By DAN WEINBERG
Dan Weinberg is chief economist at Allsquare Wealth Management in Albany. He may be reached at (518) 456-8900.
The Federal Reserve (Fed) recently changed its tone from “soft landing” to “more pain for financial markets and rising unemployment.” Policymakers intend to continue raising interest rates until the economy slows enough to lower inflation closer to 2%. The Consumer Price Index rose 8.5% for the 12 months ending July 2022.
The stock market reacted by dropping over 3% the day of the Fed’s announcement. Further market declines are likely, to the extent that the slowdown reduces spending and corporate profits. Economists are currently forecasting a 1 to 2% rise in unemployment, which is up to 2 million jobs lost. Fed Chairman Powell noted it will take months for this policy to play out.
Yet, the pain on Main St. may be manageable. One million jobs are currently unfilled. Gasoline and other commodities prices have already started declining. Consumer spending, corporate balance sheets and bank liquidity are all at healthier levels than at the beginning of most recessions. The current unemployment rate of 3.5 percent is one of the lowest in 50 years.
In our view, timing is one of the biggest concerns. First, the Fed raises interest rates. Second, banks tighten up on lending. Third, the economy slows and inflation drops. If this process takes less than six more months, we believe the stock market could rally before year-end.
Regardless of the exact timeframe, higher interest rates generally provide attractive opportunities for bond investors. Stock investors may or may not wish to “time” this economic cycle and buy stocks on dips. While we strive to buy quality stocks at low prices, precise forecasting is difficult. Consequently, we are also monitoring the Federal Reserve’s balance sheet, Congress’ deficit spending, the global energy shortage, and rising global tensions.
Finally, psychology is a factor. Reduced business and consumer confidence often leads to reduced economic growth. Wage inflation usually slows after inflation expectations slow. In summary, we anticipate more economic pain in the coming months along with an increasing probability of a recession. Nevertheless, we note that many Wall St. analysts believe any recession will be a mild one. And while Wall St. often looks ahead for the light at the end of the tunnel, individuals may also want to keep an eye on current developments as they unfold.