The S&P 500 is down 24% so far this year. Some of the most powerful people in the financial world believe that slide is not over. When these people make front-page news with their forecasts, it shakes confidence in the market further. America’s leading banker, JPMorgan Chase CEO Jaime Dimon, says the market could drop another 20%. Tobias Adrian of the International Monetary Fund agrees with that assessment.
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How realistic are these forecasts? One only needs to look back to 2009. The Dow Jones industrial average was almost 19,000 in July 2007. It fell to 6,469 in March 2009. The loss was not recovered entirely until 2013. While the current economic situation is not like that of the Great Recession, in one or two areas it may be worse.
The primary negative difference between now and 2009 is rampant inflation. The consumer price index monthly increase year over year since the second quarter has been at the highest level in four decades. This has sucked purchasing power out of American households as the prices of such necessities as food, fuel and clothing have risen by double-digit percentages. The price of gasoline hit a record $5 a gallon in June. As oil prices have fallen, the price has backed down closer to $3. However, OPEC+ recently said it would cut crude production sharply. Other nations cannot replace this, so gas prices almost certainly will rise again, and perhaps sharply.
A drop in the stock market undermines purchasing power even more, particularly among middle-class households that hold equities for savings or retirement. These households will need to cut back expenditures to guard against further erosion. Inflation and the market sell-off become a brutal combination.
Generally, economic problems have had a solution in the past two decades. Central banks, including the Federal Reserve, have cut interest rates to stimulate consumer and business activity. Presently, the Fed has changed course and has raised rates aggressively in an attempt to tame inflation. This decision makes the stock market value drop even worse. And there is no end in sight.
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