Forget a soft landing. The market’s best hope is a « growth » recession

Liam adam2022-09-26

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The Fed darkened its tone at last week’s policy meeting, warning of serious economic trouble ahead, and markets finally took the central bank at its word.

The S&P 500, already in a bear market, saw another major drop on Friday. The Dow briefly fell into bearish territory and closed at its lowest level since 2020.

But while investors have given up on whether the Fed will achieve a “hard” or “soft” landing, there is a third intermediate possibility where it all feels type of bad for a long time. At this point, this economic purgatory may be investors’ best hope.

What is happening: The Fed has had the same goal since it started raising interest rates to fight inflation in March. He wants to achieve a soft landing – that Goldilocks ideal of cooling the economy enough to drive prices down but not enough to cause a recession. But the idea has become increasingly unsustainable as inflation rates remain stubbornly high while economic data softens.

The new target appears to be a so-called growth recession: a prolonged period of weak growth and rising unemployment. The pain is more acute and lasts longer than that of a soft landing, but a “growth” recession does not pull the whole economy into contraction as a real recession would. It looks like a recession and looks like a recession, but it’s not a recession – at least not officially.

The central bank’s updated economic projections last week showed that it expects to land in this scenario. Policymakers have revised down their economic output forecasts through the end of 2024 and raised their unemployment rate forecasts from their last projections released in June.

Last week, Fed Chairman Jerome Powell acknowledged that the dream of a soft landing was over. « Reducing inflation will likely require a prolonged period of below-trend growth, » the president said after announcing another three-quarters percentage point hike in interest rates. There “will most likely be an easing of labor market conditions,” he added.

A growth recession is always painful. In the best-case scenario, said Joe Brusuelas, chief economist at RSM US, between five and six million American jobs would have to be lost to bring inflation back to the Fed’s 2% target.

Declaring the recession might just be an academic exercise anyway, said Kevin Gordon, senior director of investment research at Charles Schwab, because people are already hurting economically.

Low-income Americans are experiencing negative real wage growth, investors are losing big bucks across multiple asset classes, homebuyers are locked out of an overpriced housing market, and renters are struggling to pay their rents. leases.

The bottom line: High house prices, struggling tech stocks, runaway inflation and war in Europe are weighing on investors. Adding to the noise is the Federal Reserve’s new warning that it is not afraid to cause economic hardship. Both Goldman Sachs and Bank of America lowered their annual S&P 500 targets last week.

« We can expect continued market turbulence for some time, » said Brad McMillan, chief investment officer of Commonwealth Financial Network.

But there is a silver lining. « The Fed is performing surgery on the economy right now, » McMillan said. “In the short term, it’s painful. But in the long term? It is a healing process that sets the stage for healthier economies and markets.

Markets plot new plan to save UK

Britain’s new government on Friday announced a sweeping plan to rescue Britain’s economy from recession.

Announcing the biggest tax cuts in 50 years while increasing spending, Finance Minister Kwasi Kwarteng defended the government’s focus on growth despite lingering inflation problems as a « new approach to a new era ».

Markets immediately made it clear that they weren’t big fans of the approach, reports my colleague Julia Horowitz.

The pound crashed below $1.10 mid-afternoon, hitting a new 37-year low against the greenback, before plunging to its lowest level ever against the US dollar early Monday . UK government bonds also sold off sharply, pushing yields higher.

Investors have expressed confusion over the unconventional approach that would see the government borrow tens of billions more to stimulate spending, just as the Bank of England tries to cool the economy to bring down inflation. The central bank on Thursday pushed its key rate to its highest level since 2008. It was the seventh hike in interest rates since December.

New Prime Minister Liz Truss defended her government’s controversial announcement in an exclusive interview with CNN’s Jake Tapper on Friday. Truss told Tapper that by cutting taxes, his government « is getting businesses to invest and we’re also helping ordinary people pay their taxes. »

Marc Benioff is obsessed with Twitter

Marc Benioff and Elon Musk have something in common.

The president and co-CEO of Salesforce loves Twitter. If it were up to him, he told CNN’s Poppy Harlow in an interview, he would « absolutely » buy the social media platform.

But unlike Musk, he won’t make an offer.

« I will never buy Twitter, » Benioff told Harlow. « Because I want something doesn’t mean I’m going to get it…I’d like to go get a sundae right now with three scoops of ice cream, chocolate sauce and whipped cream and a cherry. But I’m not gonna get it. »

His comments come amid Twitter’s legal battle with Elon Musk, who offered to buy the company but later terminated the deal, my colleague Paul R. La Monica reports.

Still, he thinks there could be a huge unrealized benefit for the company. Twitter, he said, « is the biggest, most unrealized, least monetized brand » in tech, adding that « it’s an incredible company, an incredible brand, an amazing platform. » incredible form and can do incredible things for the future ».

Salesforce considered a Twitter deal in 2016. But it didn’t, as Salesforce investors balked at the idea of a Twitter takeover.

Salesforce finally closed another big deal, buying workforce collaboration app Slack for $27.7 billion at the end of 2020.

Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan and Cleveland Fed President Loretta Mester are all speaking.

Later this week: US consumer confidence, US new home sales and the end of the third quarter.

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Liam adam2022-09-26