The stock market stalled on Tuesday after rallying Monday when the Dow Jones Industrial Average rose two percent. At the close of trading, the Dow had made a small gain, but the broader S.&P. 500 index was down almost one percent and the Nasdaq composition was down more than two percent.
If the Dow drops again this week, it will be the ninth week in a row: the longest streak since WWII. The news media is full of stories of a bear market, often described as a drop of twenty percent or more, but it’s necessary to put what’s going on into perspective. Outside of the cryptocurrency industry, real carnageThis year’s plunge in equities only partially wiped out the plethora of investors in the first two years of the pandemic, fueled by Wall Street’s lowest interest rates and a gush of freshly minted money from the Federal Reserve. The pandemic bubble may have burst, but stock prices are still very high.
A few numbers tell the story. On February 19, 2020, about a month before the start of the pandemic, the S.&P. 500, which includes many of the largest companies in the country, closed at an all-time high of 3,386.15. On Monday, the index closed at 3,973.75—about five hundred and eighty-seven points, or roughly seventeen percent, above the pre-pandemic peak. The performance of the Nasdaq composite has been very similar. On Monday, the tech-heavy index closed at 11,535.27, nearly seventeen percent above the pre-pandemic peak of 9,817.18, which arrived on February 19, 2020.
To put it a little differently, in a twenty-seven-month period when the economy has been subject to near-unprecedented tensions—prolonged shutdowns, widespread supply chain problems, and most recently, a global energy price shock—the stock market. , as a whole, did pretty well. Even after the market’s recent plunge, investors who keep their savings in an index fund or maintain a well-diversified portfolio of individual stocks are sitting on substantial gains from the pre-coronavirus era. You may not get this message from CNBC or social media, but the numbers don’t lie.
Of course, this year’s decline has been particularly jarring for investors, who have been loading up on stay-at-home favorites like Netflix, Zoom, and Peloton, which are currently trading well below pandemic peaks. But for most people—particularly for nearly half of American adults who have never owned any shares through individual holdings or index funds—the key question is whether the market crash simply corrected the excesses of the past, or does it signal something darker: an impending future? A recession where GDP contracted and unemployment rose significantly.
In addressing this question, it’s worth remembering that a drop in the Nasdaq or S.&P. 500 doesn’t necessarily mean the end of the economy. Economic growth is driven by spending and hiring, both of which are doing quite well, despite a dramatic rise in inflation leading to a fall in real wages. Last month, retail sales posted a healthy 0.9 percent increase, which translated into an annual increase of 8.2 percent. And so far in 2022 employers have added an average of more than half a million jobs each month.
Understandably, the Biden Administration is citing these numbers. “The United States economy has resilience,” Cecilia Rouse, chair of the White House Council of Economic Advisers, said in an online panel last week. Rouse argued that three factors are driving the economy: a vibrant labor market, with unemployment insurance claims at their lowest in more than fifty years; solid investment levels of American businesses; and healthy household finances, reflecting the assistance provided in last year’s American Recovery Act. (Previous pandemic relief programs that Congress enacted during the Trump Administration have also helped.) “Most household balance sheets are strong and can provide some cushioning for rising prices,” Rouse said. “I understand that rising prices are painful. I understand it. But due to efforts over the past year, there is some cushioning to adapt and respond to them.”
Rouse was making a point that many economists have accepted but largely ignored by political debate. In the first two years of the epidemic, thanks to unprecedented levels of government support – particularly from stimulus payments and the increased child tax credit – many American households paid off some of their debts, particularly credit card balances and topped their bank accounts. Figures from the New York Federal Reserve show that in the first quarter of last year, at the time the American Recovery Act was passed, total credit card balances fell by $49 billion, the second-largest drop on record. At the end of the first quarter of this year, total credit card balances were eighty-six billion dollars lower than at the end of 2019.
On Monday, the nation’s largest bank, JPMorgan Chase, said it saw little sign of an increase in credit defaults that often accompanies a weakening economy. “The big picture, the short-term credit outlook remains strong, especially for the US consumer,” said Jeremy Barnum, the bank’s CFO. That’s good news. The bad news is that most pandemic relief programs have expired and credit card debt is rising again, as are auto loans and student debt. At the same time, consumer prices and interest rates are rising sharply. (While the vast majority of borrowers continue to make payments, automatic loan defaults are on the rise, especially among borrowers with low credit ratings.)
What will happen to household finance, consumer spending and hiring as Fed Chairman Jay Powell and his colleagues raise interest rates to slow the economy and lower inflation? This is the main economic question of this year. Last week, Powell reiterated that the Fed will continue to tighten monetary policy until it sees “clear and convincing” evidence that inflation is falling towards the central bank’s two percent target. While expressing hope that the Fed could achieve a “soft or soft landing” for the economy, Powell acknowledged that achieving such an outcome “will not be easy”.
A few months ago, economists were hopeful that inflation would fall sharply in the second half of this year, but Russia’s invasion of Ukraine has boosted energy prices and the new coronavirus lockdowns in China have created further turmoil in the supply chain. Last week, the national average gas price rose above $4.50 per gallon for the first time, and Chase estimates it could exceed six dollars per gallon by August, AAA reported. While overall retail sales remain strong, signs of weakness are emerging in parts of the economy, including the housing market, where mortgage rates have risen sharply this year; and even in parts of the retail business where Target and Walmart have reported that inflation-wary consumers are turning to essential products and cheaper, private-label brands.