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Fed Officials Hint That Rate Increases Are Over, and Investors Celebrate

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Stocks and bonds were buoyed after even inflation-focused Federal Reserve officials suggested that rates may stay steady.Federal Reserve officials appear to be dialing back the chances of future interest rate increases, after months in which they have carefully kept the possibility of further policy changes alive for fear that inflation would prove stubborn.Several Fed officials — including two who often push for higher interest rates — hinted on Tuesday that the central bank is making progress on inflation and may be done or close to done raising borrowing costs. Economic growth is cooling, reducing the urgency for additional moves.Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, gave a speech on Tuesday titled “Something Appears to Be Giving,” an update on a previous speech that he had titled “Something’s Got to Give.”“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” Mr. Waller said. “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”Michelle Bowman, another Fed governor who also tends to be inflation-focused, said that she saw risks that factors like higher services spending or climbing energy costs could keep inflation elevated. She said that it was still her basic expectation that the Fed would need to raise rates further. Even so, she did not sound dead-set on such a move, noting that policy was not on a “preset course.”“I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way,” Ms. Bowman said.Taken together with other recent remarks from Fed officials, the latest comments offer an increasingly clear signal that central bank policymakers may be finished with their campaign to increase interest rates in a bid to slow demand and cool inflation. Interest rates are already set to a range of 5.25 to 5.5 percent. The Fed’s next meeting will take place on Dec. 12-13, and investors are overwhelmingly betting that the central bank will hold rates steady, as policymakers did at their last two meetings.Investors appeared buoyed by the Fed officials’ comments. Higher interest rates raise costs for consumers and companies, typically weighing on markets. The two-year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, fell noticeably on Tuesday morning, extending its drop through the afternoon. Yields fall as prices rise. The move initially provided a tailwind to the stock market, helping lift the S&P 500 from its earlier fall to a gain of 0.4 percent, before the rally eased and the index drifted lower to an eventual rise of 0.1 percent.Fed officials have been nervously watching continued strength in the economy: Gross domestic product expanded at a breakneck 4.9 percent annual rate in the third quarter. The concern has been that continued solid demand will give companies the wherewithal to continue raising prices quickly.But recently, job growth has eased and consumer price inflation has shown meaningful signs of a broad-based slowdown. That is giving policymakers more confidence that their current policy setting is aggressive enough to wrestle price increases fully under control.Still, as both Mr. Waller and Ms. Bowman made clear, Fed officials are not yet ready to definitively declare victory — data could still surprise them. And while a recent run-up in longer-term interest rates had been helping to cool the economy, the move has already begun to reverse as investors predict a gentler Fed policy path.The 10-year Treasury yield, one of the most important interest rates in the world, has fallen drastically in recent weeks after shooting up in previous months, curtailing a sell-off in the stock market and lifting investor optimism. But higher stock prices and cheaper borrowing costs could prevent growth and inflation from slowing as quickly.“The recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job,” Mr. Waller said on Tuesday. More

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    Companies Push Prices Higher, Protecting Profits but Adding to Inflation

