December 17, 5:00 pm EST
As I said on Friday, stocks clearly have a significant influence on confidence. And confidence ultimately feeds into economic activity.
So, stocks matter.
On that note, the slide in stocks has started to inflict some damage. The consensus view surrounding stocks and the economy seems to have rapidly deteriorated over just the past week.
As you can see in the chart below of stocks, we touched the February correction lows late in the day today.
This is all setting up for a very big Fed decision on Wednesday. The Fed has hiked three times this year. They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.
With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns). And it’s the first time since 1994 that cash has been the highest returning asset class.
It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recovering economy — in anticipation that inflation would quicken. It didn’t happen. They ended up choking off growth. The scenario this time looks very similar. The Fed paused back early 1995, and then ended up cutting rates. Stocks boomed, returning 36% on the year.
Also, noteworthy, oil prices closed below $50 today. As I’ve said on the way down, the Fed doesn’t like to admit that they factor in oil prices in their inflation view, but their actions (historically) tell a different story. They have a history of moving when oil moves, because material adjustments in oil prices matter (up and down for inflation). And we’ve just had a big one (down).
The last time oil had a dramatic fall (2016), re-igniting deflationary forces through the global economy, global central banks responded. The Bank of Japan intervened in the currency markets (which likely resulted in buying dollars/selling yen, and buying oil with those dollars). China followed with stimulative policies. And the Fed responded by withdrawing guidance of three rate hikes that year (effectively easing).
