Stocks before the market: The Fed may have changed the markets forever
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It’s safe to say that the global economy is in pretty bad shape right now: most economists think so on the brink of recession. But US markets don’t seem to care. Stocks closed their best week since mid-June last Friday and continued into Monday.
So what does it give? A decade of money flowing from the Federal Reserve to the banks has created two economies, says Nomi Prins., Former Managing Director of Goldman Sachs and “Persistent Distortion: How Financial Markets Left the Real Economy Forever“. Wealthy Americans and corporations benefited directly from years of low rates, which sent money into businesses and stocks while Main Street wages suffered a deceleration. and little help. Prins says we’re dealing with one now “permanent distortion”, where market behavior and economic prosperity are unrelated.
What’s happening: The stock market has always been unpredictable. Analysts and economists try to predict or apply some sort of rational explanation to market movements, but the reality is that they are often guesses (sound, educated guesses, but still guesses).
This is becoming more and more obvious super rare, the volatile markets we are seeing today. Federal Reserve officials have made it clear that they have no intention of moving away from a policy of aggressive rate hikes to combat persistent inflation. The economic data is dark and CEOs, economists and global organizations Alarms are sounding about an imminent recession.
But markets that have taken quite a beating this year are back at multi-month highs. It has become pointless to try to apply economic reasoning to stock markets, Prins told me in a recent interview.
Another mandate: The Federal Reserve is mandated to keep unemployment and prices under control, but the Fed’s third unofficial mandate is to stimulate markets, Prins said. “We’ve seen that in the last 14 years,” he added. Beginning in 2008, overnight bank lending rates in the United States were set low, close to zero, and Fed officials engaged in an aggressive monetary easing policy in which they pumped money into the financial system by buying Treasury securities from the US government. This created a widespread idea in the financial world that the stock market would rise no matter what, he explained.
Most of that stimulus flowed into the markets and not out into the broader economy, creating a world where investors became dependent on the Fed while the larger economy suffered, Prins said.
Credibility problem: When the Federal Reserve began raising rates earlier this year, officials publicly explained how important their credibility is to successfully lowering inflation rates. If the Fed succeeded, they said, Americans would need to believe that the central bank is firmly in the fight to lower prices.
But investors don’t believe it, says Prins. That’s why they keep thinking a policy pivot is coming even when the Fed says no. They understand, says Prins, that eventually the Fed will return to a long-term policy of supporting markets.
Meanwhile, he says, it’s Main Street, not Wall Street, that’s feeling the brunt of these interest rate hikes, rising mortgage and lending rates and a slowing job market.
Recession predictions are a dime a dozen these days, but some are more dire than others. Here’s how: Nearly two-thirds of business economists believe the United States is in a recession or will be in the next 12 months, according to a recent survey by the National Association for Business Economics.
More than half of NABE respondents said they believed the United States was more than 50 percent likely to experience a recession in the next year, while 11 percent said they believed the nation was already in one, according to the poll released Monday. reports colleague Alicia Wallace.
Despite the strong recovery from the Covid-19 pandemic, the US economy has been weighed down for months. historically high inflation. The Federal Reserve has stepped up its efforts to combat high prices through a a series of successful interest rate hikes.
It has been affected by the high inflationary environment price increases by companies – 52% of respondents said that the prices they charge increased in the third quarter – but the latest survey indicates that some prices have started to fall. 9% of respondents reported falling prices, the highest share reported since January 2021.
The survey also showed that the cost of materials in the third quarter was at its lowest level since April 2021.
The shortage of raw materials and labor continues to hamper the operation of companies, according to the survey. The proportion of respondents reporting shortages has remained close to record levels.
Rishi Sunak, the third Prime Minister of Great Britain seven weeks, will face the enormous challenge of projecting stability after a period of historic political and financial chaos. But his other task – through a shepherding of the country recession – is ready to be just as awesome, reports colleague Julia Horowitz.
Suna said on Monday that his “highest priority is to unite our party and our people” in the face of “a profound economic challenge”.
Sunak campaigned for Labor over the summer with a promise to help households cope with the rising cost of living, which is holding back spending for many. He said he would cut taxes, but only after price pressures eased.
However, the economic outlook has worsened significantly since then, not least because of the market turmoil created by Truss’s now-abandoned plan to cut taxes as quickly as possible and boost government borrowing.
Investors will be watching closely in the coming weeks for clues about Sunak’s plans to turn things around.
In addition: The Conference Board is expected to release October’s Consumer Confidence, which measures consumers’ level of confidence in the economy, at 10 a.m. ET.
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