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    Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.PepsiCo, the snacks and beverage maker, has become a prime example of how large corporations have countered increased costs, and then some.Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.PepsiCo is not alone in continuing to raise prices. Other companies that sell consumer goods have also done well.The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And while margins are below their peak in 2021, analysts are forecasting that they will keep expanding in the second half of the year.For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”But those go-to rationales for elevating prices, he added, are now receding.The Producer Price Index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7 percent last spring. That rate has plunged to 2.3 percent for the 12 months through April.The Consumer Price Index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the previous 12 months.“Inflation is going to stay much higher than it needs to be, because companies are being greedy,” Mr. Edwards of Société Générale said.But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.David Beckworth, a senior research fellow at the right-leaning Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profit-led.”Corporations had some degree of cover for raising prices as consumers were peppered with news about imbalances in the economy. Yet Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”Mr. Edwards acknowledged that government stimulus measures during the pandemic had an effect. In his eyes, this aid meant that average consumers weren’t “beaten up enough” financially to resist higher prices that might otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on poorer households “while richer ones won’t feel it as much.”The top 20 percent of households by income typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxuries appears to have peaked, according to credit card data from large banks, but remains robust enough for firms to keep charging more. Major cruise lines, including Royal Caribbean, have continued lifting prices as demand for cruises has increased going into the summer.Many people who are not at the top of the income bracket have had to trade down to cheaper products. As a result, several companies that cater to a broad customer base have fared better than expected, as well.McDonald’s reported that its sales increased by an average of 12.6 percent per store for the three months through March, compared with the same period last year. About 4.2 percent of that growth has come from increased traffic and 8.4 percent from higher menu prices.The company attributed the recent menu price increases to higher expenses for labor, transportation and meat. Several consumer groups have responded by pointing out that recent upticks in the cost of transportation and labor have eased.A representative for the company said in an email that the company’s strong results were not just a result of price increases but also “strong consumer demand for McDonald’s around the world.”Other corporations have found that fewer sales at higher prices have still helped them earn bigger profits: a dynamic that Mr. Rines of Corbu has coined “price over volume.”Colgate-Palmolive, which in addition to commanding a roughly 40 percent share of the global toothpaste market, also sells kitchen soap and other goods, had a standout first quarter. Its operating profit for the year through March rose 6 percent from the same period a year earlier — the result of a 12 percent increase in prices even as volume declined by 2 percent.The recent bonanza for corporate profits, however, may soon start to fizzle.Research from Glenmede Investment Management indicates there are signs that more consumers are cutting back on pricier purchases. The financial services firm estimates that households in the bottom fourth by income will exhaust whatever is collectively left of their pandemic-era savings sometime this summer.Some companies are beginning to find resistance from more price-sensitive customers. Dollar Tree reported rising sales but falling margins, as lower-income customers who tend to shop there searched for deals. Shares in the company plunged on Thursday as it cut back its profit expectations for the rest of the year. Even PepsiCo and McDonald’s have recently taken hits to their share prices as traders fear that they may not be able to keep increasing their profits.For now, though, investors appear to be relieved that corporations did as well as they did in the first quarter, which has helped keep stock prices from falling broadly.Before large companies began reporting how they did in the first three months of the year, the consensus among analysts was that earnings at companies in the S&P 500 would fall roughly 7 percent compared with the same period in 2022. Instead, according to data from FactSet, earnings are expected to have fallen around 2 percent once all the results are in.Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “once again showed corporate America’s ability to preserve margins.” Her team raised overall earnings growth expectations for the rest of the year, and 2024. More

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    Forget Stock Predictions for Next Year. Focus on the Next Decade.

