Stocks, bonds and precious metals plummeted again today as Wall Street reacted with continuing, unencumbered knee jerks to soaring inflation.
It appears there’s widespread distrust and a self-fulfilling fear among investors about how forceful the Federal Reserve will be as it tries to put the evil genie back in the bottle.
The S&P 500 is now officially in a bear market, down nearly 22% since it hit its most recent high on January 3rd.
Matt Phillips writes that these market moves highlight the deeply uncertain outlook after more than a decade of growth for stocks and gold and low bond yields that made borrowing more affordable than ever for investors and consumers alike.
So affordable, in fact, that U.S. consumers’ collective personal debt has risen to over $23 trillion – about $69,800 per citizen.
The S&P 500 benchmark index closed down 3.9% on the day. The Nasdaq composite index fell 4.7%. The yield on 10-year Treasuries climbed 0.22 points to 3.39%.
Plus, bitcoin is down another 14%+ over the past 24 hours, and rates on the 30-year fixed mortgage hit 6.13%.
Spiking prices are overshadowing the Fed’s policy meeting tomorrow and Wednesday, where the Federal Open Market Committee will almost certainly hike interest rates by at least another half a percentage point.
Inflation is driving prices upward at the highest level in over 40 years, leaving the Fed with little wiggle room to cut interest rates in the face of dizzying markets — as it has done repeatedly in recent years, most recently in 2019.
For now, the markets will have to figure out how to live without the support of the Fed.
By Dave Allen for Discount Gold & Silver
Stocks, bonds and precious metals plummeted again today as Wall Street reacted with continuing, unencumbered knee jerks to soaring inflation.
It appears there’s widespread distrust and a self-fulfilling fear among investors about how forceful the Federal Reserve will be as it tries to put the evil genie back in the bottle.
The S&P 500 is now officially in a bear market, down nearly 22% since it hit its most recent high on January 3rd.
Matt Phillips writes that these market moves highlight the deeply uncertain outlook after more than a decade of growth for stocks and gold and low bond yields that made borrowing more affordable than ever for investors and consumers alike.
So affordable, in fact, that U.S. consumers’ collective personal debt has risen to over $23 trillion – about $69,800 per citizen.
The S&P 500 benchmark index closed down 3.9% on the day. The Nasdaq composite index fell 4.7%. The yield on 10-year Treasuries climbed 0.22 points to 3.39%.
Plus, bitcoin is down another 14%+ over the past 24 hours, and rates on the 30-year fixed mortgage hit 6.13%.
Spiking prices are overshadowing the Fed’s policy meeting tomorrow and Wednesday, where the Federal Open Market Committee will almost certainly hike interest rates by at least another half a percentage point.
Inflation is driving prices upward at the highest level in over 40 years, leaving the Fed with little wiggle room to cut interest rates in the face of dizzying markets — as it has done repeatedly in recent years, most recently in 2019.
For now, the markets will have to figure out how to live without the support of the Fed.
But the market is doing the Fed's work for it anyway by pushing borrowing costs higher, especially through big jumps in market interest rates during the last two trading sessions.
The yield on the 2-year Treasury — the part of the yield curve the Fed controls directly — is at its highest level in 15 years.
It's risen an extraordinary 40 basis points just since Thursday's close, after Friday's hotter-than-expected inflation report. That kind of move in just two days is exceptionally rare.
The 2-year yield briefly topped that of the 10-year note this morning, an event that's seen as a harbinger of recession.
Traders are now betting the FOMC will raise rates by 175 basis points by September, which would mean at least one 75-basis point move between now and then.
After the latest inflation numbers were released on Friday – showing an increase of 8.6% in May – stock, bond and precious metal markets adjusted quickly.
Interest rates rose and stocks, gold and silver fell as investors figured, correctly, that it meant the Fed will raise rates more aggressively.
This pattern has been evolving since last fall, but it shows something interesting that deserves some credit where credit is due:
Even as inflation has become a national crisis, the Fed is the only Washington institution that’s focused on bringing it down despite the pain it entails.
Last decade, the Fed was often called the "only game in town" because it sought to stimulate a weak economy while other branches of government sat on their hands.
And now, it's in that role again, even as the circumstances have turned 180 degrees.
Indeed, that the Fed is willing to tighten money, even at the cost of a steep stock market downturn and a potential, if not likely, recession, shows why a politically independent central bank is so important to begin with.
There are plenty of things the government could do to try to address the mismatch between supply and demand in the economy.
It could raise taxes (particularly on the rich) or cut spending, aiming overall to curtail demand. Congress and the White House could also take steps to increase the supply of goods and services where bottlenecks exist, like in energy.
But in the real world, the one we actually live in, our elected officials aren't doing those things, instead leaving it to the Fed to try to reduce demand by raising rates — despite those tools being blunt instruments for the task at hand.
Fed tightening tends to most directly affect interest-sensitive sectors, such as housing. And it can have unintended consequences on the supply side of the economy if higher rates make companies reluctant to invest in new capital.
And nobody on Capitol Hill is talking seriously about a new wave of fiscal austerity (i.e., spending restraints).
On the Democratic side of the aisle, talk of a redesigned Building Back Better bill that includes significant deficit reduction has been just talk.
On the other side, Republican Senator Rick Scott of Florida pitched the idea of low-income Americans paying at least some federal income tax (should Republicans win control of Congress in November), implying a tax increase on millions.
But Scott backed down after others in his own party said, “Bad idea.”
The Biden administration has taken steps to try to address specific supply snafus – like ensuring 24/7 work at shipping ports – but it hasn’t eliminated Trump-era tariffs on Chinese imports.
That leaves Jerome Powell and his Fed colleagues who are preparing to meet in Washington's Foggy Bottom neighborhood as the only people in town ready to try to fight inflation, even if it causes more pain.
Pete Gannon reminds us that we won't know when inflation has peaked “until it has” (I have a feeling we’ll be needing at least a few more months before we see that).
And we won't know whether a recession will hit until we're already in one (the National Bureau of Economic Research will let us know).
And we certainly can't predict how the markets will react following either one.
Although last week, the Leuthold Group’s chief investment strategist James Paulsen, reported this good news:
"Normally, the stock market struggled the most as inflation was moving up but did fantastic subsequent to the inflation peak — generally even in the event a recession materialized."
Paulsen's findings were based on an analysis of 17 prior major inflation peaks since 1940.
The bad news? A recession has ensued in nearly half of the cases (see chart above).
And, just for the record, what did too big to fail Morgan Stanley’s CEO James Gorman tell conference attendees today in NYC? "It’s possible we go into recession, obviously, probably 50-50 odds now."