“When you’re down six months in a row on the official leading economic indicators, historically, the odds of a recession are not 80% or 90%; they are 100%,” strategist David Rosenberg said.
The last time David Rosenberg shared his outlook for the U.S. stock market and the economy with MarketWatch, in late May, it was depressing enough.
“The Fed’s job is to take the punch bowl away as the party gets started, but this version of the Fed took the punch bowl away at 4 a.m.,” Rosenberg said, “when everybody was pissed drunk.” Reality admittedly isn’t something the financial markets have had much of a grip on in the past several years, with essentially free money and a hands-off Fed fueling a go-go investing climate. “Now that movie is running in reverse,” Rosenberg says, and the reality here is that the next scenes will be tough ones.
Rosenberg: The Fed is ignoring market signals and chasing lagging indicators like the year-over-year in the CPI and the unemployment rate. I’ve never seen the Fed at any point before this version totally dismiss what’s happening on the supply side of the economy and totally ignore what’s happening from market signals. I’ve never seen the Fed tighten this aggressively into a raging bull market for the U.S. dollar DXY, +0.07%.
The impact from the Fed hasn’t been felt yet in the economy. That’ll be next year’s story. This Fed is consumed with elevated inflation and very concerned that it’s going to feed into a wage-price spiral even though that hasn’t happened yet. They are telling you in their forecasts that they are willing to push the economy into recession in order to slay the inflation dragon.
Rosenberg: Powell told us in March that the Fed was going to be operating irrespective of what’s happening on the supply side of the economy. They’re really only focused on the demand side. The risk is that they’re going to overdo it. Rosenberg: First, make a differentiation between a soft-landing and a hard-landing bear market. In a soft-landing bear market, you reverse 40% of the previous bull market. If you believe we’re going to avert a recession, then the lows have already been put in for the S&P 500.
The question is, what’s the timing of when the risk-reward is going to be there to start dipping into the risk pool? This time next year I expect we’re going to be there, which will cause me to be more bullish on 2024, which I think will be a great year. But not now. Rosenberg: The housing price bubble is bigger today than it was in 2007. It takes more than eight years of income to buy a single-family home today, about double the historical norm. If you take a look at home prices to rent, income and CPI, we are basically beyond a two-standard deviation event. We’ve taken out the peak ratios of 2006-2007.
Rosenberg: What can we say about this version of the Fed? Let’s take a look at what they did. They opened up their balance sheet to the capital structure of zombie companies to save the system back in the winter of 2020. MarketWatch: Jay Powell is making no secret of his adulation for former Fed Chair Paul Volcker, to the point that some are calling him Volcker 2.0. Powell must enjoy this, because Volcker, of course, is revered as the greatest inflation-fighter ever. But back in 1980, Volcker was not so beloved.
Two important things to recognize: First is that the stock market desperately needs lower bond yields to put in a bottom. The bottom in the S&P 500 will not happen in advance of the rally in Treasurys. At the stock market lows, the equity-risk premium has generally widened 450 basis points. We need lower bond yields to give the stock market the relative valuation support that it always gets at the fundamental low. Bond yields have to come down first; equities will follow.