Vaccine mandates seem to be working, younger children may be approved for shots by Halloween, and the coronavirus appears to be in retreat. But those hopeful signs herald a messy new phase for the country’s economic recovery — and that’s putting Wall Street more on edge than it’s been in months.
The Federal Reserve has signaled it will begin dialing back programs that have helped prop up the markets for the past 18 months, while the breakneck pace of economic growth seems to be slowing, a fact underscored by a disappointing September jobs report.
And price increases that grew out of pandemic-related shutdowns and supply chain disruptions have been stubbornly persistent. A key measure of inflation released Wednesday, the Consumer Price Index, climbed 5.4 percent in September compared with the prior year — more than expected in a Bloomberg survey of economists and faster than its 5.3 percent increase through August.
“There’s a lot for the market to digest at one point in time and a lot of unknowns, frankly, that investors are grappling with,” said Matt Fruhan, who manages the nearly $3 billion Large Cap Stock Fund, as well as other funds, for Fidelity.
That uncertainty has halted the momentum that propelled stocks to a series of record highs over the summer. Last month, the S&P 500 endured its deepest drop — 4.8 percent — since the start of the pandemic. Investors have regained a bit of ground in October, but the market has been unable to muster any real momentum. After the inflation report on Wednesday, the S&P 500 slipped again in early trading, then swung back to creep higher in the afternoon.
By any objective measure, it has been a good year for stocks, with the S&P 500 up nearly 16 percent through the end of trading on Tuesday. But the bumpiness reflects a growing uncertainty about the next chapter of the recovery-driven rally, with share prices swinging more from day to day — and even hour to hour — than they had in months.
The update on the American job market on Friday almost perfectly encapsulated the confusing economic backdrop that investors face: The number of new jobs fell far short of expectations, but wage growth rocketed higher.
“The rate of growth is moderating, yet the rate of inflation is increasing,” said Paul Meggyesi, a currency analyst with JPMorgan in London. “It’s an unusual decoupling.”
Many are looking to history to try to make sense of it, which is why Wall Street is chattering about the chances of a return of an economic specter from the 1970s: the toxic mix of sluggish economic growth and high inflation that came to be known as stagflation.
The comparison isn’t perfect. Back then, inflation hit double digits, and unemployment sat at nearly 9 percent. Neither inflation nor unemployment is anywhere near that high now.
But on Wall Street, the level of attention on stagflation is soaring. Last week, the volume of articles mentioning the term “stagflation” published by the financial news service Bloomberg hit a record, the company reported.
Mr. Meggyesi, who described the current situation as “stagflation lite” in a recent note to clients, is part of that surge of analysts reconsidering the idea, along with the risks it could pose to markets.
The most obvious echo is the surprising, and durable, rise in prices. As costs for things like lumber, microchips and steel climbed this spring, officials from the Federal Reserve took pains to say the rise would prove “transitory.” Once companies returned to normal, officials said, production would increase, supply lines and inventories would be replenished, and prices would fall.
But after a renewed round of economic disruptions caused by the Delta variant of the coronavirus — including many in key Asian manufacturing hubs such as Vietnam — there’s little sign that the upward pressure on prices is going away anytime soon.
A report this month showed that the Fed’s preferred gauge of inflation rose at the quickest pace in 30 years in August, and this week a measure of wholesale used car prices — an increasingly important factor in calculating inflation — hit a historic high.
The rise in prices worries investors for a couple reasons. For one thing, climbing costs can cut into corporate profits, a key driver of stock prices. Traders also worry that if inflation rises too fast, the Fed may lift interest rates to try to control it. At times in the past, rate increases from the Fed have tanked the market. Higher rates make owning stocks less attractive compared with owning bonds, prompting some investors to dump shares.
“I think the reason we’ve gotten more volatile is the market is starting to warm up to the belief that inflation is not as transitory as the head of the Federal Reserve keeps on telling us,” said John Bailer, a portfolio manager at Newton Investment Management, where he oversees mutual funds with more than $4 billion in client assets.
If anything, the upward pressure on prices seems to be growing.
In another echo of the 1970s — when stagflation dynamics were set off by the Arab oil embargo of 1973 — Russia has resisted increasing shipments…