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    Wall Street’s market forecasts for 2023 are worthless, our columnist says. But the long view is much clearer.The Federal Reserve raised interest rates again on Wednesday, but by less than it has in previous rounds this year. A day earlier, the government reported that the annual rate of inflation, though still painfully high, dropped a bit in November, to 7.1 percent from 7.7 percent in October.If you want to know what these, and other economic developments, mean for the stock market in the year ahead, there are plenty of forecasts coming out of Wall Street.It is December, after all, when investment strategists gear up and produce earnest, specific forecasts for where the S&P 500 will be at the end of the next calendar year.With inflation soaring, the Fed raising interest rates, Russia’s war in Ukraine and China’s decision to drop its “zero Covid” policy, a recession all but certain in Europe and increasingly likely in the United States, clear maps of the future would be particularly welcome now.But that’s not what the one-year forecasts from Wall Street are providing.These attempts at clairvoyance are stymied by a fundamental problem: It’s simply impossible to forecast the path of the markets six months or a year ahead with accuracy and consistency, as many academic studies have shown. That the financial services industry continues to label these unreliable numbers as forecasts is a triumph of breathtaking chutzpah — a technical term for shameless audacity.It goes a long way in explaining why the vast majority of active investment managers can’t regularly and convincingly outperform the market — a failure I reported in a recent column about mutual funds. If you have no idea where stocks are going, it doesn’t make much sense to place specific bets on them, as active managers do.Accepting UncertaintyThese annual reports often contain impressive erudition. I pore through this stuff compulsively in search of nuggets that I can file away for some future column.Our Coverage of the Investment WorldThe decline of the stock and bond markets this year has been painful, and it remains difficult to predict what is in store for the future.Tech Stocks Sputter: Big Tech stocks have suffered staggering losses this year. But is this a good time to buy? Maybe, if you’re in it for the long term, our columnist says.Navigating Uncertainty: There seems to be growing acceptance that some kind of a recession might be coming. Here is how investors should approach the situation.A Bad Year for Bonds: This has been the most devastating time for bonds since at least 1926. But much of the damage is already behind us and the outlook for 2023 is better.Weathering the Storm: The rout in the stock and bond markets has been especially rough on people paying for college, retirement or a new home. Here is some advice.But with a high degree of confidence, I will repeat a prediction I’ve made before: The consensus forecast this year will be wrong.Read these things if you find them interesting, but don’t rely on them — or those who produce them — to guide your investing.Instead, embrace uncertainty.Accept that you need to invest without knowing what will happen to your money over the short term. So be sure, first, to put aside enough money in a safe place, like a bank account or money-market fund, to pay the bills in the months ahead.But because the stock market tends to rise over long periods, and because bonds are now generating reasonable income (as I explained last week), it’s wise to invest for a horizon of a decade or more in low-cost index funds that track the entire stock and bond markets.Don’t base your investments on specific predictions of where the stock market is heading over the short term, because nobody knows. Making bets on the basis of these forecasts is gambling, not investing.The History. Consider how bad Wall Street forecasts have been.In 2020, I noted that the median Wall Street forecast since 2000 had missed its target by an average 12.9 percentage points a year. That error over two decades was astonishing: more than double the actual average annual performance of the stock market!Imagine a weather forecast as bad as that. A meteorologist says the high temperature the next day will be 25 degrees Fahrenheit and it will snow, so you dress for a winter storm. Actually, the temperature turns out to be 60 degrees and the skies are clear. That’s about the level of accuracy for Wall Street strategists through 2020.They continued their errant ways the next year, issuing a median forecast of 3,800 for the closing level of the S&P 500 in 2021. But the index ended the year at 4,766.18, an error of about 25 percent. In a word, the forecast was horrible.The forecasts for 2022 look inaccurate, as usual, though we won’t know for sure until the end of this month. A year ago, the Wall Street consensus was that the S&P 500 would reach 4,825 at the end of 2022, a modest increase from 2021. But at the moment, the index is hovering around 4,000. In other words, a year ago, strategists were saying that 2022 would be just fine for stocks. It hasn’t been.The FutureAfter forecasts that were too low for 2021 and too high for 2022, Wall Street strategists are holding steady for 2023. The consensus is that the S&P 500 will end the year at 4,009, roughly around where it has traded in recent days.That could be right. Who knows? But if it does turn out to be correct, it will be an accident, not the result of uncanny knowledge about 2023.This inability to forecast the future goes way beyond Wall Street. Pandemics are part of human history and we know there will be more of them. But no one was capable of anticipating the specific Coronavirus pandemic that started in 2020, or the 6.6 million deaths, 646.2 million cases, and the complex economic and financial damage it continues to cause.Wall Street didn’t know that Vladimir Putin would order Russia’s invasion of Ukraine this year — or that fossil fuel companies would end up leading the stock market in 2022. The war in Ukraine and China’s attempt to shift from its Covid lockdown policy will both influence the stock market in the United States in the year ahead. But how, exactly? We can guess, but anyone who claims to know is delusional.No doubt, enormous changes that aren’t visible yet are coming in 2023. Inflation and interest rates preoccupy financial markets now, but there is no assurance that will be the case a year from now.Lack of specific knowledge about the future is a fact of life. Guessing, or betting wildly, isn’t a prudent solution.Instead, diversify. Hedge your bets so you are prepared whether specific markets move up or down, and be ready to ride out extended losses, like those of 2022. This strategy has been painful this year, though it has paid off over longer periods.A simple, classic investment strategy — a diversified portfolio made up of broad stock and bond index funds, with 60 percent allocated to stock and 40 percent to bonds, did terribly in 2022. The Vanguard Balanced Fund, which takes just this approach (though it is limited to U.S. and not global assets, which I’d favor), has lost nearly 14 percent this calendar year.But even including this year’s awful returns, this portfolio has gained more than 6 percent annualized, over the last 20 years. At that rate, it doubles in value every 11 or 12 years. There is no guarantee that it will continue to generate those returns in the future, but Vanguard said this week that it probably would.Vanguard doesn’t bother with year-ahead market forecasts because it recognizes that they are pointless. It does make estimates for market returns over a 10-year horizon. Stock market projections of longer duration have much greater accuracy than those for the next six months or a year, as Robert Shiller, the economist, demonstrated in the 1980s. He was recognized for that insight when he received the Nobel in economic science in 2013.At the moment, Vanguard’s 10-year outlook is fairly auspicious. The falling markets of the last year have led to better stock and bond valuations.It’s possible to be intelligently optimistic about financial markets over the next few decades, without knowing where the markets are heading over the next year. I wouldn’t bet on any single financial asset just because a Wall Street expert says it is about to rise.Using your money that way — whether you are buying stocks, bonds or far less solid assets like cryptocurrency — is gambling, not investing. But if you stay humble, invest in the total stock and bond markets and manage to hang in for decades, your chances of prospering are much greater. That prediction is reliable. More

