Fire sale on Wall Street continues, with stagflation fears rising

MANHATTAN (CN) — April was one of the worst months for Wall Street in years, with data showing a receding economy leaving investors dismayed amid pressure on equities from persistent inflation and rising interest rates.

All three major indices fell significantly for the fifth straight week. By the closing bell, the Dow Jones Industrial Average lost 835 points for the week, with the S&P 500 and Nasdaq declining 140 points and 505 points, respectively. 

On Friday alone, equities were torched by investors fleeing technology stocks, which have become hammered by rising interest rates. The Dow ultimately lost 940 points, a 2.7% decrease for the day, the S&P 500 fell 3.6%, and the Nasdaq shed 4.1%.

Nearly every day of the week was marred by losses, but the biggest fall came on Tuesday when the Dow fell nearly 800 points and the Nasdaq lost more than 500 points, the latter’s worst daily loss since 2020. Some of Big Tech’s most notable names saw even worse individual performances, with Amazon suffering a double-digit decline to its stock.

But investors were given similarly bad news on Thursday when the U.S. Bureau of Economic Analysis announced the U.S. economy shrunk by 1.4% during the first quarter of this year. This marks the first time the economy has contracted in seven quarters; the economy has posted gross domestic product gains since the third quarter of 2020.

In the GDP report, the main data points were that private inventory fell 0.84% last quarter while exports declined by 3.2%. As the supply-chain bottlenecks began to unwind, however, imports increased significantly, driving by a whopping 20% gain in imported goods. Additionally, personal income rose significantly last quarter by $268 billion to hit $21.2 trillion, and fixed-investment growth was the strongest its been in four quarters, increasing by 7.3%.   

Overall, the report’s headline GDP loss dominated reactions, with some calling it a slap in the face to the Federal Reserve and others. Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, said that the “shock drop in GDP is a wake-up call that the economy isn’t as strong as we all thought” and that, while GDP may be revised upward in May, the report this week is still “a warning sign.”

Other experts were less doom and gloom about the news. “We’d rate the report neutral overall,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. “Trade, inventories and government spending all dragged, but the consumer held up and business investment was strong.”

Many experts point to the surge in imports — which is a sign that consumer spending in the United States remains strong — and the decline in federal spending as a reason for the GDP shrinkage.

It is not yet clear whether the Fed will interpret the GDP report in a positive, neutral or negative light, though. The central bank is scheduled to meet next week, at which time it is expected to once again raise interest rates by either 0.25% or 0.5%.

“The unexpectedly severe 1.4% annualized decline in first-quarter GDP growth probably won’t stop the Fed from hiking interest rates by 50bp next week, since officials will chalk it up to the temporary impact of Omicron and point to the strength of underlying demand,” wrote Paul Ashworth, chief U.S. economist at Capital Economics.

Surprisingly, consumer confidence took a positive turn this month after successive massive drops. According to the April survey by the University of Michigan, the consumer sentiment index rose from 59.4 points in March to 65.2 points this month, a nearly 10% increase following several months of steady declines. Consumer expectations had an even greater increase, clocking in at 62.5 on the survey, a 15% increase over March.

That said, Richard Curtin, the survey’s chief economist, says a “soft landing” for the economy may be difficult given the dual headwinds of congressional partisan bickering and a newly tightened monetary policy.

“The pandemic created a sense of uncertainty, which has only increased due to rising inflation, and the growing consequences of the war in Ukraine,” said Curtain, adding that a “tipping point” may depend on both a strong labor market and wage gains. “Just when supportive government policies are needed, consumers have lost confidence in economic policies.”

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