It doesn’t matter if the US economy goes into recession or not: The stock market — for the foreseeable future — is royally screwed.
On the surface, the problems facing the market and the economy may seem the same. Both are trying to deal with excesses, but those excesses are wildly different.
On the economy side, the US is experiencing a violent bout of inflation created by the pandemic; pent-up demand collided with a lack of everything from workers to widgets. Like a swarm of locusts, inflation is eating up economic growth, pushing up prices and nullifying wage increases. But some of the pandemic-related conditions that got us here — like clogged supply chains — are normalizing. And there’s a chance we can solve the dislocations of the past two years without barreling into a full-blown recession.
The turbulence the stock market is experiencing is different. It’s a ferocious correction over a decade in the making — the comedown after a superhigh. We knew that the stock market had formed a bubble and that it was going to pop as interest rates went up. What we did not know was how violent the comedown would be — the inflation bedeviling the economy has prompted the Federal Reserve to hike interest rates faster than Wall Street had imagined. That, in turn, pushed the stock market off a cliff so steep that we still cannot see the bottom.
“It doesn’t matter whether it’s technically a recession,” one legendary fund manager told me. “It’s a bear market. We sit in the middle innings.”
The economy may not be screwed …
The hangover the global economy is suffering through is a well-known story by now. Kicking the economy back into gear has been like starting an old car that had been left for years outside in the Saskatchewan snow. Snarled supply chains, chaotic housing demand, a labor shortage, and a war pushed up inflation around the globe. US consumer prices rose by 7.7% in October over last year, lower than the expected rate of 7.9% — suggesting that perhaps inflation has peaked and will continue to cool. It’s a welcome sign, but still much higher than the Fed’s target of 2%.