Could stagflation be a looming problem in the US?

EARLIER this month, investors who had grown accustomed to watching Wall Street rising to successive all-time highs every so often, witnessed a rare sight - five consecutive days of weakness for US stocks, during which the Dow Jones Industrial Average lost about 2.4 per cent.

The first of those falls came on Sept 3 after the release of the August US jobs report which showed that the economy created only 253,000 jobs that month, almost half a million short of Wall St's expectations. Up till then, the predominant investment thesis had been that stocks were a buy because Covid-19 vaccines were working, the economy was growing, the federal government was spending, and the Federal Reserve was still buying, namely the US$120 billion worth of Treasuries and mortgage-backed securities monthly that added liquidity to markets while keeping interest rates low.

The main narrative was that all this added up to a "Goldilocks'' scenario, that is, that the economy was neither too hot nor too cold - like the porridge in the children's story. The August jobs report with its shocking shortfall undermined this happy thesis as it suggested that the economy may not be expanding as nicely as the market had thought.