March 2022 Q&A
You asked, I answered (and Zack answered a few too). Enjoy!
How do you explain the poor performance of the stock market during the past several months despite what seems to be considered a solid overall economy?
As I’m writing this, the Dow has regained a 35,000 level, the highest since early-February, and the NASDAQ is at its highest level since mid-January. So the performance has not been desperately bad, and the NASDAQ is up 6.3% in March itself. The Dow and S&P are down less than 3% so far this year.
But as you point out, the economy has continued to expand. That’s true, but something has radically changed with respect to market expectations and that’s the predicted trajectory of interest rates. Inflation isn’t transitory. The Federal Reserve has kicked off what is likely to be an extended tightening cycle. That diminished the multiple on corporate earnings while also expanding the risk of recession. If anything, I’m surprised the market hasn’t slipped further, and it still might.
Remarkably, the market has largely been bouncing back during the Ukraine/Russia conflict even as key input prices have surged. On top of that, omicron has shut down parts of Shanghai and other parts of China, extending supply chains issues and pushing up inflation.
What is this talk about economic hard landing or soft landing? What happens in each scenario?
Think of the economy as a plane. In a hard landing, the economy crashes and burns, and we head into a recession. In a soft landing, the Fed raises interest rates gradually enough to suppress inflation without prompting an excessively sharp slowdown in hiring and economic growth. Generally, speaking, the Federal Reserve’s record on engineering soft landings is poor. There have been eight interest rate tightening cycles since the early-1980s. Six have ended in recession (not implying causation here).
You can read more about it in the interest rate primer we published yesterday.
Since 2008 we printed and infused insane amount of liquidity through lower rates/QE/QE2 and other programs, but nothing caused inflation until we got hit with pandemic in 2020. Why?
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