Why The Fed May Be Happy About Thursday’s Stock Crash
Two weeks ago (give or take), I detailed the "the simple reason" US equities needed to fall another 15%.
At the time, the S&P was around 4,270, or 3.5% above where it was trading on Thursday afternoon, amid one of the worst single-session routs since March of 2020.
But the important level for our purposes here isn't where the S&P closed on Thursday, but rather where it closed the day before, when Jerome Powell triggered a monumental surge by effectively ruling out rate hike increments
Merely tightening FCI will not be enough to make the Fed happy, in this sense.
FCI tightening needs to feed into the real economy, in weaker consumer spending, slowing investment spending, declining property value, falling rents, fewer job openings, and so on.
It might be acceptable for some of these things to merely slow or stall (low or no inflation) rather than outright decline (deflation), but others probably have to decline outright (how do you get from job openings-to-job seekers from 2:1 to 1:1 absent fewer job openings?)
Perhaps we’ll get a feedback loop / negative spiral (negative FCI -> negative real economy -> negative FCI etc).
For a time, developments that “ordinary economic individuals” (I love that term) consider bad news will be what the Fed considers good news.
Eventually, I suppose investors will also see bad news as good news. But I think that is a significant distance away (in time and index points) because, as well-discussed here, the Fed has no influence over one the largest variables, that being war (on Ukraine and on Covid in China). When half the dials are out of reach, you’ll turn the accessible ones that much harder.
H-Man, Occam’s razor suggests this is simply a matter of markets repricing and the litany of negative factors will propel the repricing model down rather than up.
One thing that confuses me about this roller coaster is that supposedly the market already priced in the 50 bps hike, and Wednesday was therefore a euphoria that it was not 75 bps… so today is a prediction of next month?