Stocks are up 8.8% in 2024 through May 7, as measured by the S&P 500, but markets have cooled and the large-cap index is down 1.3% in the second quarter.
Some investors are inching toward the sidelines amid worrisome economic news: slowing economic growth, a softening labor market and rising core inflation.
Economists call this scenario "stagflation," and it's a five-alarm fire to investors. In late April, the U.S. Commerce Department reported that first-quarter gross domestic product growth slowed to a tepid 1.6% – far slower than the 3.4% GDP increase for Q4 2023.
Simultaneously, the core U.S. inflation rate soared to 3.7% in the first quarter of 2024, above expectations of 3.4%. That's up from a mild 2% rate in the fourth quarter.
Rising inflation and slower GDP growth have thrown a wrench in the U.S. Federal Reserve's reported plans to start cutting interest rates. Only a few months ago, some economists predicted six interest rate cuts in 2024.
That's bad news for stocks, which use low rates and a robust GDP as the rocket fuel they need to thrive. Now the stock market may be running out of gas as the threat of 1970s-like stagflation and resulting market uncertainty loom large over the economic landscape.
"One of the most powerful lessons from studying 234 years of U.S. financial history is that market crashes are highly unpredictable," says Mark J. Higgins, senior vice president at Index Fund Advisors in Portland, Oregon.
One reason is that many of the worst crashes were quite literally triggered by events that were, by definition, unpredictable.
"For example, the Panic of 1819 traced its origins to the eruption of Mount Tambora in 1815, and the subsequent global cooling and European crop failures that followed," Higgins says. "The Panic of 1907 traced its origins to the San Francisco earthquake of 1906, while a global pandemic caused the Panic of March 2020."
With storm clouds looming over the U.S. economy, what's the likelihood of a stock market crash in 2024? Stock market experts weigh in with their call on the economy and the stock market – here's what they have to say on the biggest "crash impactors" in May:
One of the most significant risks is the potential for sticky inflation and higher interest rates.
"Inflation readings to start the year have surprised to the upside with month-over-month core CPI averaging 0.4% during the first three months of the year," says Kendall Dilley, a chartered financial analyst with Vineyard Global Advisors. "This equates to a three-month annualized core CPI rate of 4.5%, indicating that inflation may remain higher for longer than expected."
That's beneficial for defensive-minded assets like bonds, but not for stocks.
"In conjunction with the hot inflation prints to start the year, yields have turned higher, with the 10-year U.S. Treasury yield rising over 83 basis points to a 2024 closing high of 4.7%," Dilley notes. (The 10-year yield has since retreated to about 4.5% as of May 8.) "Resilient inflation increases the potential for a 'no-landing' scenario where the Fed is forced to maintain rates higher for longer to combat lingering inflationary pressures."
Bundled together, the specter of stubborn inflation, a less accommodating Fed and higher interest rates "present a significant headwind for equities should they come to fruition," Dilley adds.
Wealthy countries are hunkering down economically. Any rise in protectionism, increasing tariffs or a shift in industrial policy would add significant risk to the stock market.
"The retreat from globalization threatens to undermine the economic growth and wealth generation that free and unhindered trade has facilitated," says Deiya Pernas, co-founder of Pernas Research, an asset management firm in San Juan, Puerto Rico. "Despite the slowdown in global integration, there's cautious optimism that nations will find mutually beneficial ways to cooperate, maintaining a degree of global economic stability."
Another big risk in 2024 is that market participants continue to underestimate the resolve of the Federal Reserve to tame inflation decisively.
"The reason investors underestimate the Fed's resolve is because they are too focused on the monthly inflation and labor numbers while ignoring the more important financial history guiding the Federal Reserve's hand," Higgins says. "One of the gravest errors in the Federal Reserve's history was failing to maintain tight monetary policy and nip inflation in the bud in the late 1960s and 1970s."
Each time the Fed loosened monetary policy too soon, it weakened its credibility and allowed increasingly high inflation expectations to become entrenched in the economy.
"This is why Paul Volcker was forced to raise the federal funds rate to more than 20% to end the Great Inflation from 1979 to 1981," Higgins says. "In 2024, the Federal Reserve is unlikely to repeat this mistake if only because many of the FOMC members, including Chair Jerome Powell, remember the costly consequences."
The stock market still miscalculates the Fed's determination to maintain its hawkish position. "That creates conditions modestly more conducive to a financial panic," Higgins adds. "Moreover, there is precedent from periods similar to the one we are in that suggest a soft landing is less likely than a hard one."
Large, thriving companies with exposure to artificial intelligence have dominated in recent years. Any sign of a slide by so-called Magnificent Seven stocks may drive Main Street investors to the exits.
"Nvidia's performance in the first three months of 2024 has moved it to the third-largest stock in the S&P 500, and it's been a large part of the broad rally," says Mitch Bodenmiller, portfolio manager and research analyst for Buckingham Advisors in Dayton, Ohio. "Should Nvidia or other Magnificent Seven stocks begin to miss earnings estimates or issue weaker-than-expected guidance, it would likely generate a pullback from current levels."
American consumers are losing confidence in the U.S. economy, and any further slide could trigger a stock market stampede to the sidelines.
In April, consumer confidence slid to its lowest level since mid-2022, according to a Conference Board report.
"Confidence retreated further in April, reaching its lowest level since July 2022 as consumers became less positive about the current labor market situation and more concerned about future business conditions, job availability and income," Dana M. Peterson, chief economist at the Conference Board, said at the time of the release. "Despite April's dip in the overall index, since mid-2022, optimism about the present situation continues to more than offset concerns about the future."
Meanwhile, 51.5% of U.S. consumers plan on curbing retail spending for the rest of 2024, according to a new GlobalData report. Americans are getting into "thrifty" mode, with 34.1% of shoppers saying they've purchased secondhand clothes so far in 2024.
There's nothing wrong with purchasing "pre-loved" jeans or sweaters, but the increasing number of Americans doing so is yet another warning sign for the economy and the stock market.
Retirement planning may be shifting as well: An Allianz Life survey released May 7 showed that 47% of Americans now see retirement as a slow transition away from full-time work, and 61% said people should expect that they'll need to work in retirement to survive.
Analysts seem to like first-quarter earnings at leading-light U.S. companies, but some aren't keen on what they see on the horizon.
"We're seeing better-than-expected first-quarter earnings and revenue," says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, in a new research note. "There is some disappointment in the forward-looking earnings expectations companies provided to this point."
Note to Investors: Stay Calm and Carry On
Stock market investors may be anxious, but as the old saying goes, "There's no need to panic."
"While we maintain a positive view on the U.S. stock market in 2024, there are a range of risk factors that could derail the current bull market," Dilley says. "For nervous investors, a good option to reduce risk and potential downside losses is to reallocate from U.S. equities and take advantage of high short-term yield opportunities. With the two-year U.S. Treasury currently yielding (nearly) 5%, there are attractive low-risk alternatives to equities that can generate generous returns with minimal downside risk."
In the meantime, avoid timing the market, Dilley advises.
"Timing the market is always tricky," Dilley says. "The popular adage is that time in the market beats timing the market almost every time. Investors who are worried about entry risk can utilize higher yields in Treasurys to diversify their portfolios."
"Trying to wait out the market for a big pullback can take longer than anticipated, and investors may miss out on significant gains in the meantime," Dilley says.
