July was a surprisingly good month for the stock market. While economists are worried about the onset of a recession and consumer confidence remains near an all-time low, investors seem content to keep pouring money into tech stocks. The Federal Reserve has been baffled by the high demand in the economy, which flies in the face of the central bank’s quantitative tightening policy. As long as fiscal demand stays high, inflation will remain red-hot and consumers will have no choice but to scrimp and save to make ends meet.
Throughout July, the three major indexes notched an impressive series of rallies to bounce back from some of their worst first-half starts of the year in decades. The S&P 500 jumped 9.1%, clawing back from its worst first six months since 1962. The Nasdaq Composite jumped an eye-popping 12.3%, one of its best monthly gains in history, even as economists predicted that this year could be brutal for tech stocks. Meanwhile, even the Dow Jones Industrial Average increased by an impressive 6.7% throughout July.
The stock market slipped to start the month Monday morning, perhaps as investors returned to reality and remembered that massive forces were pressuring the economy. The S&P 500 lost 0.8% to start the day. The Nasdaq Composite saw the harshest drop, sinking 0.9% as tech investors weighed the possibility of future drops in revenue as companies report their second-quarter earnings. The Dow Jones Industrial Average lost the smallest amount, in turn, dropping only 0.6% to start the day.
Summer Rally Could End in Disaster
While this summer rally might have looked great to some investors, economists are warning that the worst could still lie ahead. “Summer is a great time to go camping, but we aren’t out of the woods yet,” wrote Bank of America analysts on Sunday. The group warned of potential trouble brewing in the equities market. The analysts noted that economists’ estimates about the economy are only just now dropping their predictions for the stock market, which could create a “false bottom” effect that has some investors acting overly optimistic.
“Our bull market signposts also indicate it’s premature to call a bottom,” the analysts noted. It’s often difficult to predict movement in the market, and this is doubly true when the markets seem to be moving in open defiance of economists’ predictions. Currently, some analysts say the two consecutive quarters of negative GDP growth fit the description of an informal recession, while investors are happy to keep pouring money into high-risk tech stocks.
The Federal Reserve signaled at its most recent meeting that it could slow its pace on interest rate hikes aimed at curtailing inflation. This spiked investor sentiment and led to a midweek rally last Wednesday. However, this rally could defeat itself–too much demand in the market will keep inflation high, and will result in the Fed having to take extreme measures to hike interest rates further.
Inflation Hits the Home
Inflation isn’t just making working-class people miserable at the gas pump and the grocery store. It’s also hiking rent rates for tenants and cratering demand in the housing market. And, in fact, experts say these two patterns are linked. Since the Federal Reserve is hiking interest rates, it’s more expensive to buy a house right now. As such, many would-be homeowners are renting for longer, increasing the demand for apartments–and spiking the price of rent as landlords see an opportunity to cash in on demand.
“As the challenges for home buyers start to increase at this higher interest rate environment, we will see more people remain in rental markets for longer,” says Zillow Chief Economist Skylar Olsen. “They’ll have to save up or downsize expectations in order to access home ownership with a lower debt load in order to avoid the impact of higher rates. And so that means you rent for longer.”
Strangely enough, these rent spikes are occurring even as home prices are dropping. Demand for housing is falling dramatically, with many prospective owners scared off by the prospect of higher interest rates accruing for longer periods. This could create an imbalance in the market and have ripple effects throughout the economy.
Housing Prices Drop
Housing prices dropped at a record pace throughout June, with the annual appreciation rate dropping from 19.3% to 17.3%. That’s a massive swing, and it’s concerning for economists. The last time the housing market moved like this was in 2008, just before the subprime lending crisis caused the economy to slow into a recession.
“The slowdown was broad-based among the top 50 markets at the metro level, with some areas experiencing even more pronounced cooling,” explains Black Knight Data & Analytics president Ben Graboske. “In fact, 25% of major U.S. markets saw growth slow by three percentage points in June, with four decelerating by four or more points in that month alone.”