If we hadn’t already quoted old Tom Eliot on April’s alleged cruelty, we’d no doubt be tempted to do so again after Friday brought the April selloff to such a climax.
The Nasdaq Composite suffered its worst month since October 2008. That was the month that followed the collapse of Lehman Brothers, AIG and almost the entire US financial system. Congress rejected TARP and then, after some petty gerrymandering and some very big stock market crashes, turned around and passed it. It was a time of panic in the financial markets.
That makes the current calm seem strange. Stocks in FAANG, Facebook, Apple, Amazon, Netflix, and Google (which should now be properly called TOMORROW, because Facebook is Meta and Google is Alphabet), had their teeth broken. Collectively, they shed about a trillion dollars in value over the course of the month. Netflix, one of the kings of stay-at-home stocks during the pandemic, is down 50 percent for the month. Alphabet is down 19.2 percent. Apple and Facebook have lost more than 10 percent. Amazon is down 25 percent. But no one seems to panic. It may be a steep decline, but it’s kind of neat.
One of the key drivers of the sell-off is the realization that the era of manna from heaven, in the form of easy money from the Federal Reserve, is over. The Fed is expected to raise its target interest rate by 50 basis points at its meeting next week. Analysts at Bank of America expect the Fed to raise rates by the same amount in the next two meetings and then raise them by a quarter of a percentage point at each subsequent meeting. While we have been beating the drum for a steeper rate hike for months, the market recently arrived at this outlook. As recently as March 1, fed funds futures prices implied a 90 percent chance of a quarter-point rise and essentially a half-point zero chance at the May meeting.
The consensus view has now become our view that the Fed lagged behind in the months that it insisted, explicitly at first and then more quietly, that inflation was transitory and could be counted on to go away in largely as time healed the wounds of the pandemic and ushered in a quicker-than-expected recovery. This policy error means that in order to control inflation, the Fed will have to raise rates rapidly and to a higher terminal rate. Real rates, that is, interest rates after inflation, will most likely have to rise into positive territory, which would mean a Fed target higher than it has been in decades. That could push the economy into a recession. Some analysts think a recession is inevitable, some think it could be avoided with a so-called soft landing, and a small cadre think a recession will be necessary to control inflation.
The negative turn in first quarter GDP certainly added to talk of recession risks. In some ways, it might be a relief if we had entered a mild recession that could reduce business and consumer demand and ease inflationary pressures. Unfortunately, there’s nothing in the first trimester contraction to suggest that. By contrast, consumer spending was quite high as was demand from the business sector. The labor market tightened further. What dragged the headline figure down was rising imports and falling exports coupled with the necessary withdrawal of inventories following the accidental holiday build-up late last year. The economy contracted but not in a way that reduced inflation. So the negative growth rate is unlikely to cause the Fed to do much of a pause next week.
What may pose the greatest risk of recession is consumer psychology. Currently, consumer spending has remained strong because employment is high and wages are rising (although not yet as fast as prices). These have been the lone props for an already depressed consumer sentiment. If the Fed’s rate hikes increase unemployment and slow wage gains before inflation is brought under control, which may be economically necessary, consumer confidence could fall to record lows. The result of that would likely be a recession that could be even deeper than today’s pessimists are forecasting.
If that sounds too bearish, we’ll remind you that we started today’s roundup by describing the worst stock sell-off in decades. Certainly, the market reflects a gloomy picture.
Things could be worse. This is how the poet Edna St. Vincent Millay described her month in her poem “Spring.”
An empty cup, a flight of stairs without a carpet.
It is not enough that every year, descending this hill,
He comes like an idiot, babbling and scattering flowers.
There is some comfort in the fact that we leave April with an understanding of what the babble meant, and it doesn’t all come down to nothing.