High inflation begat recession fears begat a stock market slump. As the U.S. stock market closed Thursday, it logged the worst first half of a year in 52 years.
Ironically, there was some small hope on the inflation front earlier in the day. Inflation, as measured by the Personal Consumption Expenditures index, cooled slightly in May on an annual basis, to 6.3%. The consensus was for 6.5%.
May’s actual number was the same as for April, which represents a slowing from before. The March showing was 6.6%. Excluding food and energy, the May PCE reading is markedly lower, at 4.7%, versus April’s 4.9% and March’s 5.2%.
But Federal Reserve Chair Jerome Powell stamped out the flurry of hope Wednesday by his hawkish remarks at the European Central Bank’s annual economic policy conference in Portugal. He said he was more worried about failing to pull down inflation than the Fed’s pumping up interest rates too high and producing a recession.
“Is there a risk we would go too far? Certainly, there’s a risk,” Powell said. “The bigger mistake to make—let’s put it that way—would be to fail to restore price stability.”
This downbeat message resonates with the market and the public, said Bryce Doty, senior portfolio manager at Sit Investment Associates. “Powell expects the unemployment rate to rise,” he wrote in a research note. “So we get slower growth, more people out of the workforce, and still have to cope with nagging inflation.” He added, “It’s no wonder people feel like we are in a recession as they are finally forced to dip into their savings to maintain their lifestyles.”
Bill Adams, chief economist for Comerica Bank, wasn’t impressed that consumer spending rose in May. “That was all people eating higher prices,” he said in a note. “The volume of consumer spending was down on the month, with a noticeable pullback in spending on durable goods.”
Is there a silver lining to the first half’s dismal market performance? Quincy Krosby, chief equity strategist for LPL Financial, noted that the second half of 1970 saw the S&P 500 stage a strong comeback.