During Franklin Roosevelt’s inaugural address in 1933, the newly elected president tried to reassure the nation by declaring, “The only thing we have to fear is fear itself.”
A similar message might apply today, but almost nobody would believe it. Fear is the path of least resistance; pessimism is the easiest mood to follow.
But the present doom and gloom may be closer to its end than its beginning. The negative narrative that’s hobbling the stock market might soon begin to fade away…
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Inflation’s Death March
Returning to 1933, FDR’s comforting words were remarkably prescient. Although U.S. GDP had plummeted 25% during the prior three years, it rebounded 11% in 1934 and then recorded three straight positive years after that. The unemployment rate also improved for four straight years, and the stock market soared 200% over that timeframe.
You read that right: The stock market soared 200% in the middle of the 1930s.
Today, the economy is not suffering a Great Depression or even a mild recession. On paper, it is still growing. But for much of the nation, our statistical growth feels recessionary.
Thanks to sky-high interest rates, long-term bond prices, as measured by the iShares 20+ Year Treasury Bond ETF (TLT), have dropped 37% since the start of 2022. Commodity prices are also slumping.
In other words, doom and gloom pervades almost every financial market on the planet.
Thoughtful individuals on both sides of the interest-rate debate can provide ample backing for their opposing points of view. But at this stage of the game, the Fed’s relentless inflation-fighting campaign is starting to look more like a bad habit than an astute, forward-looking strategy.
Inflation has dropped precipitously during the last 12 months, which should provide some comfort to the policymakers at the Fed. But some of these policymakers cite the recent uptick in the inflation rate as a cause for concern.
It isn’t. Period.
Nothing in the financial markets ever moves in a straight line, not even the inflation rate. The chart below provides a revealing historical perspective…
Back in the late 1970s and early 1980s, when former Fed Chairman Volcker was battling the sky-high inflation of that era with equally shy-high interest rate hikes, the CPI inflation rate peaked at 14.8% in March 1980.
Fifteen months later, the inflation rate had dropped to 9.6%. But then, during the next three months, the inflation rate stopped falling. It ticked higher three months in a row to hit 11%. Did this mini-reversal indicate that Volcker’s anti-inflation campaign had failed? Did it mean that the inflationary menace was about to bare its claws once again?
No and no.
That brief inflationary uptick was simply a break in the action. Over the ensuing two years, the inflation rate collapsed to just 2.5%… on its way to hitting a cycle low of 1.1% in 1986.
Volcker’s inflation conquest is the stuff of legend, and the central case study of numerous economics textbooks. But as spectacular as that feat was, it did not proceed in a straight line.
During the seven long years it took the inflation rate to drop from 14.8% to 1.1%, the monthly reading increased 24 times! In other words, in the process of falling, the monthly CPI reading rose 30% of the time.
To repeat; nothing in the financial markets moves in a straight line.
Therefore, the Fed’s handwringing over the recent inflationary uptick is misplaced anxiety. The inflation rate is trending down, and the only thing left to do is to watch it fall.
Powell’s team has steered a prudent course thus far – one that has helped to curb inflationary pressures and reestablish monetary stability. But the Fed is drawing ever closer to enacting too much of good thing.
The Fed’s economically depressive policies have been weighing on the financial markets for more than a year. That’s the bad news.
The good news is that this major depressant is in the process of reversing and – gradually – becoming a stimulant.
Even if Powell’s team boosts short-term rates one last time, the stock and bond markets should begin celebrating the end of the rate-hike cycle… before it actually ends.
That tipping point is fast approaching.
Once the eagerly awaited interest-rate peak does finally arrive, the ensuing drop in interest rates could power a major a stock market rally.
High interest rates are like the water behind a dam. They are a kind of stored kinetic energy for the economy. But like dam water, they cannot release their energy until they fall from where they are. Once they fall, however, they can spin the turbines of economic growth for years at a time.
That moment has not yet arrived, but it is drawing near.
Regards,
Eric
P.S. I was the first person to publicly release footage of Elon Musk’s secretive AI project – what he calls “Project Omega” months before the AI boom went exponential.
Now, I believe the stage is set for AI once again. Only this time, we’re on the verge of seeing an AI panic unlike anything you could ever imagine…
“Project Omega” is entering its final phase, and I’m warning everyone to prepare.
