Sell in May and leave is an old investment adage. Well, are the investment markets now going to swoon in June?
Talk of an impending recession grew much louder in May, even without associated economic data indicating an economy on the verge of contracting. There’s plenty of momentum in the economy, but stock investors fear the economy will slow as consumers burn through pandemic-related savings. JP Morgan CEO Jamie Dimon warned in late May that he believed consumers still had six to nine months of purchasing power.
This week consumer inflation and consumer sentiment data will be in focus.
There are some early signs that inflation may have peaked. Core personal consumption spending in April – the Federal Reserve’s favorite inflation gauge – has slowed a fraction of its meteoric acceleration earlier in the year. Any decline in the annual rate of the consumer price index is good news, but will be difficult given rising gas and food prices.
Economic optimists will rightly focus on the core elements of the CPI, removing the effect of pump and grocery prices. The Fed knows that its actions have little effect on fuel and food prices. Instead, the central bank wants to see demand for goods and services soften without collapsing. This is the soft landing scenario he wants.
Consumer attitudes towards the future are rather austere. Gasoline at five dollars a gallon will do. This decline in confidence in six months is consistent with Dimon’s gloomy forecasts.
Buyers and investors know that interest rates will continue to rise as the Fed continues to fight inflation. The higher cost of borrowing is likely to reduce consumers’ appetite for big-ticket items such as appliances, cars and houses. The stock market is now reacting to what is expected to be lower demand and slower earnings growth going forward.
Whether investment markets will be a disappointment this summer for long-term investors depends on the inflation station for consumers.
Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is vice president of news. Twitter: @HudsonsView