Will Stocks Go Back Up?

Will Stocks Go Back Up? The stock market’s been breaking a lot of records recently, but mostly for all the wrong reasons.

 

Shares plummeted more than 20% over the first six months of 2022, marking the worst opening half to a year since 1970.

 

Furthermore, the S&P 500 also clocked one of its largest daily losses in May, when the benchmark index saw 4.04% wiped off its value within a mere 24 hours. To put this into context, a drop of that magnitude has never occurred previously other than during the pandemic crash of 2020.

Indeed, with just a few notable exceptions, almost every industry seems to have been affected in some way or another.

 

While there are plenty of reasons as to why equity prices have fallen lately, one of the most important appears to be the high level of inflation we have right now.

 

In fact, it’s out of control. Years of quantitative easing (QE) by successive Federal Reserve chiefs have seen to that, as first Ben Bernanke, then Janet Yellen, and finally Jerome Powell have all lent their names to respective fed puts.

 

But the so-called “everything bubble” of the last ten years has come home to roost. The Fed’s lax monetary policy – as well as a profligate Wall Street that exploited generous government repurchase agreements – could never remain in place for too long.

 

So it makes sense that devaluation and high-interest rates are the norms now. Stimulus measures during the Covid-era were of astronomical proportions, and that couldn’t go on forever. It had to be paid back some time, and that time looks to be now.

 

There’s an irony that this should happen on Jerome Powell’s watch, though. When first appointed to the Federal Reserve chair in 2018, Powell appeared to be reversing the asset-inflating policies that Yellen had brought about.

 

However, as is often the case, subsequent events intervened. Powell was forced to underwrite a flailing economy in 2019, leading to stock valuations that had never been so high in the previous 20 years.

 

What happened in early 2020 exacerbated the situation further. Shares tumbled in the wake of the coronavirus outbreak, and Powell had no choice but to implement both direct and indirect forms of QE again. Stock prices erupted, and one of the wildest bull markets in history got underway.

 

But was the Powell Put the straw that broke the US economy’s back? And, is there really any hope that the market could recover anytime soon?

 

The rate at which inflation has risen this year appears to have taken both industry experts and regular consumers by surprise.

 

For instance, current Treasury Secretary Janet Yellen recently conceded that her initial assessment of the threat of soaring food and energy prices was wrong.

 

She had assumed the inflation spike of 2021 could be explained by the rapid economic recovery arising from the first wave of Covid-19 vaccinations, overlooking or ignoring other potentially pertinent factors in the process.

 

Of course, with hindsight, we now know this is not the case.

 

Worryingly still, Yellen seems pretty sanguine about the risk of an actual recession occurring in the US. And, given the White House recently tried to obfuscate on what would constitute one at the present moment, it doesn’t inspire confidence that government officials really know what it is they’re doing.

 

This takes us to the central issue. The Federal Reserve just announced plans to hike interest rates by a massive 75 bps, targeting a range of 2.25% to 2.50%.

 

There are good reasons to do this now. Business activity contracted for the first time since 2020, the housing market slowed, and jobless claims are also up too.

 

What’s certain, however, is that the era of QE is over. Instead, we’re on the path to further quantitative tightening (QT) – which is terrible news for bullish investors everywhere.

 

Despite these developments, it’s not all doom-and-gloom. The rate rise was widely expected, and, as Chairman Powell said, it’s “not something we can avoid doing.”

 

Moreover, there are signs that at least some analysts believe there’s light at the end of the tunnel. For example, Bank of America strategist Mark Cabana thinks the Fed will cut rates in late ‘23, staving off what will be by that time a mild recession.

 

If that should happen, it will coincide with a broader cessation of QT too. Indeed, the Fed has history here, having cut rates in 2019 while also declaring an end to its tightening measures as well.

 

So there is a route out of QT, only it’s unlikely to give any succor to investors until the end of next year. However, if the markets begin to price in the moves early on, stocks could rally well before the advent of the actual cuts.

 

To most people, two consecutive quarters of negative growth means we are in a recession.

 

Whether Joe Biden wants to argue it’s the National Bureau of Economic Research’s Business Cycle Dating Committee that gets to decide this is simply not the point.

 

The economy is in a really bad place today, and the Fed has tacitly acknowledged this with its latest interest rate rise.

 

But for those banking on a quick recovery in the near future, they might end up disappointed.

 

Yet, if you look hard, you will still find a few optimistic voices crying out in the wilderness. Which, at this point in time, is little consolation and probably not worth clinging to tightly.

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