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Markets Brace For Impact As Fed Whisperer Tips 75
Headed into the new week, I suggested on multiple occasions that the market was on the brink of losing all faith in the Fed and that both equities and bonds would continue to bleed absent a compelling reason to believe policymakers are poised to get a handle on the inflation problem.
Those warnings were, unfortunately, borne out on Monday. Stocks and bonds were both beset, but the real drama came in the final hour, when the S&P extended losses and yields rocketed higher by as much as 36bps
Aaah the hawks are in control. FOMC is going to hike us into a nasty recession. Oh well. There will be opportunity in the wreckage.
… and yet, at the end of today (6/13/22), the S&P 500 is ~12% higher than its pre-pandemic record level and ~54% higher than 5-years prior.
That’s ~54% higher than 5-years prior to today
Doesn’t an average of about 7% a year sound fine? (Between AI, electric vehicles, LEO satellites, telemedicine, CRISPR, etc. it does feel like there is value being created?
A lot of these SPAC’s will likely not survive.
@RIA,
“FOMC is going to hike us into a nasty recession.” A recession, I think is very likely. Whether it is a “nasty” recession depends, I think, on whether the Fed keeps hiking when the recession emerges, or backs off.
That depends, I think, on whether inflation has responded to the hikes up until then, and if not then on whether the Fed prioritizes fighting inflation or preserving jobs. I think there is a plausible scenario in which by fall, the Fed chooses jobs over price stability.
“Oh well. There will be opportunity in the wreckage.” The key thing, I think, is that we don’t need a nasty recession to see SP500 near 3000. Rates +100bp more and a mild recession would, I think, be enough.
“FOMC is going to hike us into a nasty recession”.
The determination of whether the recession is relatively mild or nasty will likely be determined by the “race” against the depletion of still very high levels of excess cash currently held by households, non-financial corporations and banks vs. rising unemployment (which will break the Fed’s hawkish tilt).
On an aggregate basis, households hold enough cash to pay off household debt- but of course, who knows if the ratio is 1:1 within each household.
I am leaning towards something less than nasty because the Fed would rather be cutting (adding to the punch bowl) vs. raising (taking away the punch bowl)- so as soon as unemployment starts to rise, the Fed will, at a minimum stop raising/reducing liquidity.
Thanks for the insight.
I can’t see them stopping before people start hating stocks and swearing them off for life. Now that people who used to not participate in markets learned the trick to get rich quick, I don’t see money printing making a cameo for at least a decade.
As RIA said, there will be opportunity in the wreckage. But I disagree with money printing not making a cameo for at least a decade statement. I’d say within 3 years we’ll be back to QE, if not sooner.
“Excess cash”? Really?
Household cash balances (currency, checking, savings, money markets) have increased from $12.7T Q42019 to almost $18T Q12022.
Non-financial corporations cash balances have increased from $5.2T to $6.7T over the same time period- although, the non-financial corporations’ cash balances seem to have peaked at $7T Q42021.
Bank deposits are a record $6T.
Balance sheets seem to be in very good shape.
Yep. All valid aggregate numbers, but very poorly distributed. The devil is in the details
An edited excerpt from a recent piece I wrote:
“We’ve seen a breakdown from last January showing median savings by income bracket. Not surprisingly, the median savings for people earning less than $20,000 was $810. More surprising was that for folks in the $60,000 to $80,000 segment the number was only $10,000.
Another survey claimed that in January 64% of Americans were living paycheck to paycheck, versus 52% in April 2021 when Covid benefits were still being paid out.
Perhaps as a result, in April bank credit-card balances rose 14.2% from a year earlier, auto loans increased 7.5% and other consumer loans climbed 19%.
Finally, the savings rate fell to 4.4% in April, the lowest since September 2008.”
Sorry, but in my humble opinion, that hardly suggests that there is a large pool of “excess” savings for the majority of Americans to run down to support everyday spending.