Stagflation fears are bubbling up as consumer confidence hits a one-decade low.
Stocks took a hit Tuesday after disappointing economic data showed consumer spending fell more than economists anticipated last month, prompting fears that recently spiking inflation coupled with the delta variant's spread could lead to a period of stagflation—an uncommon scenario that's fueled broad market sell-offs in the past and is characterized by stagnant economic growth and prolonged inflation.
In another warning sign of stagflation, Essaye says the New York Fed's Empire Manufacturing Index"offered a similar take on the economy" on Monday,a sharper than expected decline in manufacturing activity last month while prices paid by consumers actually rose. Though he insists stagflation, which sparked a decade of lackluster stock returns in the 1970s, has not yet arrived, Essaye cautioned"the risks are out there" and said that if the trend continues in the government's August inflation and economic growth readings,"the market will not respond well."
In a Monday note to clients, JPMorgan warned markets have started to price in a"very pessimistic growth scenario" alongside inflation over the next year, suggesting a period of stagflation could arise even though the investment bank says the scenario is"unlikely" because it believes growth concerns emanating from the delta variant are"overstated."
Like JPMorgan, other market experts believe the delta variant will have only modest effects on the economic recovery: Marc Zabicki, LPL Financial's research director, says"slower growth isn't necessarily a bad thing and tends to keep inflation at bay," reiterating expectations that prices will moderate by next year once pandemic bottlenecks and materials shortages subside.
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