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May 23, 2022, 10:06 a.m. EDT

Buy the dip? Sell the ‘rip’? What’s ahead for stock investors as ‘sticky’ inflation fears heighten consumer concern.

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By Christine Idzelis

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“Unfortunately, gasoline prices bounced back up to another record high in May and with inflation rampant across most categories, people are spending more money on fewer items,” said Beth Ann Bovino, U.S. chief economist for S&P Global Ratings, in emailed comments on May 17. 

When S&P adjusted U.S. retail sales in April for inflation, “a frightening split has appeared over the last year, and has only gotten wider through April,” said Bovino.

“Purchasing power has been squeezed, particularly for low-income households,” she said. “While savings stored up during the pandemic has given households a cushion to absorb these higher prices, eventually these buffers run thin.”

Although the labor market remains strong, new U.S. jobless claims during the week ending May 14 climbed to a four-month high . Christopher said that Wells Fargo Investment Institute believes “a mild recession” may begin late this year. 

They’re not alone.

“We continue to expect that the financial conditions tightening triggered by Fed policy will likely lead to a recession by end 2023,” wrote Deutsche Bank analysts led by chief U.S. economist Matthew Luzzetti, in a research note dated May 20. “Over the past several weeks, U.S. financial conditions have tightened sharply.”

This week, investors will get fresh economic data on inflation, consumer spending and disposable income. The U.S. economic calendar also includes readings on consumer sentiment, U.S. manufacturing and services, initial jobless claims, and minutes from the Federal Open Market Committee’s last policy meeting .

Jittery investors

While investors are jittery, stock-market bottoms tend to form after a “panic selloff,” and the recent slump so far has been “orderly,” according to Tastytrade’s Kinahan.

The S&P 500 has dropped about 18% this year through Friday, while the Dow has fallen 14% and the technology-heavy Nasdaq Composite has tumbled around 27%, according to FactSet.

Read: The S&P 500 narrowly averts a bear market. How long do they last once they arrive?

Through the lens of bullish investors, bear markets entail “feral, fearful, dystopian price action,” the BofA investment strategists wrote in their note. “The tape shows big damage already,” with “inflation shock” largely priced in along with “rates shock.”

Once “recession shock” is discounted, “lows will be set,” the strategists wrote, citing a bullish perspective. 

Both Kinahan and Wells Fargo’s Christopher cautioned against trying to time the market, with Kinahan describing any attempt to pick a bottom as a “fool’s errand.”

Christopher said investors might consider putting small amounts of cash to work over time as the market falls to new lows, and buying quality stocks to minimize losses. “If you’re a longer-term investor, you don’t want to pull money out of the market,” he said.

With recession risks rising, Wells Fargo Investment Institute has cut its year-end target price range for the S&P 500 to 4,200-4,400 from 4,500-4,700, its report shows. That’s above the index’s close Friday at 3,901.

The U.S. stock market was trading mixed Monday morning, with the S&P 500 and Dow each rising while the Nasdaq was down modestly, according to FactSet data. Consumer discretionary was the worst performing sector in the S&P 500 index in Monday morning trade, down around 1.8%, FactSet data show, at last check.

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