It’s been a busy week, dominated by bear markets, a Federal Reserve interest rate hike, record gas prices, crypto plunges, layoffs, and more.
With everything coming at once, it can be hard to ferret out what it all means.
But the market spoke loudly this week, with all three major stock indices finishing the week lower. Even though the Dow missed sliding into bear market territory and the S&P 500 managed to eke out a gain Friday, the S&P 500 still had its worst week since March 2020, falling 5.8%.
And it may be suggesting consumers prepare for more gloom.
Most economists expect high inflation to linger, the Fed to continue raising its benchmark fed funds interest rate, the economy to tilt towards recession if not into recession, and unemployment to rise.
The Fed raised rates by 0.75%, the largest increase since November 1994, to fight surging inflation.
For weeks, most everyone had expected a half-point increase, especially after the consumer price index over the 12 months to April had dipped to 8.3% from March’s 8.5%. But when May unexpectedly accelerated to 8.6%, the mood changed quickly, and talk turned to the possibility of a bigger rate hike, which the Fed delivered.
Fed Chairman Jerome Powell also said another 75-basis-point increase remains on the table for July. And more rate hikes after that should boost the fed funds rate to end the year at 3.4% and 3.8% next year from the current 1.5% to 1.75% target range, Fed forecasts show.
Even with all those rate increases, the Fed still sees year-end inflation (based on the personal consumption expenditures price index) at 5.2% and 2.6% next year, both above its 2% target.
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It’s unlikely gas prices will fall significantly soon. National gas prices continue lingering near record highs, last averaging $5.00 for a gallon of regular unleaded, according to AAA.
With inventories running below average, refinery capacity to transform oil into usable products stretched, the only route to lower prices is if demand falls.
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However, “based on the demand we’re seeing, it seems high prices have not really deterred drivers,” Andrew Gross, AAA spokesperson, said earlier this week. “If prices stay at or above $5, we may see people start to change their daily driving habits or lifestyle.”
Natasha Kaneva, head of global commodities strategy at JP Morgan, expects the national average for a gallon of regular unleaded will hit at least $6 this summer.
“Unfortunately, the tools at the Administration’s disposal are likely limited in both number and potential impact,” she said in a report on Friday. “Unless the US government is able to find a refinery it can help restart or ramp up production in the next few months, the Biden Administration will be left with few good options.”
The Fed doesn’t directly control consumer rates, but whenever the Fed raises its benchmark rate, all other interest rates eventually follow suit. That means interest rates on all debt including mortgages, credit cards, and loans will rise as well as those on savings instruments like CDs, government bonds and savings accounts.
So, it’s probably a good time for consumers to start planning. For example, people should start paying off debt with the highest interest rates, if possible.
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Or they can transfer credit card balances to lower rate cards or call their credit card issuer and ask for a lower interest rate on their current card, Matt Schulz, LendingTree chief credit analyst, said.
“Far too few people do it, but 70% of those who asked in the past year got at least some reduction,” he said. “The average decrease was 7 percentage points, which is significant.”
The Standard & Poor’s 500 index has already fallen into a bear market, which means it has dropped at least 20% from its record high in January. And many analysts expect further losses as the Fed tightens the noose around inflation with much higher rates.
Higher rates typically hit growth and technology sectors hard because those companies rely most on borrowing to fuel earnings growth.
But twin fears of higher rates and lingering inflation turbocharged more widespread selling.
“Such has been the speed of recent moves in markets that our once-bearish calls for …the S&P 500 now look conservative,” John Higgins, Capital Economics chief markets economist, wrote in a commentary. Capital Economics predicts the S&P 500 could fall to as low as 3,400 by year-end and 3,200 by end-2023, from Friday’s close of 3,674.84.
Inflation has already hammered consumer budgets and quickly shifted spending patterns, as some retailers discovered with weaker-than-expected earnings last quarter. Coupled with steady rate hikes, consumers will likely get squeezed again and company earnings will pay the price.
Possibly. May retail sales data didn’t attract much attention, but it was important because it was surprisingly weak. Sales declined for the first time since December, easing 0.3%, compared with forecasts for a gain. They were likely even lower if adjusted for inflation.
“Consumers are pulling back on spending amid headwinds from Russia-Ukraine, surging energy and food prices, tightening monetary policy, a cooling housing market, the end of crisis-era fiscal stimulus, and Chinese lockdowns,” Bill Adams, Comerica Bank chief economist, said.
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Retail sales cover about half of personal consumption expenditures, so the decline is meaningful to economic growth.
“May’s retail sales report increases the risk that GDP contracted for a second consecutive quarter in the second quarter of 2022,” Adams said.
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If that happens, the U.S. economy would technically be in recession, defined as two consecutive quarters of negative growth. The economy contracted 1.5% in the first quarter.
Globally, 76% of CEOs believe their primary region of operation is already in recession or will be in one in the next 12 to 18 months, according to a Conference Board survey released Friday.
“I would be very, very surprised if we saw inflation come down to 2.5% without also having seen a recession,” Lawrence Summers, former Treasury Secretary. said in a Bloomberg interview on Friday. That’s why he thinks “the central tendency is towards stagflation.”
Warning signs are flashing that the labor market is about to significantly weaken.
The Fed projects the unemployment rate will inch up to 3.7% by year-end, from May’s 3.6%, and continue steadily rising to end 2023 at 3.9% and 2024 at 4.1%.
But many economists think those forecasts are too optimistic. As consumers continue to slow spending, company profits will compress, and cutbacks made. That’s why Wells Fargo Chief Economist Jay Bryson has changed his outlook to a mild recession by mid-2023 with unemployment climbing towards 5% by the end of next year.
Summers is even more pessimistic, predicting a jobless rate of at least 5.6%. He’s one of few economists who correctly predicted the inflation trajectory last year.
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“The outlook for the rest of this year and next is turning less rosy as the tightening in financial market conditions will have economic costs,” Ryan Sweet, an economist at Moody’s Analytics said.
Crypto hasn’t been the hedge against inflation some thought it was a year ago when Goldman Sachs declared crypto a new asset class.
Crypto has also stumbled in line with the stock market, only more so, in the face of economic uncertainty.
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The true test will be if or when it rebounds, some say. Bitcoin has lost about 70% of its value from its record high in early November, while other digital assets have basically become worthless. Crypto enthusiasts like to remind people, though, that popular digital assets like Bitcoin are resilient.
“Even though crypto assets have behaved as anything but a diversifier…selling off more than traditional assets as the COVID-19 pandemic set in—he (Michael Sonnenshein) says that their faster and stronger rebound in 2020 only reassured investors about their resiliency as an asset class,” Goldman Sachs cited Sonnenshein, CEO of Grayscale Investments, as saying in its crypto report last year.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
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