Americans are expected to head out on vacation this summer and flood into travel destinations after two frustrating years of confinement. But the economic backdrop is changing fast.

Predictions that the current decade would look very different from the last are coming to fruition in 2022—and producing a rising degree of anxiety among advisors’ clients and the general public. Suddenly, investors are dealing with the unfamiliar dual forces of sinking securities markets and inflation, after the latter was absent for more than three decades. Higher employment and wealth levels are juxtaposed against repeated market declines, and the public is losing its sense of financial complacency.

Haleh Moddasser, a managing partner at Stearns Financial Group in Chapel Hill, N.C., says she’s begun to see higher levels of anxiety among clients now that bonds and stocks, normally uncorrelated, are falling at the same rate. “Bonds are down almost as much as stocks, 11% versus 15%,” she says.

It’s not helping when investors are seeing horrific stories coming from Ukraine every day.

Uncertainty about the macro environment was the dominant theme at Mauldin Economics’ virtual Strategic Investment Conference (SIC) in early May. Since employment is still strong—six million Americans continue to look for work and 11 million jobs are available—the Federal Reserve’s Jerome Powell is likely confident that the central bank could raise interest rates without harming the strong job outlook. At least that was the feeling among conference participants like Jim Bianco of Bianco Research.

Others were more skeptical. David Rosenberg, head of his own namesake firm in Toronto, predicted that stock market woes would spill over into a housing downturn, leading the U.S. economy into a recession. Beyond supply problems in the energy, housing, food and other commodities markets, Rosenberg and Bianco attributed America’s inflation problem to its successive monetary and fiscal stimulus programs.

Inflation is global, but “why is the U.S. No 1?” Bianco asked, saying America’s inflation rate outpaced that of other nations by 3%, largely because its massive government programs dwarfed those of other nations. Rosenberg previously criticized the Obama administration for enacting insufficient stimulus after the Great Recession, but he called President Biden’s 2021 fiscal packages unwise.

Both experts agreed about the Fed chair’s objectives. A year ago, Powell was sounding “like a social worker,” Rosenberg said. Today, he sounds more like predecessor Paul Volcker, the famous inflation hawk who subdued inflation in the early 1980s.

Powell is still likely concerned about the conditions faced by less successful Americans, people who haven’t participated in the explosion of asset prices, Bianco said.

“Forty percent of the American public rents and has less than $1,000 in savings,” Bianco said. These folks “are getting killed by inflation and they are very mad.” If tackling that inflation means hurting the portfolios of wealthier people, the Fed will likely say: so be it. After all, 100% of the U.S. population has been affected by the inflation. And most equities are owned by America’s most affluent citizens, who can best afford to take a hit for the team.

The feverish housing market is one harbinger of the inflationary situation, Bianco said. Before Covid-19, only about 20% of homes in America were sold above the asking price. Over the last two years, that figure has surged to 55%. He said real estate agents, normally hired to get a fair price for buyers, have failed to understand how strong demand is among many buyers. (Prices in numerous markets besides housing, like food and energy, have also been influenced by a lack of supply.)

While housing may be collateral damage in the Fed’s quantitative tightening strategy, Bianco said the central bank’s primary target is the stock market—since stocks are the “fastest” way to attack inflation. He cited an April 6 article by former New York Fed chief executive officer William Dudley calling on the Fed to force a stock selloff or even a bear market. Dudley no longer speaks for the Fed, but his status as a powerful former governor provides insights into central banker thinking.

Several Mauldin conference speakers said Powell wants to avoid being remembered by history as another Arthur Burns, the Fed chairman whose easy monetary policies gave birth to hyper-inflation in the 1970s.

Critics say the Fed’s mandate should have nothing to do with stocks: that the central bank should be concerned instead with the dual problems of stabilizing inflation and employment. But in reality, the stock market is the easiest target for the Fed to implement its goals with the least damage. At equities’ peak at the end of 2021, they had climbed more than 95% in the 21 months since their March 2020 lows, or the equivalent of 95% of GDP, Bianco noted. The euphoria has led market participants into delirious behavior, from meme stock purchases to SPAC IPOs to hedge fund leveraging schemes (like that of Bill Hwang’s Archegos Capital Management). The feverish activity has people recalling Alan Greenspan’s “irrational exuberance” warning of 1996.

To fight that kind of thinking, Bianco said, the Fed wants homeowners and stockholders to “think twice about paying list price.” But the Fed’s instruments are blunt, and higher interest rates could also hurt tens of millions of ordinary citizens who have the biggest chunk of their retirement savings in stocks. A negative wealth effect could prompt many people to indeed think twice, not just about the list price of their purchases but about buying discretionary goods and services at all.

Ultimately, it’s not hundreds of Ph.D.s at the Fed but millions of businesses and consumers who will determine the direction of inflation. And according to another Mauldin conference speaker, Peter Boockvar of Bleakley Advisory Group, inflation could prove to be stickier than the central bank would like. That assumption is based on recent warnings by several Fortune 500 CEOs.

On a recent earnings call, for instance, Kimberly-Clark’s CEO voiced concern that his company was pushing consumers to the brink, Boockvar said. Altria executives remarked that they were starting to see cigarette smokers trade down to discount brands. A number of companies have seen profits shrink as costs rise, and Boockvar predicted these companies would phase in price hikes gradually over the next few years to restore their margins.

Powell seems convinced that the job market is running so strong that the Fed can keep tightening until it subdues inflation—and do so without causing a recession (or at least a harsh one). That means the Fed could keep raising rates until inflation drops to 4%, Bianco predicted.

That’s where the Fed’s plans for a soft landing could run into trouble, he continued. Currently, inflation is running north of 8%, and the U.S. economy has never experienced an inflation reduction of more than 4% during an economic cycle without suffering a recession, which some economists believe looms right around the corner. Noting that 11 or 14 Fed tightening cycles had ended with recessions, Rosenberg cited a series of 18 economic indicators he developed as chief economist for North America at Merrill Lynch. Using those, he estimated that the U.S. was 82% of the way to a recession that he said would arrive in the second half of 2022.

But the pandemic economy has been so bizarre and quirky that trying to make predictions using historical parallels is a dicey proposition. As the S&P 500 approached bear market territory in May, the economy looked a lot stronger than the financial markets. This is a total reversal from the previous decade, when deflation concerns and slow growth were pervasive.

Even if there is a recession, there is no certainty it will be nasty. Manhattan Institute economist Allison Schrager recently observed in a Bloomberg Opinion article that inventories and capital investment are low, while household balance sheets are relatively strong. A mild recession could prevent excesses from building up.

Indeed, the worst excesses of the past two years have been in financial assets, and it’s those same assets that have spent the first four months of 2022 deflating rapidly. Vacationing Americans should get so lucky with their travel expenses this summer.