“Some say the world will end in a fire,” says a famous Robert Frost line. “And some say in the snow.”
If ever poetry could explain the stock market, it could come very close to capturing a dirty mood in a continuous seventh week of stock-market losses.
With half the world’s investors apparently panicked by rising prices and the other half worried about growth, there are some valuable buyers ready to balance the common denominator.
But when stagnation and inflation are almost nowhere to be found, this economic adjustment does not seem to be the beginning of a chronic illness. Rather, it has created a temporary setback that will – soon – bring the economy back into balance.
This has hardly alleviated the pain of the last six months of stock-market SPX,
Rejects, but it does not justify the terrible warning of the US recession. The recent rise in food and energy prices has already begun to sour consumer sentiment, making it much easier for the Fed to achieve the task of price stabilization. Growth from here will certainly be slow, but the sharp fall in demand is hard to imagine that consumers and companies have rarely had this flush.
This is obviously a disorienting time. After nearly four decades of declining inflation and mostly strong growth, very few active investors have ever felt the heat of such a sharp rise in market prices. With the exception of the 2008 financial crisis, which was already 14 years ago, the chances of a recession tremor were relatively slim.
It has been a long time since analysts chose estimates for their assessment models. Should they use the Fed’s long-term inflation forecast of 2% when they know their car has only 60 60 gasoline? With chair Jerome Powell now calling it a “soft landing”, could the Fed ease its forecast for next year to 2.0% -2.9% growth?
The stock has fallen because in this environment no one gets through the investment committee with sunny estimates about inflation or growth. Meanwhile, it is difficult to say what the uncertainty of the numbers of both sets means. When rates were reliably low and earnings were predictable, it was easy to speak for oneself in price-to-income multipliers in the high-20s. Today, investors aren’t sure stocks are bargaining now because the S&P 500 Multiple is now in its teens.
But in the case of America, which has been reduced to ashes by the fires of inflation, the matter cannot be sorted out. First, US consumer inflation seems to have peaked last week, even as wage pressures still need to be seen. Second, if high prices don’t force many to cancel summer trips, even if the supply chain isn’t quite normal, they will calm this year’s Christmas shopping frenzy. Third, and most importantly, long-term rates remain stable, even with short-term growth, the market suggests that the Fed will succeed in stabilizing prices.
It is technically possible that the United States will push into recession by next year, but much more will have to go wrong. In the dark headlines, it is easy to forget that unemployment has reached historic lows and workers are leaving their jobs in search of something better near historic highs. Corporate capital costs have risen, and companies are investing in more advanced technology and more resilient supply chains.
Lots of risk
It is difficult to estimate exactly how much damage the economy has suffered as a “downshift”. If the Fed is to fulfill an order to pay a “stable price”, it must settle for a lower level for another order of “maximum employment.” Debt defaulters have to rise from their historically low level. The housing market needs to be stabilized.
Meanwhile, there are plenty of risks off the American coast that could weigh on the U.S. economy. Europeans are now facing dramatically higher energy prices as sanctions are imposed on Russia. Food-importing countries also face higher prices for wheat and fertilizers. In China, industrial production fell 2.9% last month due to the Kovid restrictions, which threatened to further disrupt the global supply chain.
Many of these risks have occurred suddenly and unexpectedly, creating a tough headwind for U.S. stocks. Ironically, the relatively sharp price push due to supply chain disruptions and rising commodity prices makes red-hot demand more likely to cool off on its own. Inflation rates may find a new range above pre-epidemic levels, but they will be lower and more predictable than they are today.
There could be more fire and more ice. But the world will not end.
Christopher Smart is the Chief Global Strategist and head of the Bearings Investment Institute. Follow him on Twitter csmart.
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