“Some say the world will end in fire,” Robert Frost famously said. “Some say it’s ice.”
If poetry can explain the stock market, it may come closest to capturing the bad mood that is about to send stocks down for a seventh straight week.
With half the world’s investors apparently spooked by rising prices and the other half worried about growth, few buyers are ready to balance the prevailing pessimism.
But when economic stagnation and inflation collide, with little to nowhere to hide, this economic adjustment doesn’t look like the beginning of a lingering disease. Instead, it has the element of a temporary shock that will soon bring the economy back into balance.
That does little to ease the pain of the stock market SPX over the past six months,
down, but that doesn’t justify grim warnings that a U.S. recession is looming.The recent spike in food and energy prices has begun bad consumer sentiment, making the Fed’s task of stabilizing prices easier to achieve.Growth will definitely slow from here, but it’s hard to imagine a sharp drop in demand because consumer and company Such a straight flush is rare.
lose the way
These are clearly bewildering times. After nearly 40 years of falling inflation and mostly solid growth, few active investors can handle the heat the market is feeling with such sharp price increases. With the exception of the 2008 financial crisis, already 14 years ago, the prospect of a chilling recession is relatively short-lived.
It’s been a long time since analysts selected assumptions for their valuation models.Should they use the Fed’s long-term inflation forecast 2% when they know their car only uses $60 gas? The Fed can really slow next year’s growth to its forecast of 2.0%-2.9% Executive Chairman Jerome Powell is now saying “soft landing. “?
Stocks have been falling because no one can pass the investment committee’s optimistic assumptions about inflation or growth in this environment. At the same time, the uncertainty of the two sets of numbers means it’s hard to tell what’s cheap. When interest rates are reliably falling and earnings are predictable, it’s easy to convince yourself to enter a 20-something P/E multiple. Today, investors aren’t sure if the stock is cheap, as the S&P 500’s price-to-earnings ratio is now in the teens.
But the U.S. is engulfed by inflationary fires that do not stand up to scrutiny. First, U.S. consumer price inflation appears to have peaked last week, even if wage pressures remain to be seen. Second, if higher prices don’t force many summer travel cancellations, they’ll quell this year’s Christmas shopping spree even if supply chains don’t fully return to normal. Third, and most importantly, long-term rates have held steady even as short-term rates rise, suggesting the market believes the Fed will succeed in stabilizing prices.
It’s technically possible that the U.S. will slip into a recession within the next year, but more things will have to go wrong.Amid the dark headlines, it’s easy to forget that unemployment has reached near all-time lows and workers quit looking for something better near all-time highs. corporate capital expenditure As well as businesses investing in more advanced technologies and more resilient supply chains.
It is difficult to predict how much damage will be caused by the economic “downturn”. If the Fed is to accomplish one task of providing “price stabilization,” it must settle for lower levels to carry out its other task of “maximizing employment.”Loan defaults will have to rise from themselves all-time low. The housing market will have to stabilize.
At the same time, there are many risks that could weigh on the U.S. economy beyond the U.S. coast. Europeans now face sharp increases in energy prices as they tighten sanctions on Russia. Wheat and fertilizer prices are also much higher in food-importing countries.In China, Covid-19 restrictions undercut industrial production decline A staggering 2.9% last month Threats further disruptions to global supply chains.
Many of these risks came out of the blue, unexpectedly, and created massive headwinds for U.S. stocks. Ironically, the relatively sharp price shock from supply chain disruptions and soaring commodity prices makes it more likely that red-hot demand will cool on its own. Inflation rates may find a new range above pre-pandemic levels, but they will be lower and more predictable than they are now.
There may be more fire, there may be more ice. But the world will not end.
Christopher Smart is Chief Global Strategist and Director of the Barings Investment Institute.follow him on twitter @csmart.