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    With So Much Riding on the Fed’s Moves, It’s Hard to Know How to Invest

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    Where the markets go from here depends on whether and how deftly the Federal Reserve pivots from its hawkish stance.Making money was easy for investors when they could still plausibly believe that the Federal Reserve might back down on its aggressive campaign to subdue inflation at any cost. But harsh words from the Fed chairman, Jerome H. Powell, backed by a string of large interest rate increases, finally convinced markets that the central bank meant business, sending stock and bond prices tumbling.A nervous confidence returned as October began, with stocks experiencing a big two-day rally, but then prices sank anew. Investors at first seemed more confident that the Fed would reverse course, but anxiety returned as they worried about how much damage would be inflicted before that happened. Where the markets go from here, and how to position an investment portfolio, depends on whether and how deftly the Fed changes its strategy.“A crescendo of factors is coming together that makes me think we’re going to have another few weeks of pain before the Fed capitulates,” said Marko Papic, chief strategist at the Clocktower Group.Mr. Papic thinks a dovish turn may come soon, as the Fed signals that it would settle for inflation two or three percentage points above its 2 percent target.Others think more pain lies ahead, maybe a lot more. A prerequisite for a pivot might be a “credit event,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies, meaning a default by a large investment firm or corporate or government borrower, often with severe consequences. Mutual FundsA glance at mutual fund performance in the third quarter. More

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    Stocks Return to Earth, With the S&P 500 Nearing a Bear Market

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    Until very recently, the stock market seemed to defy gravity, producing double-digit returns that provided many Americans with financial comfort even as everything else crumbled around them.When the pandemic began upending society, the market sank for a few weeks and then recorded one of the greatest rallies in history. Stock prices rose the day rioters breached the U.S. Capitol, and they were up during the week that protests roiled many American cities after the murder of George Floyd. During this time of great upheaval, the market seemed to flash a contrarian signal that things were going to be OK — economically, at least.But real world problems have finally crashed the stock market’s party. Soaring inflation, fueled by rising food prices and the war in Ukraine, has prompted the Federal Reserve to raise interest rates significantly for the first time in many years, which has sent stock prices plummeting to earth.Stocks rose 2.4 percent on Friday, but not enough to make up for a week of declines. It was the sixth consecutive week of losses for the stock market, the first time that has happened since 2011. The S&P 500, which has been flirting with a bear market, or a drop of 20 percent, is down more than 16 percent since its peak in January. It may fall further as inflation persists and a recession looms.Even after the bleeding stops, stock market investors, who include more than 50 percent of Americans, could face years of relatively meager returns that will leave them with substantially less money to pay for their children’s college education and support themselves in retirement.This reckoning comes just months before the midterm elections, deepening problems for Democrats who are already struggling to convince voters that their party and President Joseph R. Biden are steering the economy on the right track.Former President Donald J. Trump often took credit for the stock market’s meteoric rise. Now, Mr. Biden and his party will almost certainly take some of the blame for its recent fall.In reality, the stock market is not a perfect measure of the real economy. Unemployment is low and consumer spending is still holding up, but more than a month of punishing losses can damage the country’s financial psyche.“People look at the stock market as a barometer of the economy and how they are faring financially,” said Mark Zandi, chief economist at Moody’s Analytics. “They feel good when they see green on the screen and crummy when they see red.”Years of low rates have been rocket fuel for stock prices, partly because other investments, like bonds, that are pegged to interest rates produce such minimal returns. The stock market became one of the few places where investors could make big money.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what the increases mean for consumers.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.During the pandemic, rates went even lower, as policymakers sought to support businesses and consumers through the shutdowns — and it worked. Investors piled into companies’ stocks and kept them flush with capital, which allowed them to keep hiring, paying rent, ramping up production and, of course, rewarding shareholders with ample dividends and stock buybacks.But inflation, which puts a heavy burden on families trying to make ends meet, also helped kill the market’s mood. Steadily rising food costs and record high gasoline prices prompted the Fed to raise rates and try to slow the economy.The stock price of Alphabet, Google’s parent, is down about 20 percent since the start of the year.Laura Morton for The New York TimesWall Street has been expecting this moment to come for a long time. But the market’s reaction — which some refer to as a “reset” and others call a necessary “comeuppance” for stock investors — is painful nonetheless.“I don’t think people recognized how fragile of a foundation the stock market was resting on,” said Emily Bowersock Hill, founder of Bowersock Capital Partners and chairwoman of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion.Ms. Hill said some of the declines were probably good for the market because it was clearing out the froth that created the conditions for “meme stocks”: companies with dubious business prospects like AMC Theatres, BlackBerry and Bed Bath & Beyond, whose share prices were driven up by speculators.But the downdraft has sunk the share prices of companies that represent innovation and the future, too; Amazon is down more than 30 percent since the start of the year and Alphabet, Google’s parent, is off about 20 percent, as investors rethink those companies’ real value.Virtually no stocks have been spared from losses. The market decline has “gone on and on, and it’s depressing,” Ms. Hill said.Perhaps no one understood that emotional symbolism of the market better than Mr. Trump.“The reason our stock market is so successful is because of me,” Mr. Trump said in November 2017 — one of many statements in which he boasted about rising stock prices or publicly pressured the Fed to further lower interest rates to juice the economy.Early in the pandemic, in April 2020 — with stores, offices and churches shut, children marooned at home attempting remote school, and morgues running out of space for virus victims — Mr. Trump tweeted that the United States had “the biggest Stock Market increase since 1974.”While a majority of Americans have some money invested in the stock market, it remains a rich person’s game. According to an analysis by the New York University economics Professor Edward Wolff, the top 5 percent of American wealth holders own 72 percent of all stocks.But the stock market’s symbolic value matters. “It’s the one story that makes the news every night,” said Richard Sylla, a professor emeritus of economics at New York University’s Stern School of Business.Is the market up or down? Are we winning or losing today, this week, this year, this presidency?On Friday, the University of Michigan’s consumer sentiment index fell lower than expected, a drop that some economists attribute partly to stock market losses. The index is now 13 points below the low when Covid first hit, noted Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. Such deep pessimism “suggests that people have short memories,” Mr. Shepherdson wrote in a research note.It also suggests trouble for the Biden administration. Not only is the stock market party ending under President Biden’s watch, it could be a while before another one gets going.“Now nobody is going to be getting much richer from stocks,” one market historian predicts.Gili Benita for The New York TimesMr. Sylla, who co-wrote a book about the history of interest rates and tracked two centuries of stock market returns, correctly predicted in September 2011 that the coming decade would produce high returns.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Hot Job Market, an Economic Relief, Is a Wall Street Worry

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    This year’s decline in stock prices follows a historical pattern: “When unemployment is ultra low, the uppity times are behind us,” a bank research chief said.The U.S. unemployment rate is 3.6 percent — only a hair above its level just before the pandemic, which was a 50-year low. Corporate profits rocketed by 35 percent in 2021, and profit margins were at their widest since 1950. Yet stocks have been hammered lately: Two key stock indexes, the S&P 500 and the Nasdaq 100, have been deep in negative terrain since the start of the year.What may seem a contradiction is actually a historical pattern: Hot labor markets and hot stock markets often don’t mix well.In fact, times of low unemployment are correlated with somewhat subdued stock returns, while valuations trend higher on average during periods of high unemployment. Analysts explain this phenomenon as a plain function of the unemployment rate’s status as a “lagging indicator” — letting people know how the economy was faring in the immediate past — while the stock market itself constantly serves as a “leading indicator,” coldly, if somewhat imperfectly, projecting an evolving consensus about the fate of companies as time goes on.“When unemployment is ultra low, the uppity times are behind us, and when it’s super high, there are good times ahead,” said Padhraic Garvey, a head of research at ING, a global bank.Stocks outperform on average when unemployment is high.Average annual returns in the S&P 500 index from 1948 to 2022, by the concurrent rate of unemployment

