Hold Up! Fed Chair Jerome Powell Just Issued a Dour Warning on the Economy. Is the Bull Market in Trouble?

Is the current bull market, which began three years ago on Oct. 12, 2022, in trouble?

If you've been listening to the most important economic policymaker on the planet lately, you might have come to that very conclusion.

In a Sept. 23 speech to the Greater Providence Chamber of Commerce in Rhode Island, Federal Reserve Chair Jerome Powell outlined his outlook for the U.S. economy, and it wasn't optimistic. In fact, you might describe it as downright dour. What should investors make of these comments?

A slowing economy

"The pace of economic growth has moderated," said Powell. He's right. In the first half of 2024, the economy grew by only about 1.5%. Much of the deceleration was due to a slowdown in consumer spending, which accounts for about two-thirds of U.S. economic activity.

"Activity in the housing sector remains weak," he said. He's right on that, too. It was a blue, blue summer for the housing market. New home construction slowed, and existing-home sales fell in August, putting the housing market on track for its worst year in three decades. Elevated mortgage rates and limited inventory have put home purchases out of reach for many Americans.

Keep in mind that the housing market accounts for as much as 16% of U.S. gross domestic product, so a slump in that industry has an economywide impact.

Powell also said that job gains have slowed. It's true. Payroll gains averaged just 27,000 a month from May through August. (We didn't get September's jobs numbers due to the government shutdown.) That was a sharp fall-off in employment gains, which had topped 100,000 a month for the previous six months.

Elevated inflation

Powell said that inflation "remains somewhat elevated relative to our 2% longer-run goal." According to the latest readout of the Personal Consumption Expenditures Price Index (the Fed's preferred metric for gauging inflation), prices rose by 2.7% in August, and the adjusted index that excludes volatile food and energy prices rose by 2.9%. Both figures were quite a bit higher than the Fed's 2% inflation target.

So what does all this mean for the bull market? Well, the economy and the stock market are not the same, of course. But recessions and bear markets (a fall of 20% or more from a recent high) are definitely correlated. And the most common triggers of a bear market are a weak or slowing economy or investor expectations of such a slowdown. So it's worrying that it looks like we're in that situation.

Is a drop coming?

After his speech, Powell took questions, including one regarding the stock market. He answered with this ominous sentence: "By many measures, for example, equity prices are fairly highly valued." That's a cautious way to assert that the stock market might be in bubble territory.

Image source: Getty Images.

Older investors will remember a 1996 speech by then-Fed Chairman Alan Greenspan, when he asked: "But how do we know when irrational exuberance has unduly escalated asset values?" That was the same type of remark that Powell recently made. Both men were suggesting that stock investors may have become a bit too enthusiastic, considering all the factors that drive share prices.

The internet bubble continued on for a few years after Greenspan's famous "irrational exuberance" utterance, but it did burst in late 1999. The S&P 500's forward price-to-earnings ratio was at 25 when that happened. Today, it stands at around 24.

So, is trouble brewing? It's hard to say. Corporate earnings have been strong, which is always good for share prices and the broad market indexes. But the wider data suggest the U.S. economy is slowing, albeit gradually. And stocks are generally trading at expensive valuations.

Smart investors will remain cautious in such an environment, diversifying away from large growth stocks and into defensive sectors, especially healthcare, which is somewhat recession-proof.

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