Market Update: June 10, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

The market hasn’t really done much of anything this week. Since breaking out of the sideways trading pattern two weeks ago, the S&P 500 has bounced back and forth for the last few days producing no distinct direction for investors.

In the news this week, the European Central Bank increased their interest rate for the first time in a long time to help combat inflation. The Target CEO has inventory problems thanks to inflation. And the World Bank warns of increasing odds of stagflation throughout the globe.

With that announcement in mind, I thought I’d spend some time explaining the meaning and mechanisms behind Stagflation. Under normal inflationary events, we typically see positive GDP growth, decreasing unemployment, and rising wages. Together, these positive economic indicators increase demand throughout the economy which in turn drives inflation.

Under stagflation, the trend actually reverses. Higher prices cause consumers to stop spending which slows the economy and GDP growth, decreases profitability in businesses which in turn increases unemployment, and depresses wages. This causes a conundrum for central bankers who have to choose between killing inflation and amplifying the negative effects on the economy or boosting the economy and amplifying inflation.

The hallmark example for this type of event is 1974 where inflation reached 12%, GDP growth was negative, and the unemployment rate was above 7%. Ultimately, the Federal Reserve elected to kill inflation by raising interest rates to incredibly high levels and sent the economy into a multiyear secular bear market.

Currently, inflation is of course very high (measured in blue). But GDP growth, shown in red, remains positive. Furthermore, the unemployment rate is well below average at 3.6%. So at the moment, we are not at risk for stagflation. But the odds of stagflation developing over the next few years are certainly not zero.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved June 9, 2022, from FactSet Database.

2.Amadeo, Kimberly. The Balance. “US Real GDP Growth Rate by Year Compared to Inflation and Unemployment.” March 7, 2022. Retrieved from https://www.thebalance.com/u-s-gdp-growth-3306008

3.FactSet Research Systems. (n.d.). Real GDP Growth YoY & Core CPI YoY (Interactive Charts). Retrieved June 9, 2022, from FactSet Database.

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