to plan for the future. The Fed allowed extremely lax financial policies to stay in place for nearly two years. Many investors came to rely on this “easy-money” environment.
Why is the Stock Market Flagging?
But if the Fed’s policy changes will increase the value of the dollar, why is the stock market tumbling this year? “The main factor cited by investors and analysts for the market’s weakness is the policy change at the Federal Reserve,” writes Lewis Krauskopf. “While equities have risen during many of the Fed’s past rate-raising cycles, some investors worry that surging inflation and sky-high commodity prices could force the central bank to tighten more aggressively, potentially hurting growth and pushing the economy into a recession.”
Krauskopf also points out that Treasury bond yields are surging far above the returns investors can expect on stocks. This means that bonds are more attractive investments than corporate stocks. This pattern can lead to some unusual investing behavior. With less money flowing to tech companies and other high-risk investment opportunities, the economy can slow dramatically as companies struggle to drum up funding.
It’s also impossible to ignore Russia’s illegal invasion of Ukraine when discussing the global economy. Russia’s invasion caused a supply shock in Europe that has sent the price of gas sky-high. This has injected uncertainty into the global market. Many experts believe that the economy will remain destabilized until the conflict in Ukraine comes to an end.