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The New York Stock Exchange operates during normal business hours in the Financial District on Oct. 13.John Minchillo/The Associated Press

Everywhere they look, stock investors see trouble ahead.

Runaway inflation, and the interest rate increases meant to contain it, will make life harder for consumers. A severe COVID-19 lockdown in China and the invasion of Ukraine are adding to disruptions in the flow of goods across borders, contributing to rising food and energy prices and threatening corporate profits.

On Wall Street in April, it all seemed to build to the same conclusion: The economy is about to take a hit.

That fear led to the S&P 500′s worst monthly decline since the March, 2020, panic over the coronavirus. The index, down 5.4 per cent for the month through Thursday, dropped another 2 per cent Friday afternoon. April was the third month of losses this year, and stocks are now down more than 10 per cent in 2022.

The blow was softened a little by earnings reports from companies – including some of the most influential technology firms, like Microsoft Corp. and Facebook’s parent, Meta Platforms Inc. – that pleased investors. The job market and data on consumption also continued to show signs of resilience.

But analysts say that Wall Street’s pessimism is not likely to end until the major concerns are resolved, and when that will happen seems impossible to know.

What matters most is the impact that all of this will have on consumers, who account for the largest share of economic activity in the United States. While consumer spending has held up for now, several measures show that sentiment is eroding quickly, and economists expect demand to slow as people face high prices and rising borrowing costs at the same time.

“The consumer is the main driver of the U.S. economy,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “So how the consumer goes, so goes the economy.” Ms. Bostjancic said that as the Federal Reserve continues to raise rates this year and into next year, “we see more vulnerability for the consumer and risks of a consumer pullback rise.”

Ms. Bostjancic’s firm has reduced its expectations for gross domestic product growth this year to 3.1 per cent, compared with 5.7 per cent reported for 2021. But the outlook for 2023 is where concerns are particularly evident. Oxford Economics is forecasting growth will slow to 2 per cent, but others are predicting a recession.

What the Fed does and says will be crucial. The central bank raised interest rates by one-quarter of a percentage point in March, after having held them near zero since the coronavirus pandemic began. With consumer prices already rising at the fastest pace in four decades, that move was largely expected.

But in April, Fed officials began to shift their view, expressed in speeches and other public comments, on how quickly interest rates will have to rise to get inflation under control, and Wall Street’s economic projections shifted too. In the futures market, where traders bet on how high interest rates could go, the predominant view now is that the Fed’s benchmark rate will climb to around 2 per cent by July – something that seemed unimaginable even a month ago.

For that to happen, the central bank would have to raise its policy rate by half a percentage point at each of its next three meetings, and the fear is that such aggressive increases will trigger an economic slump, rather than just cooling things down enough to slow inflation but keep the economy growing.

“Every time the Fed has spoken, markets have taken it fairly negatively,” said Saira Malik, chief investment officer at Nuveen, a global investment manager. “Investors are concerned that with these multiple rate hikes, the Fed is going to cause a recession rather than a soft landing.”

Higher interest rates will hit consumer demand. Mortgage rates, for example, have already jumped to above 5 per cent from 3.2 per cent at the start of the year, eating up new homebuyers’ budgets. Other borrowing costs – everything from consumer loans to corporate debt – will rise as the Fed pushes its benchmark rate higher.

For now, many companies – from United Airlines Holding Inc. to PepsiCo Inc. – are passing on rising costs and reporting that sales continue to rise.

Economists are wondering how long this will continue.

“There’s going to be a natural slowdown in spending, maybe before interest rates increase, as costs increase,” said Jean Boivin, head of the BlackRock Investment Institute. “The central bank will need to monitor that very carefully because, if it happens naturally and then you add interest rate increases, this is how you get to a recession scenario.”

Broadly speaking, earnings reports this week have shows that profit growth continues. About 80 per cent of companies in the S&P 500 to report results through Thursday have done better than expected, data from FactSet show.

But other companies have only added to the downdraft. Netflix Inc. plunged after it said last week that it expected to lose subscribers – 200,000 in the first three months of the year and an additional two million in the current quarter. The stock is down more than 46 per cent for the month.

On Friday, Amazon.com Inc. slid 12 per cent one day after the e-commerce giant reported its first quarterly loss since 2015, citing rising fuel and labour costs and warning that sales would slow. Its shares are down 22 per cent this month.

General Electric Co. on Tuesday warned that the economic fallout from Russia’s invasion of Ukraine would weigh on its results. Its shares fell 10 per cent that day and are down about 16 per cent for the month.

The war, which began in February, brought a new risk to the fragile global supply chain: Western countries’ sanctions on Russia, including a ban on oil imports from the country by the United States, and European promises to limit purchases of Russian oil and gas.

Now executives are also assessing how the COVID-19 lockdowns in China could affect profit margins. Multiple cities are in lockdown in the world’s second largest economy, and although factories remain open, China’s draconian “zero COVID” policy has led to interruptions in shipments and delays in delivery times.

Texas Instruments Inc. and the machinery maker Caterpillar Inc. cautioned investors this week that the lockdowns in China were affecting the company’s manufacturing operations. On Thursday, Apple Inc. also warned that the outbreak in China would hamper demand and production of iPhones and other products.

The outlook for the economy, the effects of the Ukraine invasion, the lockdowns in China and exactly how fast the Fed will raise interest rates are still unclear. Markets are likely to stay volatile until they are.

“There are definitely a lot of open-ended and unquantified risks looming,” said Victoria Greene, chief investment officer at G Squared Private Wealth, an advisory firm. “The what-ifs in an already uncertain market can cause panic.”

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