(Bloomberg) — Inflation shows few signs of cooling in the economy. The same cannot be said of markets, which are starting to seem like the only thing the Federal Reserve has going for it these days.
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Even with Thursday’s big bounce, the S&P 500 has lost a quarter of its value this year. Shocking as that’s been for investors, it’s one of the few things happening anywhere that actually accords with the Fed’s goal of draining the economy of bloat. Recently, the toll in terms of wealth destroyed — about $15 trillion to date — has started to approach that of the 2008 financial crisis, when measured against US gross domestic product.
And while the stock market isn’t the economy, it’s a signal and an input into it, affecting everything from consumer sentiment to the price of private enterprises. Declines on a par with what’s already happened in equities have been a decent proxy for reversals in inflation more than a dozen times since the late 1950s, according to research from Doug Ramsey, chief investment officer at the Leuthold Group.
“The wealth effect played a greater role than it ever had in inciting the inflationary spiral, and it’s also going to play a great role in reducing it,” Ramsey said in an interview at Bloomberg’s headquarters in New York. “When you think about the stock market declining in conventional percentage terms on the index, that understates the amount of wealth that it wipes out.”
Buttressed by easy-money policies and massive fiscal stimulus, the S&P 500 more than doubled between its pandemic low and this year’s high, making Americans who owned stocks feel richer, if only on paper. All that has changed in 2022, with the Fed raising rates at the fastest pace in decades.
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Plunging equity prices wiped 4.1% off Americans’ aggregate net worth to $144 trillion in the quarter ending June 30. That was the second-biggest decline since 2008.
It hasn’t taken a notable toll on consumer psyches yet, with Thursday’s reading on consumer prices for September showing stubbornly high inflation….
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