Summer soft-landing for stock markets hinges on inflation and consumer confidence

Sell in May and go away is a tired investing adage. Well, will the investment markets now swoon in June?

Talk of an impending recession grew much louder in May even without accompanying economic data pointing to an economy on the edge of contracting. There’s a lot of momentum in the economy, but stock investors are worried the economy is coasting, as consumers burn through pandemic savings. JP Morgan CEO Jamie Dimon warned in late May he thinks consumers have six to nine months of spending power left.

This week, consumer inflation and consumer sentiment data will be in focus.

There have been early signs that inflation may have peaked. April’s core Personal Consumption Expenditures — the Federal Reserve’s favored inflation gauge — slowed a fraction from its blistering acceleration earlier in the year. Any pull back in the annual rate of the Consumer Price Index is good news but will be tough given the rising prices of gasoline and food.

Economic optimists rightly will focus on the core parts of the CPI — stripping out the effect of pump and grocery prices. The Fed knows its actions have little effect on fuel and food prices. Instead, the central bank wants to see demand for goods and services soften without collapsing. That’s the soft-landing scenario it desires.

Consumer attitudes about the future are pretty dour. Five-dollar-a-gallon gasoline will do that. That dwindling confidence six months out dovetails with Dimon’s gloomy forecast.

Shoppers and investors know interest rates will keep escalating as the Fed continues fighting inflation. The higher cost of borrowing is likely to reduce consumer appetites for big-ticket items such as appliances, cars, and homes. The stock market is responding now to what is expected to be less demand and a slowdown in earnings growth in the future.

Whether investment markets will be a bummer this summer for long-term investors rests on the station of inflation for consumers.

Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView