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The bear market usually signals a spike in inflation

Investors have waited for high inflation readings to moderate for months, and now the continuation

bear market

is likely to produce this result.

That’s according to Doug Ramsey, chief investment officer of the Leuthold Group, who said in a note last week that price declines of 20% in the S&P 500 “usually trigger a powerful disinflationary impulse.”

Indeed, the wealth effect – or the idea that consumers feel richer when they see their investment portfolio grow – induces them to spend more money on goods and services and contribute to the growth of the economy. The exact opposite happens when stock prices drop significantly.

“The negative wealth effect definitely exists, and it’s a powerful thing,” Ramsey said. The S&P 500 has lost over $9 trillion in market value during the current bear market, while crypto markets have wiped out $2 trillion in value, so it’s hard to see this won’t affect not consumer sentiment and consumption habits.

Lower prices are already showing in some commodities, with timber, copper, wheat, cotton and natural gas in significant bear markets, even oil prices are down around 12% over the past last month.

While falling prices would be welcomed by both investors and

Federal Reserve

because it might indicate less interest rate hikes Looking ahead, that doesn’t mean the pain in the stock market is over, according to Ramsey. This is because falling prices signal the likelihood of an economic crisis.


is even higher.

“The action that troubles us the most is the pullback in the CRB Raw Industrials Index, as we believe it is about as close to a daily version of the ISM Manufacturing Survey as possible,” said CRB Raw Industrials. he declared.

The ISM Manufacturing Index is a monthly economic indicator that measures new orders, production, employment, shipments and inventories for over 300 manufacturing companies.

In other words, a drop in commodity prices suggests a drop in economic activity, which could mean that a further decline in stock prices is possible if a recession materializes. And while commodity prices have fallen, initial jobless claims have risen in recent weeks, suggesting the labor market may be weakening.

“If inflation was contained and the unemployment rate was still, say, close to 5%, the [Boom-Bust] The weakness in the barometer could be consistent with a mid-cycle slowdown. But for months we’ve been cataloging the list of economic and market developments that scream late cycle,” Ramsey said.

The unemployment rate currently sits at 3.6%, so there is room for it to rise before the economic scenario turns dire. But activity is definitely starting to weaken, and the U.S. economy is technically already in recession if the Fed’s GDPNow forecast for second-quarter GDP growth turns out to be accurate.

“In summary, the bear market in equities appears to be delivering the disinflationary blow it usually does. Yet there is another economic event that bear markets have been good at predicting – and the evidence also points in that direction,” concluded Ramsey.