By Introduction
While the situation may not be as dire as all that, it doesn’t mean that stocks are in the clear. In fact, instead of a huge and sudden drop down the elevator shaft, the market could take the stairs all the way down.
Concerns About Federal Reserve’s Policies
The editorial argues that the Federal Reserve’s policies are on the wrong track, in a way that could seriously damage the economy and bring about another market plunge reminiscent of the stock market crash on Oct. 19, 1987.
In that regard they aren’t alone, as plenty of market strategists have offered up evidence that the central bank has misstepped.
Warning Signs from Experts
- David Rosenberg, founder and president of market strategy of analysis provider Rosenberg Research, has warned that “the income recession has already begun” as real disposable income has eroded.
- Yardeni Research President Ed Yardeni notes that his “optimistic outlooks for the economy and stock market” are in jeopardy if bond yields—driven by interest rates—continue to move higher.
Indeed, with virtually risk-free Treasuries offering juicy rates, investors have little incentive to roll the dice with equity ownership; that means as long as interest rates are high—which appears to be the Fed’s plan—stocks will inevitably feel pressure.
Counterargument on Black Monday Prediction
However Sevens Report founder and President Tom Essaye believes that WSJ’s prediction of a Black Monday seems a bit unlikely.
He argues that the 1987 event was caused in no small part by the recent introduction of stock-index futures, and while some investors may believe that artificial-intelligence-driven trading presents a similar threat today, breakers introduced to prevent another Black Monday should halt a repeat of that selloff.
The Future of the Economy: Long-Term Jitters or a Jump Scare?
The M2 money supply of liquid assets has recently seen its biggest year-over-year decline since 1933, raising concerns about an impending crash. However, this decline should be viewed in the context of the significant surge of more than 40% that occurred due to Covid-era stimulus measures. Even with the recent decrease, the M2 money supply remains comfortably above pre-pandemic levels.
While the strength of the labor market continues to be a positive indicator, it is important to recognize that employment data tends to lag behind other factors. Jobless claims are currently at such low levels that it would take a significant deterioration in the labor market to increase concerns about a hard landing. Therefore, it is crucial to consider absolute values and acknowledge that the labor market still has room to loosen up considerably before a recession becomes more likely.
Despite these positive aspects, investors should not dismiss their worries entirely. There is a consensus among experts like Essaye that an economic slowdown is looming, but it is expected to be a gradual process rather than a sudden crash.
According to Essaye, the risk lies in the attrition-based nature of this potential slowdown. If a growth scare occurs, the market may systematically reverse the gains seen in 2023, rather than experiencing a spectacular implosion. This approach would result in a prolonged decline rather than an abrupt crash.
This viewpoint is shared by Stifel Market Strategist Barry Bannister, who predicts that the S&P 500 will likely remain range-bound until spring and may even tread water for several years due to persistent high interest rates. Bannister goes so far as to describe the S&P 500’s performance in the 2020s decade as a series of trades within a “Secular Bear Market.”
While investors may not face the immediate shock of a Black Monday crash, they may find themselves wishing they had dealt with the pain all at once after enduring a prolonged decline.
In conclusion, the future of the economy is uncertain. While there are positive indicators such as the current strength of the labor market, there are also concerns about an economic slowdown. Investors should remain cautious and prepared for potential challenges ahead.
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