Soft landing? Or the softest landing?
Investors seem to be banking on the economy continuing to slow, but not too much. And that the Federal Reserve's interest rate hiking pause is now a full stop. What if the market is wrong?
Fans of Stephen Colbert’s old Comedy Central show (before he took over for David Letterman at CBS) should recognize the joke in my headline. Colbert’s fictional uber-conservative talk show host persona used to make light of former President George W. Bush by asking his audience — in the interest of “truthiness” — if GWB was a great president or the greatest president. I kind of feel that investors are playing a similar game with their hopes about the economy. Are we headed for a soft landing or the softest landing?
The latest jobs numbers, coupled with expectations that the Federal Reserve is done raising interest rates, have led to another big rally on Wall Street Friday. Stocks have gained every day this week. The hope is that the Fed is going to defeat inflation without causing a major pullback in the economy. But these so-called soft landings are elusive. Some would argue that they’re a total fiction, kind of like the economic version of Bigfoot or the Loch Ness Monster.
Jon Maier, chief investment officer at Global X ETFs, told me this morning that the market may be underestimating the possibility of more rate hikes from the Fed. Inflation could pick up again. And Fed chair Jerome Powell made it clear during Wednesday’s press conference that the central bank is not thinking about cutting rates just yet.
But Maier also noted that the downside risks to the economy could be bigger than investors are expecting. The resumption of student loan payments following a lengthy moratorium could put a damper on holiday spending. The housing market may show more signs of strain now that mortgage rates have spiked to near 8%, a more than two-decade high. And the threat of a government shutdown hasn’t gone away either. That could hurt GDP in Q4 as well.
So “bad news” for the economy may not necessarily be “good news” for the market.
Stephen J. Rich, chairman & CEO of Mutual of America Capital Management, said in a report Friday that due to the expectation that “rates will be higher for longer during 2024, a soft landing that avoids a recession and continues to support the wage and employment gains that the middle class has made is becoming less likely.”
In other words, don’t rule out a 2024 recession just yet.
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