You Call This Stagflation? What’s Up With That?

By Gary Aiken | May 9, 2024

For the first time in seven months, following an impressive rally that saw the S&P 500 surge by nearly 28% from last year’s October lows, stocks declined this April. In my October 2023 analysis, I noted how much negativity was embedded in market participants’ positioning and alluded to the idea that buying stocks might not be a terrible thing to do. Here we are in early May after a fantastic run of stock market returns.
There’s an old saying, “Sell in May and go away.” Your broker might attend their child’s graduation from college and hightail it for the Hamptons – the beach, their yacht, and the country club for the summer. Clients also tend to lose focus on the markets as lounging poolside and enjoying warm weather barbeques hold more appeal than watching their portfolios. The saying assumes that nothing good can come of a summertime market.
That was certainly true last year. Selling in May and going away meant you missed an 11% increase in stock prices through July that evaporated into the lows of October. You could have realized the saying: sold your stocks, stuck the money in treasury bills, and bought stocks back at the same price in October as you sold them in May – thus enjoying your summer while your financial advisor (or their Chief Investment Officer) sweated it out.

A Year in the S&P 500 Index

Sources: Bloomberg Finance, L.P.

Despite coincidentally living up to the hype last year, there’s no statistical validity to this speculator’s old wives tale. This summer, economic statisticians will focus on inflation and jobs, especially those at the Federal Reserve. Some measures of inflation have accelerated in recent months, but the Federal Reserve’s preferred measure, the U.S. Personal Consumption Expenditure Core Price Index (Core PCE), has stalled at a 2.8% annual rate. When this inflation rate is substantially below the Fed Funds interest rate as it is today, monetary policy is deemed to be tight. Monetary policy has been officially tight for over a year now, as the chart below indicates.

Inflation Rate Decelerates Amid Tight Monetary Policy

Sources: Bloomberg Finance, L.P.

Tight monetary policy usually leads to slowing economic growth. The first quarter of 2024 saw U.S. growth slow to a 1.6% annual pace – well below the recent trend. However, this slowing of economic growth may not be much to worry about. The bulk of the slowdown came from the difference between exports and imports. Importantly, consumer spending and business investment were strong. Consumers spent money on durable goods, healthcare, and travel. Businesses invested in manufacturing, industrial equipment, computer hardware and software.
Concord clients benefited from these trends in their portfolios during the first quarter as well. We were overweight technology and healthcare stocks – especially around the two dominant trends of Artificial Intelligence and GLP-1 drugs for diabetes and obesity. We found value in consumer durables stocks as we have been largely bullish about household formation and all the things that come along with owning a home. According to the Bureau of Economic Analysis, investment in single-family home construction rose 18.1% in the first quarter – the third quarter in a row of significant double-digit growth. The reported earnings of companies in sectors with strong GDP growth have largely reflected that reality. While sometimes the data confounds us, the data makes good sense, at least for now. To the extent that interest rates remain higher for longer, valuations of high-flying technology and healthcare stocks may face pressure. Similarly, the housing market is still dependent on buyers with steady income – if the economy were to turn down and unemployment to rise significantly, consumer stocks would also potentially suffer.
For now though, as companies continue to profit, they also hold on to workers. The unemployment rate, at 3.9%, reflects a labor force where employers seem not to want to lose the workers they have but also seem less interested in hiring additional workers. Anecdotally, company executives are starting to take notice of interest expense on loans to fund their day-to-day operations. While not yet focused on reducing costs substantially, they are paying attention to something that wasn’t much of an issue for the past few years – interest expense. They’re thinking harder about new projects and the hurdle rates of return required to put new capital to work before taking on more debt. This is responsible behavior. In economic terms, it’s rational.
That Econ 101 principle is exactly what the Federal Reserve is hoping to see. A slowdown in the pace of economic growth ought to translate to lower inflation. At the press conference after the May 1st meeting, Federal Reserve Chair Powell was asked two questions pertinent to ponder this summer. First, Jennifer Schonberger with Yahoo Finance asked about Powell’s commentary in August 2022 to expect pain in the economy as the fight over inflation heated up. The reporter noted that the pain never came and basically asked the question from Kenan Thompson’s Saturday Night Live Game Show: “What’s up with that?!” Powell noted that the Federal Reserve still expected unemployment to tick higher as inflation went lower but was generally happy that the pain he expected never came. Aren’t we all?!1
The second question was from Claire Jones from the Financial Times. She asked whether slowing economic growth combined with accelerating consumer inflation might be categorized as the dreaded “stagflation.” Powell nearly laughed as memes formed simultaneously on finance Twitter. Powell replied, “I was around for stagflation, and it was 10 percent unemployment, it was high single digits inflation . . . and very slow growth. So right now, we have 3 percent growth, which is pretty solid growth, I would say, by any measure, and we have inflation running under 3 percent. So, I don’t really understand where that’s coming from.”1
But is Powell right to slough off these questions? After all, reporters are asking the questions that people who must pay higher prices for everyday items like food, fuel, electricity, rent, and insurance are asking. There are also questions whose premises reflect the survey readings in the University of Michigan Consumer Sentiment Index on inflation expectations (rising again), confidence (falling), and, importantly for politicians come November: Are you better off than you were five years ago? Despite rising stock prices, lower inflation, and a growing economy with plentiful jobs, the survey says no. What’s up with that?


Gary Aiken, Chief Investment Officer

Gary Aiken is the Chief Investment Officer for Concord Asset Management and is responsible for macroeconomic analysis, asset allocation, and security selection, as well as trading and investment operations.

Gary has over 21 years of investment experience and holds an undergraduate degree in economics from the University of Maryland and an MBA from The George Washington University School of Business.


1Transcript of Chair Powell’s Press Conference, May 1, 2024
2University of Michigan Surveys of Consumers, Final Results for April 2024, May 3, 2024

Concord Asset Management, LLC (“CAM”) is a registered investment advisor with the Securities and Exchange Commission. CAM is affiliated and shares advisory personnel with Concord Wealth Partners (“CWP”). CAM offers advisory services, including customized sub-advisory solutions, to other registered investment advisers and/or institutional managers, including its affiliate, Concord Wealth Partners, LLC. CAM’s investment advisory services are only offered to current or prospective clients where CAM and its investment adviser representatives are properly licensed or exempt from licensure. The information in this article includes the opinions of the author and may not accurately reflect the opinions or values of Concord Wealth Partners or its affiliates.

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