Grizzly

As the Fed tries to tame enemy #1, stocks are in the red — but the economy’s stuck in a gray zone

Tuesday, June 21, 2022 by Robinhood Snacks |
The market walking ahead of the economy (Owen Smith/Getty Images)

The market walking ahead of the economy (Owen Smith/Getty Images)

The sun also rises... the stocks, not so much. The S&P 500 is down 23% this year after stocks slipped deeper into a bear market last week. ICYMI: the Fed went off script and hiked interest rates by three-quarters of a percentage point (higher than the half point originally expected). Fed Chair Powell (#JPow) said we could get another big hike in July.

  • Inflation was up a worse-than-expected 8.6% in May from last year. Now JPow's leaning further into higher interest rates, which discourage borrowing/spending (think: high credit-card interest) and encourage saving (think: higher yields).
  • Higher rates cool consumer demand, which should cool prices. But they also lower companies’ earnings-growth expectations, which lowers corporate valuations (see: slumping stocks).
  • The 10-year Treasury yield topped its highest level in over a decade last week as investors anticipate more inflation + higher rates. When yields rise, US gov’t bonds become more attractive relative to riskier investments like stocks.

The market looks forward... We know the economy isn't the stock market. Prime example: mid-2020, the market was sipping prosecco on a Hamptons yacht (records on records) while the economy was eating Safeway frozen peas in bed (record GDP shrinkage). Cue: trillions in stimmy $$, disappearing interest rates, and a big econ rebound. Now:

  • Yay area: The tight labor market is looking strong with ultralow unemployment, and manufacturing ramped up last month despite supply snags.
  • Gray area: We're starting to see more layoffs as the Fed tightens its belt, and consumer spending surprisingly fell in May as inflation strained savings.
  • Nay area: The Fed slashed its outlook for 2022 economic growth (to 1.7% from 2.8%), and the risk of a recession has soared.
THE TAKEAWAY

It’s the econ-flation paradox… Inflation hurts the economy, but so does fighting inflation. To tame enemy #1, central banks need to slow the economy (which is sinking stocks). The sweet spot: cooling the economy without causing a recession and igniting a market meltdown. The best news could be if prices (especially oil and gas) show significant signs of easing.