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    Average annual returns
    Note: The S&P 500 index was formally introduced in 1957. The performance of companies prior to 1957 that joined the index later are included in this analysis.Sources: Ben Koeppel, BXK Capital; Ben Carlson, Ritholtz Wealth By The New York TimesIn 2007, for instance, unemployment sank as low as 4.4 percent, but the annual return for the S&P 500 index was only 5.5 percent. Stocks plunged during the financial crisis the next year — and then, in 2009, as unemployment ripped higher to 10 percent, the index gained 26.5 percent. (Breaks in the pattern occur, since various tailwinds for big business, such as the tech boom of the 1990s, can briefly overpower historical trends.)When recoveries peak, investor exuberance can lead to excessive risk taking by businesses, which plants the seeds of the next downturn — just as workers are benefiting from being in high demand, with their higher wages cutting into corporate cash piles built up during good times, putting pressure on near-term profits. Financial investors also have to contend with the Federal Reserve’s response to the cycle — if there’s inflation, as there is now, a strong labor market may give it room to raise interest rates. A weak one can pressure it to cut rates. Action in either direction affects stock valuations.The State of Jobs in the United StatesJob openings and the number of workers voluntarily leaving their positions in the United States remained near record levels in March.March Jobs Report: U.S. employers added 431,000 jobs and the unemployment rate fell to 3.6 percent ​​in the third month of 2022.Job Market and Stocks: This year’s decline in stock prices follows a historical pattern: Hot labor markets and stocks often don’t mix well.New Career Paths: For some, the Covid-19 crisis presented an opportunity to change course. Here is how these six people pivoted professionally.Return to the Office: Many companies are loosening Covid safety rules, leaving people to navigate social distancing on their own. Some workers are concerned.This year, in addition to those forces, the war in Ukraine has slowed global growth and added to the pandemic’s strain on global supply chains, increasing the cost of raw materials.Senior executives at Morgan Stanley wrote in a recent note that their “strategists see higher wages amid the tightening labor market and related labor shortages posing a risk to 2022 corporate profit margins,” adding a reminder that “what matters for markets isn’t always the same as what matters for the aggregate economy.”Wage growth, milder in recent history, has spiked quickly.Median wage growth for hourly workers from the prior year, three-month average

    Note: Gaps in the data are due to methodology changes in the Current Population Survey that prevent year-over-year comparisons.Source: Federal Reserve Bank of AtlantaBy The New York TimesEven though large companies achieved record profit margins last year, earnings estimates for many firms are declining compared with expectations set earlier this year. Recent “wage inflation,” as many frame it, is seen by countless stock traders as adding one burden too many — rapid enough to worry not only executives but also some prominent liberal economists who typically shrug off complaints about labor expenses as overplayed.Federal Reserve data shows that median annual pay increases are within the range — 3 to 7 percent — that prevailed from the 1980s until the 2007-9 recession. But a variety of leaders in business and in government, including the Fed chair, Jerome H. Powell, and Treasury Secretary Janet L. Yellen, have become more wary of their brisk pace.Corporate profits hit new highs last year.After-tax profits for U.S. corporations, seasonally adjusted

