“Bleeders all over the place,” Nomura’s Charlie McElligott said Thursday, as the recession choir sang.
He noted Fed speakers emphasizing the Committee’s intention to get policy into restrictive territory, the poor Philly Fed survey and what he branded “the ‘deteriorating consumer’ meme,” as exemplified by Walmart, Target and, on Thursday, Kohl’s.
All of this is creating, perpetuating and enhancing the “growth scare” narrative, which has found expression in a bid for Treasurys. At least bonds are your hedge again. For how long is anyone’s guess.
Esther George nodded to equities on Thursday during an interview with CNBC, the most stock-focused venue imaginable.
“Looking at the stock market is an important price signal — as many others are,” she said. “This is a time of uncertainty. It’s been a rough week in the equity market.”
Yes, it has. When George spoke on Thursday morning, stocks were coming off the single worst session in two years, on the way to a seventh consecutive weekly decline (figure below).
“[It’s] not surprising you see this volatility,” George added. The Fed’s tightening efforts aren’t “aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge,” she told Steve Liesman.
McElligott recapped the rationale for Wednesday’s wipeout. “The realization that the Fed [is] planning on getting to neutral before year-end and likely rolling into ‘restrictive’ territory from there until inflation is ‘killed-dead’ — recession be damned — truly cracked risk assets,” he said, adding that Walmart and Target showed the American consumer isn’t “bulletproof” after all. Taken together, it was “simply too much to bear.”
Read more: ‘Aha!’ Moment Razes Fed’s Soft Landing Fable
It’s worth taking a step back to assess it all — where we’ve been and how we got here.
“This is also the comeuppance of the ‘COVID bullwhip’ effect,” McElligott wrote, suggesting we’re witnessing a pivotal moment in economic history unfold in real time.
Previously, the US economy was defined by “pent-up demand, over-ordering, double-booking and paying through the nose for transports into the empty shelves hysteria” along with consumers “who were flush with savings and stimulus.”
Now, though, we’re seeing the “out-trade,” Charlie said, calling this a “come-to-Jesus moment, as the suddenly weakened consumer is having to be more discriminate with spending.” It’s a “real-time down-shifting,” he remarked.
Commenting further on Thursday, George told CNBC that, “It’s hard to know how much [tightening] will be needed given all the moving parts we see in today’s economy.”
Am I wrong or is the cure for inflation starting to look worse than inflation?
Duplicating Covid’s demand destruction with QT and higher rates … is that what we are aiming for here?
I can’t help believing that oil and gas prices are the fundamental problem…..not low unemployment or higher wages.
Putin’s war has exacerbated that big part of inflationary pressure.
Shhhh! Pointing out the obvious can be a career limiting move.
I would not be surprised if your point becomes the after the fact narrative once inflation comes back to 4-5% in early H2. It will be the “reason” for the next semi-dovish pivot from the FED. I’m guessing some time late summer.
We have to see in time if the cure is worse than inflation. In 2008 it was imo. Commodity inflation is a tax on the economy on my opinion. High prices tend to be the cure for high prices. Combine that with lower govt spending and we have a natural (in my mind) slowing force. A wage price spiral would be a game changer but mgmts probably will continue to use technology to limit office workers power while at the lower end it will be a battle but should not be a longer term issue as it will either bring in new workers or close some locations.
And we have to think about corp mgmt responses. Exec mgmts tend to focus on their compensation and that tends to be in stock options. So I expect mgmts to start looking to cut jobs, cut spending, etc to help prop up earnings.
And things tend to self correct.
The speculation is almost out of the markets. Just as at tops few see clouds on the horizon while at bottoms few see the potential. Volatility is opportunity rather than “risk” in my thinking.
The Fed needs to be careful what they “wish” for. Markets can take over and sentiment can be difficult to turn. Whether they will be late here we will see. I can’t believe behind the scenes they are not a bit shaken at the rapidity of this “adjustment” despite the brave face they are trying to portray in public (or they are cluelss as they have shown in the past – ie 08).
But I think an investor needs to focus on the basic fundamentals. Balance sheets, valuations, sustainable competitive advantages. And not overpay for perceived “safe” names. Look at absolute rather than relative valuations.
Genius is a bull market. Bear markets make us all look like fools. Stay humble, do your work, understand risks, and use the volatility as opportunity to upgrade the portfolio, readjust risk, whatever is needed to take advantage of what is happening. And learn from mistakes, learn from what is happening and stay “in the game ” meaning make sure you have the capital to play going forward.
There is still a lot of overvalued stuff out there and more and more really interesting risk/reward opportunities out there imo.
How bad it gets who really knows but a lot of companies will be worth a lot more in 10 years than they are right now (and of course some will not be around).
Know what you own and be smart about it.
Hang in there everyone. I hope this maybe helps a bit.
So much for a softish landing…..
I don’t think dta alone makes you smarter than anyoneone else- So the fed has pulled free money and p/e expansion from the equity market. They own most of the mortgages. Next what is the lag time of these two facts in the economy. 9 months? Nobody complained when the fed made them trading profits they didn’t earn. Who’s been swimming naked? We’re finding out.. I think this means more pressure on stocks than bonds , which makes sense given we’re at war with Russia….
I suppose we earned these trading losses ….. and were foolish to invest in equities in the first place.
I’m not sure I’d say the consumer is weaker. They are still spending the same amount but they are willing to substitute down in quality and/or get less in return for the same money. I also think there’s also a lot of delaying purchases with consumers expecting prices to come back to earth soon. It won’t happen, we’re likely at a new level for many items. Eventually consumers will grow tired of delayed purchases and either pull the trigger or chose to forgo. My guess the former will be the prevalent outcome.