The Dow dropped 981 points last Friday (April 22, 2022) for the fourth straight week and the worst trading day since 2020.
The Wall Street Journal chalked up the drop to worries about slowing corporate earnings and the FederalReserve’splans to rapidly raise interest rates.
Verizon shares plunged 5.6% after its management reported losing 36,000 subscribers during the first quarter of 2022.
What exactly is going on with stocks that are typically considered bluechips. Aren’t stocks supposed to be a hedge against inflation? Here to help us gain perspective on the economy is Devlyn Steele, education director for Augusta Precious Metals.
1. Welcome, Devlyn. In your opinion, why did the stock market drop so much at one time last Friday?
Persistent inflation suggests that interest rates are on the way up. We know inflation has been a problem for some time. But up until very recently, the markets have been reassured by the Federal Reserve’s commitments to make no more than modest, measured rate increases to control inflation.
However, over the last couple of weeks, Federal Reserve policymakers have been more vocal in their call for bigger-than-usual rate increases to fight inflation that now is at a 40-year high. And then, last Thursday – the day before the Dow’s 900-point drop – Fed Chairman Jerome Powell himself essentially said he was on board with the idea of a 50-basis-point rate increase at the next meeting of the Federal Open Market Committee in May. Since real inflation first reappeared on the landscape a year ago, Powell was reluctant to embrace bigger rate increases. But when he publicly declared his support for them on Thursday, it was interpreted by markets that, yes, bigger rate hikes are coming – and those markets reacted accordingly on Friday.
2. Does the market always react this way when interest rates go up?
Equities markets tend to react poorly to interest rate increases. The reasons are understandable. The purpose of interest rate hikes is to cool down the economy when signs of inflation begin to appear. So the market – which can be very anticipatory – believes slower overall growth is coming and reacts accordingly.
One of the ways this slowdown ultimately is brought about by rate increases is that banks and other lenders now raise their borrowing costs. This will tend to make it less appealing for consumers to borrow. It also makes it more expensive for businesses to secure financing.
Also, this time around, debt at all levels – household, corporate and government – is at historic highs. So not only will higher rates reduce the appeal of further leverage, but they also make it more expensive to service current debt which – as I said – now is at historic highs. All of this together can conspire to lower economic activity, overall.
3. I’ve noticed the stock market has been kind of choppy for a while now. Is all of this volatility due to interest-rate hikes – or are other things going on?
I would say that for the most part the markets have exhibited less confidence for a while now because of fears that interest rates could be going up as inflation has worsened. Remember how I said markets are anticipatory? Even before there are any overtures from Federal Reserve policymakers that rate increases are coming, markets are astute enough to recognize that persistent inflation likely means rates will be boosted. Inflation has been sitting around 40-year highs for several months now. Markets understand that and recognize what probably is coming – rate hikes.
That said, there have been other things going on that have sapped some confidence out of equities markets. We all obviously know about the ongoing pandemic. As that persists and exerts a negative impact on supply chains – particularly in China, which is the world’s biggest exporter of goods – markets will react to that, as well. Then there’s the conflict in Ukraine. Markets will tend to get jittery anyway when there’s geopolitical discord involving what we think of as a global superpower. Beyond that, Russia is a major energy exporter and Ukraine is a significant agricultural exporter, so the market is going to have concerns about disruptions there.
Still, the bigger, more chronic influence over markets right now is going to be the concern regarding inflation and rate hikes, in my view.
4. Does what happened with the stock market on Friday mean we’re in a recession?
The short answer is, “No.” Big stock market declines by themselves are not determinants of recession. They can – I emphasize can – be clues that a recession could be coming or symptomatic of an economy already in a recession.
The longstanding “textbook” definition of a recession is at least two consecutive quarters of decline in real GDP. The National Bureau of Economic Research – a nonprofit which has become famous for its formal declarations of when recessions begin and end – defines them as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” That’s a less formal definition. In either case, though, stock market declines tend to be part of the contraction phase – or recession phase – of a business cycle. But no, big market drops by themselves don’t equal recession.
5. When something like this happens, does it prompt the Federal Reserve to think twice about sticking with its plan to raise interest rates?
That can depend. To be fair to the Federal Reserve, although it wants to reduce inflation, the central bank would prefer not significantly hurting the value of assets such as equities and real estate – and it very much would like to avoid triggering a recession.
As with everything else in life, it really comes down to making an evaluation of which may be worse: the affliction – or the cure itself. For example, when inflation was so bad in the 1970s and early 1980s – it nearly reached 15% in 1980 – the central bank saw that as such a pressing matter it hiked the Federal Funds rate all the way up to 20%. Paul Volcker, Fed chairman at the time, knew boosting rates to that level would all but ensure a recession, but the consequences of inflation at those levels were seen as so great that a recessionary outcome was viewed as acceptable.
On the other hand, the last Fed rate-tightening regime saw rates get above 2% for just a relative handful of months – from late 2018 to mid-2019 – before they started coming back down. That’s because there were signs in the first quarter of 2019 that even just a little bit of tightening was beginning to hurt economic growth. For its part, inflation didn’t get above even 3% in 2018, so the Fed saw it as a safe bet it could reverse course on rate hikes.
So, again, it depends. But inflation is high enough now that the Fed might be willing to live with a little more pain – or, rather, ask us to live with a little more pain – in the form of economic slowdown if the result is a reduction in consumer prices.
6. Where can we learn more about Augusta and what it can offer to consumers?
You can visit the official website at AugustaPreciousMetals.com.
About Devlyn Steele:
Devlyn Steele began in 1983 as a financial analyst for Butler Aviation and went on to work for UPS and People’s Express Airlines. As his career has progressed, he’s been an analyst in various industries, from finance, manufacturing, and technology to venture capital and more. He has sat on the boards of several Silicon Valley and technology companies and still does.
He is a member of the Harvard School of Business analytics program and predicted the housing crash in 2008 and the rise in gold and silver that followed.
Devlyn is an avid investor in all markets: real estate, stocks, gold and silver, and cryptocurrencies, and is a gold bull.
Devlyn is the director of education for Augusta Precious Metals. His focus as an analyst is primarily on Federal Reserve policies that can affect the dollar and precious metals.
CONTACT: To schedule an interview with Devlyn Steele, email jerry.specialguests@gmail.com.
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