    Notes: Profits are in current dollars, not adjusted for inflation, minus capital consumption adjustment or inventory valuation adjustment (IVA). Sources: U.S. Bureau of Economic Analysis; Federal Reserve Bank of St. LouisBy The New York TimesIn the nonfinancial “real” economy, intense competition for workers that leads to greater choice and compensation is positive “because we’re making more money, we have more money to spend, we can absorb inflation better because we’ve gotten raises,” said Liz Young, head of investment strategy at SoFi, a San Francisco-based financial services company. At the same time, she acknowledged, “The other thing with a tight labor market is that when wages increase somebody has to pay for that.”Through most of the swift recovery from the pandemic-induced recession, money managers made a simple bet on the strengthening labor market as a signal that more people earning more disposable income would lead to even more spending on goods and services sold by the companies they trade, enhancing their future earnings.Now, the calculus on Wall Street isn’t so simple.In the coming months, many financial analysts say they’ll pay less attention to data on job creation and focus instead on growth in average hourly earnings — cheering for them to flatten or at least moderate, so that labor costs can ebb.Stocks have tumbled so far in 2022.S&P 500 daily close through April 26

    Source: S&P Dow Jones Indices LLCBy The New York TimesAfter three years of outsized returns, the down year in markets is compounding the sour mood among the nation’s broadly defined middle class, whose wage gains have generally not kept up with inflation, and whose retirement savings and net worth (outside of home equity) are partly tied to such indexes. The University of Michigan consumer sentiment index has been hovering near lows not reached since the slow jobs recovery after the 2008 financial crisis.Ultimately, this cranky disconnect between strong jobs data and the national mood may stem from an initial lag between relative winners and losers in this robust-but-rocky recovery: The economic benefits of tightening an already-tight labor market are, in the short run, relatively concentrated — accruing to those with lower starting wages and less formal education, and to demographic cohorts like Black Americans, who are often “last hired, first fired” during business cycles. In the meantime, the downsides of even temporary high inflation are diffuse — spread broadly across the population, though frequently damaging the finances of lower-income groups the most.It remains true that the increased demand for labor has helped millions of workers come out ahead. After adjusting for inflation, wages have fallen for middle- and high-income groups but risen for the bottom third of earners on average: The wages of the typically lower-paid employees of the leisure and hospitality industry — the broad sector focused on travel, dining, entertainment, recreation and tourism — have risen nearly 15 percent over the past year, far outpacing inflation.A substantial bloc of economists are contending that wages are receiving too much blame for inflation. A recent analysis across 110 industries by the Economic Policy Institute, a progressive think tank based in Washington, concluded that wage growth wasn’t correlated with the surge in costs that suppliers dealt with last year, suggesting that much of inflation could still be stemming from other forces, like supply chain imbalances.Many analysts believe that if unemployment stays low enough for long enough, the fruits of a hot labor market will widen — creating a virtuous cycle in which employers increase pay for various rungs of workers, while economizing their business models to become more efficient, increasing capacity, productivity and the health of corporate balance sheets.That hope is under threat, as the Federal Reserve proceeds with a plan to increase borrowing costs by quickly raising interest rates to rein in some lending, consumer spending, business investment and demand for labor.Despite various challenges, the most optimistic market participants predict that employers, workers and consumers can experience a so-called “soft landing” this year, in which the Fed increases borrowing costs, helping inflation and wage growth moderate without a painful slowdown that kills off the recovery: Morgan Stanley strategists, for instance, expect real wages to turn positive overall by midyear, outpacing price increases, as inflation eases and pay rates maintain some strength. That could be a boon for stocks as well.“It’s possible that over the next few quarters the labor market continues to be tight despite the Fed hiking,” said Andrew Flowers, a labor economist at Appcast, a tech firm that helps companies target recruitment ads. He still sees an “overwhelming appetite” for hiring.Although especially low unemployment isn’t typically a bullish sign for stocks, some recent years have bucked the trend. In 2019, when the S&P 500 returned roughly 30 percent, unemployment by year’s end had fallen to 3.6 percent, in line with present levels.In such an uncertain environment, forecasts for how stocks will fare by the end of the year are varying widely among top Wall Street firms. By several technical measures, the market’s trajectory is currently near “make or break” levels.Public companies have “become massively efficient, so from an operating performance basis, they’ve been able to take on these extra costs,” said Brian Belski, the chief investment strategist at BMO Capital Markets. The outlook from Mr. Belski’s bank is among the most confident, with a call that the S&P 500 index will finish 2022 at 5,300 — 27 percent above Tuesday’s close, and far above most estimates.“At the end of the day, I think for the economy it’s good that we are seeing these sort of wages,” he said. “Don’t ever bet against the U.S. consumer, ever.” More