Wall Street desperately wants the stock market to return to the good old days. When interest rates were zero, like during the pandemic, the government was mailing checks everywhere, but everyone had lots of real money and used it to buy fake money. It seemed In that environment, any fool, or anyone on Wall Street, can buy just about any asset and just sit back and watch it rise in value. Stock prices didn’t just go up, they skyrocketed.
Wall Street has even concocted a pretty compelling story about how the market will return to this state. A rapid rate hike by the Federal Reserve would disrupt the financial system, create a hole in the real estate sector and cause job cuts. These have already hit industries like technology and media hard, but they will spread across the economy.This in turn recession This forced the Fed to change course, cut rate to revitalize the economy. After months of turmoil, markets returned to the low interest rate environment that characterized the pre-pandemic decade, Stock will be cruise control again. return to normal.
There is only one problem with the Wall Street story. It’s completely backwards.
“I think one of the big pricing mistakes in the market right now is the idea of cutting interest rates by the end of the year,” said Justin Simon, managing director of hedge fund Jasper Capital. “You need a crisis for that to happen, but I don’t think so.”
Instead, think about what the world would be like if rising interest rates didn’t destroy the US economy, it just reshaped it. In this scenario, growth slows down but continues. Consumers keep trying, no recession. Parts of the economy are hurting and inflation remains a concern, but there is no immediate danger that the Fed will be forced to turn. In this scenario, the stock market becomes unstable. There are winning stocks and losing stocks. Charts look ugly. The market may go sideways. Wall Street stock pickers may need to sweat a little to keep their customers happy.
“There’s a slowdown here and there’s going to be an acceleration from there,” said one legendary fund manager. “But the economy just feels like it’s going well.”
As inconvenient as it may be for Wall Street, the reality is that the new era of inflation is far from over — and it’s not scary. Cutting interest rates to zero was a move to revive a moribund economy. It was an emergency valve that we pulled out for so long that now it feels like normal for Wall Street. it’s not. Keeping interest rates low in a healthy economy is like pushing a healthy nine-year-old in a stroller. Sure they can, but they have to accept the fact that at some point aid starts to stunt their growth. Or, as one family office head told me, if the Fed has to rely on rate cuts to stabilize the economy, it’s because we’re all “a bunch of pansies that can’t handle falling real estate and stocks. , meaning that asset prices can only rise upwards.”
The bank failures and stock market crashes we’ve seen over the past year are disturbing, but they’re part of capitalism and not an anomaly. If our economic system were to undergo a drastic change like it just happened, there would be chaos. And while that might make life a little tougher for Wall Street investors, it doesn’t necessarily portend the rest of the economy collapsing, it’s just the beginning of something new.
backtracking is a bad sign
The pandemic has made the economy so strange that it’s hard to predict exactly what will happen next, but that hasn’t stopped Wall Street’s efforts. Analysts warn quarterly that a recession is on the horizon. If you wait half a year, you will definitely have a recession. Some argue that recession came We haven’t seen any of it, like family ghosts or socks in the laundry. Despite constant support from Wall Street, Americans are working, consuming, and helping their economy grow in the face of hopeless and bleak projections.
Earlier this month, the San Francisco Fed reported that consumers still have $500 million in savings What’s left of the pandemic’s stimulus and spending shifts.another recent Federal Reserve Survey Of the more than 11,000 Americans, most were pessimistic about the economy overall, but seemed less concerned when asked about their personal finances. Seventy-three percent of those surveyed told the Fed that they were “financially okay or comfortable.” ‘, and 63% said he could cover a $400 emergency if needed, which is near the highest number in his 10-year-old survey.
So far, there are no signs of any change in customer behavior, no sign of customers shopping less frequently, buying pure products or cutting prices.Richard Hein, CEO, Urban Outfitters
Underpinning America’s solid financial position is a strong job market. The US added 253,000 jobs in April, tying the unemployment rate to its lowest level since 1969, according to the latest monthly payroll report. The number of people claiming unemployment insurance is also Still near 40-year lows. And there are still many unfilled jobs.In April, when the latest data will be released Increase in job openings It was the highest level since January.
