Sell in May and go away is the tired investing adage. Well, will the investment markets now swoon in June?
Talk of an impending recession grew much louder in May even without accompanying economic data pointing to an economy on the edge of contracting. There’s a lot of momentum in the economy, but stock investors are worried it is coasting, as consumers burn through pandemic savings. JP Morgan CEO Jamie Dimon warned last week he thinks consumers have six to nine months of spending power left.
In the week ahead, consumer inflation and consumer sentiment data will be in focus.
There have been early signs that inflation may have peaked. April’s core Personal Consumption Expenditures — the Federal Reserve’s favored inflation gauge — slowed a fraction from its blistering acceleration earlier in the year. Any pull back in the annual rate of the CPI is good news, but it will be tough given the climbing price of gasoline and food. Economic optimists rightly will focus on core CPI — stripping out the effect of pump and grocery prices. The Fed knows its actions have very little impact on fuel and food prices. Instead, it wants to see demand for goods and services soften without collapsing. That’s the soft landing scenario it hopes for.
Consumer attitudes about the future are pretty sour. Five-dollar-a-gallon gasoline will do that. That dwindling confidence six months out dovetails with Dimon’s gloomy forecast.
Shoppers and investors know interest rates will rise as the Fed continues fighting inflation. The higher cost of borrowing is likely to cool consumer appetites for big ticket items such as appliances, cars and homes. The stock market is responding now to what is expected to be less demand and a slowdown in earnings growth in the future.
Whether investment markets will be a bummer this summer for long-term investors rests on the station of inflation for consumers.
