Investor Inflation Worries Now Shifting to Growth Concerns

After nearly two years of intense concerns about inflation and interest rates, the focus of worry has now turned to economic growth, including manufacturing and jobs.

Investor Worries Have Shifted from Inflation to Growth For the better part of two years, it seemed like every economic and market-based conversation revolved around inflation. Would inflation continue to trend lower? Would the Federal Reserve need to keep raising interest rates to fight rising prices? When would inflation finally reach a level that allows the Fed to pause rate hikes or even begin easing? It was inflation, inflation, inflation … Fed, Fed, Fed. But there’s an interesting element to this story and period that I don’t think is widely appreciated. While many investors and the financial media remained fixated on inflation as an outsized economic risk, the stock market digested the impact relatively quickly and then moved on. It’s a reminder that too much focus on the news cycle can work against investors. The stock market prices in the future, not the present or the past. How To Navigate Your Investments During the Presidential Election Focusing too much on the news cycle or market fears does not help investors. Instead, I recommend reading our just-released September Stock Market Outlook Report 1. This report provides a clear view of key factors that will influence the next phase of the market—including interest rate trends, growth projections, sector opportunities, and the potential impact of the upcoming election. You’ll have access to our insights, such as: Capital markets commentary Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… If you have $500,000 or more to invest, request our free September Stock Market Outlook Report 1 today! In the chart below, I show the consumer price index measure of inflation (blue line, left axis) and the S&P 500 (red line, right axis). As readers can see, inflation was still over 7% year-over-year when the bull market kicked into gear. While 2023 was all about recession odds, rising interest rates, and sticky inflation, stocks were already pricing in a peak in the interest rate cycle and forward-looking earnings and growth. Inflation and the Stock Market, September 2019 – September 2024 Source: Federal Reserve Bank of St. Louis 2 Today, with the Federal Reserve poised to lower interest rates for the first time since 2019, I think it’s notable that inflation has faded as a prominent worry among investors. Now, everyone seems to be worried about economic growth and the jobs market. Early September featured market volatility, and there was a sharp -2.1% selloff that closely followed weak manufacturing data. Investors were quick to connect the two. The Institute for Supply Management reported manufacturing PMI at 47.2%, which indicates relatively weak manufacturing activity as more factories reported contractionary activity than not. But the attribution of weak manufacturing data to a one-day equity market selloff is not how markets work, and it would almost certainly not be substantial enough to cause a selloff on its own. That's because manufacturing commands a relatively small slice of total U.S. economic output, at less than 20%. The U.S. services sector matters far more, to the tune of generating 72% of U.S. GDP in 2023. Services PMI did not garner many headlines in those early days of September, however, which tells me that investors continue to bias negative news. This is a positive for markets, in my view, as it signals the wall of worry is still holding strong. According to the August Services PMI, 51.5% of businesses reported expansion activity for the month, which was slightly higher than July’s print. Business activity registered at 53.3%, and the New Orders Index expanded to 53%. Few talked about it. Then there’s the jobs market, which recent data suggests is in a weakening pattern, but not in dire straits. First was the report released by the Labor Department, which indicated it may have overstated job gains by 818,000 (in the 12 months through March). Whereas it was previously assumed that the U.S. economy had added close to 250,000 jobs per month in that period, the figure could potentially be closer to 175,000. Headlines warned the economy was weaker-than-expected. The August payrolls report didn’t help matters, as job growth in June and July was revised lower by 86,000 jobs, signaling that hiring over the summer was slightly weaker than originally reported. It was also reported that total nonfarm payroll employment increased by 142,000 in August, which while solid was essentially lost in the fray of downward revisions. In my view, the wall of worry is also present here in the storylines about the U.S. jobs market. Even though hiring is slowing from the torrid pace of previous years, there are still new jobs being added at a reasonably solid clip. But headlines make it seem like the economy is cracking and the Fed needs to step in to resuscitate it. That is objectively not the case. Bottom Line for Investors At the outset of 2023, investors were worried that inflation had spun fully out of control, and that rising interest rates would choke off growth. A vast majority of economists were predicting a recession. It never arrived. Throughout this time, many investors and the financial media focused solely on the inflation story, with every month’s CPI print being framed like it was a make-or-break moment for the market. We can say now, with the benefit of hindsight, that these inflation fears ultimately became the wall of worry that stocks climbed. I see the same thing happening now with economic growth. Any sign of softer-than-expected data, as we’ve seen with manufacturing and jobs, has sent investors into a tizzy of concern that high interest rates are finally taking their toll. Other headlines posit that the artificial intelligence buildout is a bust. Or that the U.S. consumer is tapped out. The list goes on, and for equity investors, that may be good news – it means concerns have shifted from inflation to growth, potentially giving stocks another wall of worry to climb. To help you navigate these shifting market dynamics, I'm offering all readers our comprehensive September Stock Market Outlook Report 3, which provides an in-depth analysis and practical insights to keep you ahead of the curve, including: Capital markets commentary Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… If you have $500,000 or more to invest, request our free September Stock Market Outlook Report today! About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 2 Fred Economic Data. September 11, 2024. 3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Any projections, targets, or estimates in this report are forward looking statements and are based on the firm's research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation. Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein. The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor's. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index. The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. Zacks Investment Management 10 S. Riverside Plaza Suite 1600 Chicago, Illinois 60606-3830 If you do not wish to receive further email solicitations from Zacks on behalf of its partners, please click here to unsubscribe.