A strong labor market and healthy household balance sheets mean consumers haven’t stopped spending. Given the fact that consumer spending accounts for nearly two-thirds of the U.S. economy, it’s hard to imagine a sudden economic collapse while Americans are still willing to pull out their credit cards. Increase in retail sales A respectable 0.4%. car salesIt was sluggish during the pandemic due to supply constraints, but is starting to pick up. At best, Americans are adjusting their habits, buying cheaper products and postponing big purchases. The economy is changing, and consumers are changing with it.That’s what store executives like Walmart and TJ Maxx Seen in their sales. There are even signs that some consumers haven’t changed at all.that’s all bloombergJoe Weisenthal features management telling investors that no one is telling customers that a recession is coming.
“Right now, we don’t see any signs of a change in customer behavior, with customers shopping less and less,” Urban Outfitters CEO Richard Haynes said in a recent investor conference call. , there is no sign of buying pure commodities or cutting prices.”
Back in 2009, policymakers set interest rates at zero in hopes that the US economy would eventually grow enough to withstand rising interest rates. Well, that dream has come true. US consumers are pushing higher interest rates and higher inflation. It’s all happening at a time and speed that no one expected, and at a time that may not be favorable for stocks.
a choppy new world
Since the beginning of 2023, the stock market has been high on AI-driven hype and hopium, and we believe all will return to the way it was before. The former market winners who ruled the world of low interest rates are looking to make up for their losses in 2022. The tech-heavy Nasdaq is up 30%, while the S&P 500 has returned about 8%. When trades are made and portfolios are constructed to suit a particular environment, Wall Street has a way of convincing itself that past performance is actually an indicator of future returns. However, the coast is not clear.
A resilient U.S. economy sounds good for the stock market, but the Wall Street consensus treats rising interest rates as a temporary anomaly when it’s actually climate change. also means
This new normal will defy Wall Street expectations and, frankly, will result in a less exciting time for stocks.
Inflation may continue as robust consumer spending allows businesses to keep prices high without losing business. In a world where the Federal Reserve has to keep an eye on inflation, that means keeping interest rates higher for longer. It’s a world where savers can gain an edge over spenders, making it more expensive to borrow money. And the logic of investment will also change. If investors could guarantee a 5% return on their 10-year Treasuries, they would be less likely to put their money into startups and venture funds that may not see a 10-year return. Businesses will also be more cautious about spending, as highly leveraged financial institutions are at risk of failing. Sectors with debt-dependent business models, such as commercial real estate and private equity, will experience disruption over time. Torsten Srock, chief economist at Apollo Global Management, called this future a “recession not a recession.”
“15 years of money printing has created a significant bubble in asset prices,” he said in an email to clients earlier this month. “As a result, the big correction during this recession will not be in the economy, but in asset prices as the Fed continues to deflate the buy-anything bubble created by global easy money.”
This new normal will defy Wall Street expectations and, frankly, will result in a less exciting time for stocks. The pandemic era produced several years of record corporate earnings, but now wage inflation, consumer price sensitivity and rising borrowing costs are squeezing corporate profits. The time has come for investment professionals to determine the winners and losers in the market. It’s time to take a thorough look at your company’s balance sheet and see if it’s being run properly. All of this may sound basic, but in a bull market it could easily fly out the window (and it did).
“Yes, the Nasdaq is up 26%, but I don’t think we’re going to be in a bull market anymore,” Simon said. “From now on, we’ll move on to something a little more erratic or flat.”
This should be an interesting summer.
As with all things in investing, the key will be timing the transition between denial and acceptance of this new interest rate system by Wall Street. The problems facing the economy today are not the same ones we faced recently. Inflation has not yet been overcome, and no one knows how long it will take before it is contained. These new conditions are reshaping the American economy, not destroying it, and pushing it forward. There is no going back.
Lynette Lopez is Insider’s Senior Correspondent.