As of June 30, the S&P 500 index — which monitors the performance of 500 large public companies — fell more than 21% since the first day of 2022. According to multiple reports, the stock market has not seen a worse six months to begin the year since 1970. As a series of selloffs characterized the month of June, a forecast from investment bank Morgan Stanley indicated that the S&P 500 could drop another 15% to 20%.
The dismal Wall Street benchmark was set as the United States contends with record-high inflation, as well as other phenomena eroding consumer and business confidence. The Consumer Price Index (CPI) rose 8.6% between May 2021 and May 2022, while the core Personal Consumption Expenditures Price Index (PCEPI) increased 4.7% over the same period.
As a result, consumer confidence — as measured by the University of Michigan’s benchmark Survey of Consumers — fell to its lowest reading since 1952.
“Business is a confidence game,” Pershing Square Capital Management CEO Bill Ackman commented earlier this week. “Consumer confidence is weak because of inflation, not because of the economy. Jobs are plentiful and the economy is strong. The [Federal Reserve] needs to act decisively to kill inflation and inflationary expectations. Then confidence can be restored.”
In an effort to manage high inflation, monetary policymakers at the Federal Reserve are hiking interest rates — most recently through a 0.75% increment that represented the boldest move to battle inflation in nearly three decades. Rate hikes increase the cost of borrowing capital, thereby tightening business investment and consumer activity. Earlier in June, Federal Reserve Governor Christopher Waller warned that efforts from the central bank to tackle higher price levels would lead to higher unemployment.
Because personal consumption accounts for nearly 70% of economic activity in the United States, the indicator is closely linked to overall economic performance.
“Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines,” Survey of Consumers Director Joanna Hsu said in a statement, “As higher prices become harder to avoid, consumers may feel they have no choice but to adjust their spending patterns, whether through substitution of goods or foregoing purchases altogether.”
Business leaders are likewise pessimistic. A Conference Board survey of 750 global executives found that over 60% believe a recession will occur in their primary region of operations by the end of 2023.
“CEOs are losing confidence because of uncertainty due to the perceived risk of sustained high inflation,” Ackman added. “The [Federal Reserve] must act decisively to subdue inflation and inflationary expectations. Then business confidence will be restored.”
Indeed, inflationary pressures are top-of-mind for executives. A JPMorgan Chase poll released earlier this week shows that business leaders are markedly less optimistic about their industries and their own businesses compared to last year.
“The first half of 2022 has really tested business leaders with pricing pressures and increased interest rates, on top of the supply chain and labor-related issues they were already facing,” Ginger Chambless, head of research for JPMorgan Chase Commercial Banking, explained. “While it’s surprising to see how drastically sentiment has shifted, it is important to note that business leaders are still mostly upbeat when it comes to their companies and areas that they can more directly control.”