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Double Order of Stag, Hold the Flation By Spencer Jakab

Add a potential government shutdown on Friday to your list of market worries as the House spending bill faces opposition from Democrats in the Senate. Futures are pointing to losses when U.S. stock trading begins.

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The market's first reaction to economic news is often wrong. Yesterday its second take might have been too.

A cooler-than-expected report on consumer prices spurred a 2% jump in the hard-hit Nasdaq Composite Index that faltered in time to ruin traders' lunches. Weaker inflation should make the Fed more comfortable cutting interest rates, which is good for stocks.

That was the initial thought by futures traders who bet on such things. By Wednesday evening, though, the odds of rates being any lower by May had dropped to less than half what they had been before the report, according to CME FedWatch.

We'll know a lot more a month from now when we see the first big impact of tariffs on prices. The odd combination of growth and inflation worries the levies have stoked has a word that first gained traction in the 1970s making a comeback : stagflation.

The portmanteau of stagnation and inflation is a scary one for central bankers because they blew it so badly back then. When oil prices spiked after the 1973 Arab oil embargo, the Fed's strategy was to avoid piling pain onto a reeling economy by tightening policy too much. Inflation stayed high for long enough, though, that it became entrenched in expectations, requiring painful rate hikes to tame it.

More recently the Fed kept interest rates at zero for so long after the Covid emergency that, along with supply-chain and labor-market snafus, it helped inflation reach a four-decade high. The public's frustration was heard loud and clear at the ballot box.

But markets might be getting things half wrong this time by underestimating the "stag" and worrying too much about "flation." One reason is obvious: Tariffs can be removed at the stroke of President Trump's sharpie. On Tuesday alone he doubled planned levies on Canadian metals to 50% and then changed his mind within hours.

But there's another, less-understood factor-a reversal of the wealth effect. Doug Ramsey, chief investment officer at Leuthold Group, points out that the value of stocks compared with U.S. gross domestic product rose above 200% at the start of this year. That's twice the proportion before the financial crisis and three times as much at the time of the 1987 stock-market crash.

The upshot is that, while we technically aren't in a bear market yet, the loss of wealth already is consistent with past ones. The financial and psychological hit to household finances will dampen inflation by discouraging spending.

And possibly spur a consumer recession. The richest 10% of Americans own the vast majority of stocks, according to Fed data, and they were the only income cohort not pinching pennies recently. Now they might too .

Meanwhile, the other knock-on effect of tariffs, and of constantly shifting messages about them, has been that companies suddenly can't decide whether, or where, to invest. So a business recession, or at least a slowdown, is more likely too.

The good news is that any spike in inflation could be fleeting. The less-good news is that Fed rate cuts are probably coming, but not because of the "soft landing" economists were predicting just a few months ago. This one could be bumpy and painful.

Stocks I'm Watching

Intel : The beleaguered chip maker's shares surged in premarket trading after industry veteran Lip-Bu Tan was named as CEO . The company was being run by two interim co-chiefs. Intel shares had been down by 54% over the past year.

Adobe : The software company turned AI play's results beat expectations, but its guidance was a bit light . Its stock is down in premarket trading.

Dollar General : "America's general store" is set to unveil full-year results before the market open. Its commentary on the state of low-income consumers will be parsed carefully.

SentinelOne : The cybersecurity's stock is sliding premarket after its quarterly sales disappointed.

DocuSign : One of the Covid-19 emergency's biggest winners, the e-signature company's stock is a lot lower today. It reports results after the bell.

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Consumer Angst Is Striking All Income Levels

American consumers have had a lot to fret about so far this year, between never-ending tariff headlines, stubborn inflation and most recently, fresh fears about a recession. Now those concerns seem to be hitting spending by both rich and poor, across necessities and luxuries, all at once.

What I'm Reading Uncertainty over federal funding for bioscience programs is endangering U.S. leadership in the field. That could affect drug development and the nation's competitiveness more widely. ( WSJ ) Now it's getting serious: Shoppers are skimping on cigarettes, Doritos and Twinkies. Convenience-store sales are down. ( WSJ ) How business leaders talk about the Trump administration in private has been markedly different from what they are willing to say in public. ( WSJ ) Uber will get a robo-taxi boost. It's time to buy the stock. ( Barron's ) Squid Game? Risk-loving Korean retail traders might be affecting the wildest parts of the U.S. stock market. ( Acadian Asset Management ) Beyond the Newsroom

Buy Side from WSJ: With consumer prices expected to increase with Trump tariffs, consider shopping now to save money .

About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

March 13, 2025 06:23 ET (10:23 GMT)

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