OPINION: Amid the dark headlines, it’s easy to forget that unemployment has reached near-historic lows and corporate capital expenditure is up. And no, we're not heading for a recession.
If ever poetry could explain the stock market, this may come closest to capturing the sour mood that’s about to deliver a seventh consecutive week of stock-market losses.
That hardly mitigates the pain of the last six months of stock-market SPX, +0.01% declines, but it doesn’t justify the grim warnings of a looming U.S. recession. Recent price spikes in food and energy have already started to sour consumer sentiment, making the Fed’s task of price stabilization much easier to achieve. Growth will surely slow from here, but it’s hard to imagine a sharp collapse in demand given that consumers and companies have rarely been this flush.
Stocks have been falling because in this environment no one gets through an investment committee with sunny assumptions about either inflation or growth. Meanwhile, uncertainty around both sets of numbers means it’s hard to tell what’s cheap. When rates were falling reliably and earnings were predictable, it was easy to talk yourself into price-to-earnings multiples in the high-20s. Today, investors aren’t sure stocks are bargains now that the S&P 500 multiples are now in the high teens.
Plenty of risks Just how much damage is done as the economy “downshifts” is hard to predict. If the Fed is to fulfill one mandate to deliver “stable prices,” it will have to settle for a lower level for its other mandate of “maximum employment.” Loan defaults will have to rise from their own historically low levels. The housing market will have to stabilize.
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