Don’t Let the Stock Market Rally Fool You
You may want to feel optimistic. The S&P 500 has rallied nearly 15% from its mid-June low. Inflation dropped from June’s 9.1%. And investors seem bullish that rate increases could be slowing after the Fed’s last 75 basis points hike. But market makers warn against misreading the economy. This is just the breath before the plunge. The Fed will not relent, and the economy will continue to contract.1
Morgan Stanley cautioned the bear market will last longer despite the recent rally. They predict stocks will slide in the second half of the year. Inflation, slow growth, and high interest rates will drag prices down and keep them there. Clients were told to expect a recession as the Fed keeps tightening.
JPMorgan Chase CEO Jamie Dimon says storm clouds are on the horizon. He sees a 30% chance of a ‘harder recession’. More concerning, he predicts a 30% chance of something worse than a ‘harder recession’ hitting. Dimon expects the Fed to raise interest rates to 4% from 2.4% now by years end. 2
Peter Boockvar is the Chief Investment Officer of Bleakley Advisory Group, a $8B wealth management firm. Boockvar doesn’t trust the Fed to properly manage the economy. He believes they will make a mistake when it comes to raising rates. They will do the wrong amount at the wrong time and crash the economy.
In addition, Boockvar doesn’t believe the market is seeing how the recession is spreading to other parts of the economy. The latest reports on housing and manufacturing don’t paint a positive picture.
National Association of Home Builders/Wells Fargo Housing Market Index dropped into negative territory. The index has not been negative since 2014. This is the eighth month in a row that builder confidence fell.
Boockvar cautioned that the Fed is stoking another real estate bubble. When it bursts, home equity will be wiped out. Despite higher costs for land, labor and materials, 20% of builders in August reported lowering prices. They are growing desperate to increase sales and limit cancellations. Mortgage rates are also hurting demand. Rates have almost doubled since the beginning of this year. Total volume of single-family starts will post a decline in 2022. This is first decrease since 2011.
NAHB chief economist Robert Dietz said, “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.”
Manufacturing is also taking a downturn. The New York Fed creates the Empire State Manufacturing Survey. The survey fell by 42 points in August. It fell because of a collapse in new orders and shipments. 3
The Federal Reserve Won’t Waver from 2% Inflation Goal
William Dudley is a former New York Fed President. He said markets are misreading the Fed’s recent statements. Powell had opened the possibility that the Fed may slow rate hikes as conditions warrant it. Markets took this to mean the Fed will cut interest rates in 2023. Instead, Dudley thinks rates will continue to climb past 4%.
“I think the Fed is going to be higher for longer than what market participants understand at this point,” Dudley said.
The market doesn’t believe that the Fed is serious about hitting its 2% inflation rate. “The problem here is that the market doesn’t believe Powell when he says he wants to get inflation back down to 2%. They think basically that [if] inflation is 3% in the middle of next year and the economy is soft, the Fed will relent,” Dudley said. “I believe Powell means what he says, but it’s going to take time for the market to understand that.”
Forecasts that the Fed will soon start cutting rates are “a puzzle to me,” Mary Daly, president of the San Francisco Fed, said in an early August interview, adding the hiking cycle is “nowhere near almost done.” 4
The current stock market rally is fueling false optimism. The idea that the Fed will stop raising interest rates is wishful thinking. Experts believe this rally is a small peak before the economy slides into a deep valley. Boockvar recommends investors move their money into commodities, especially precious metals. A Gold IRA can provide real security and stability to protect your retirement funds.