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It's All About Interest Rates
A few things have happened in the past couple of days. But most people are focused on the stock market, which dropped sharply, bounced, and then pulled back again. As a result, there have been a number of headlines about how the bear market is back, and so forth. For the average investor, this kind of volatility is worrisome. How bad can it get?
Why is the Market Going Down?
The big question on everyone’s mind is, why is the market going down? The answer, in short, is interest rates. Interest rates are up. When rates go up, stocks tend to go down. And this takes us to the next question: why are interest rates up—and will they continue to rise?
Are we in a Recession or Not?
The first estimate of national economic growth, the gross domestic product (GDP), came in this morning at an annualized, quarter-on-quarter growth rate of –0.9 percent. This is better than last quarter’s number of –1.6 percent, but it is still the second quarter in a row of decline. By some definitions, this means we are now in a recession, and you can expect to see that all over the headlines in the next several days.
Rising Inflation: Where Does It Go from Here?
We’ve received numerous questions about our inflation outlook over the past few weeks. In some cases, it seems investors are beginning to throw in the towel on traditional asset classes in favor of more inflation-sensitive areas like commodities, real assets, and managed futures, which have had a good run as of late. Before making wholesale changes to portfolios, though, it’s important to understand where inflation may be headed, as opposed to where it’s been.
Yesterday was another bad down day in the markets. Not only that, but other assets are getting hit as well, with bitcoin getting hit even more than the general financial markets. As worries rise, when will the bleeding stop?
Worries Rise as Markets Drop
The economy seems to be doing well, with job growth still at high levels, consumer spending still healthy, and businesses continuing to invest. But the stock market—which is supposedly a barometer of that economy—is acting very differently. The market has fallen significantly from its peak at the start of the year and, more recently, has taken a sharper drop. What’s going on here, and will it continue?
Why is the Market Going Down?
One of the outcomes from the recent Fed meeting, where the Fed decided to raise rates for the first time in years, was a clear plan to continue to raise rates over the next year. Fed Chair Jerome Powell added fuel to the fire yesterday when he said that the Fed was willing to raise rates even faster than the meeting notes suggested. The Fed is now clearly focused on bringing inflation back down, even if it means slowing down the economy.
Is a 2022 Recession on the Horizon?
Investor Expectations Vs. Realty
We are not always as lucky as I have been to see well-founded expectations met, especially in the economic realm. In the past week, I have written about interest rates and valuations, about the taper tantrum and Wordle, and about economic and market risks. All of them implicitly depend on the expectations that investors, as a group, hold and, even more importantly, on the relationship between those expectations and what happens. Expectations are often systematically biased by recent events. Bad news is expected to be followed by more bad news, and good news by more good news. That is how we are wired to think.
The Stock Market Is Not Crashing
Yesterday, I got two emails requesting a response to the current market pullback. I received another couple of emails referring to a prediction (by a very well-known investor) that the stock market was now inevitably poised for a 50 percent decline. Clearly, the anxiety level is high, which makes sense given the multitude of worries and things that could go wrong. We have the Omicron wave, inflation, interest rates, a potential war in Ukraine, and on and on. Is this the end of days—again?
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