Why the market will not do what you expect

Everyone and their mother is anticipating a recession which will drop the stock market this year. People are whining that there is no catalyst for the market to be pumping right now.

Due to the macro economic headwinds we face, bad news is good news. Higher unemployment, bank failures, and declining earnings are bullish. They’re bullish because they will bring inflation down quicker than expected. For example, Powell referred to tightening credit conditions from bank failures as equal to a .25 rate hike. Paired with good news of inflation reducing over the past few months, we are starting to see the light at the end of the tunnel for rate hikes.

In the last FOMC, Powell didn’t leave the door open for much more rate hikes. He’s followed his guidance from the beginning, this relatively dovish guidance is reassuring. The market is forward looking. At the current moment, rate cuts are on the table by the start of next year (possibly earlier). Rate hikes are main reason earnings are declining, banks have massive unrealized losses and jobs are being lost. Thus rate cuts will be a useful tool in nullifying the mild recession we face (provided inflation continues its trend downward).

We experienced a large 20% drop last year because investors had no idea how entrenched inflation was. This led to uncertainty about when rate hikes will end. As the future of rates become more certain, the market will correct higher. Even in the midst of a recession, the market could rise if there is a clear timeline for rate reductions.