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Fed’s Inflation Mission Has Recession Destination and Hard Landing for Stocks

Published 06/11/2022, 07:53 AM
Updated 06/11/2022, 08:17 AM
© Reuters.

© Reuters.

By Yasin Ebrahim

Investing.com -- After years of propping up stocks, the Federal Reserve is now faced with the task of piercing the ‘wealth bubble’ to dampen inflation. But deflating the bubble lands the economy in recession likely forcing the market to shed about a fifth of its value.

“We believe that the Fed will land us in a recession,” Phillip Toews, CEO & Portfolio Manager of Toews Asset Management told Investing.com earlier this week. A recession could tip stocks into an “average bear market or worst, with losses of about 35%,” Toews added, pointing to the historical average decline in bear markets.  

With markets down about 18% year-to-date, an average bear-market decline suggests stocks potentially risk shedding nearly a fifth of their value in a recession.

The Fed's Finger Prints All Over the Wealth Effect

The more than a decade-long diet of low interest rates and market-friendly monetary policy conditions as well as fiscal stimulus have pumped up the value of assets on consumer balance sheets, leading to a mountain of wealth that encourages spending and feeds inflation.

Growth sectors of the market such as tech, which were in-vogue and frequently made the list of the most overcrowded trades during the equity bull market run, played a big role in the wealth build up for equity investors.

“When we looked at what the vast majority of new clients that came into our wealth management practice, the FANG stocks were a big chunk of their portfolio,” Eric Diton, President and Managing Director at The Wealth Alliance, said in a recent interview with Investing.com.

But growth stocks with higher valuations have become increasingly unattractive in a rising rate environment.

“I've been saying for the last year, you can own tech but not in an S&P 500 style, where five or six stocks make up about 25% of your portfolio. Those people are really getting hurt right now,” Diton added.

Early Signs of Fed Policy Poking at the Wealth Bubble

There are early signs that the Fed’s policy measures are putting the squeeze on consumer wealth.

U.S. household wealth shrank for the first time in two years in the first quarter of 2022, a Federal Reserve report on Thursday showed.

Household net worth slipped to $149.3 trillion from an all-time high of $149.8 trillion at the end of last year, according to the Fed's quarterly snapshot of the national balance sheet.

The decline was driven by a $3 trillion slump in stocks, though rising real estate values, which climbed by another $1.7 trillion in the quarter, kept a lid on losses.

Home prices, which topped 20.6% in March from a year earlier, have continued to surge even as mortgage rates have climbed, according to the latest S&P CoreLogic Case-Shiller Home Price Index.

Deflating the wealth bubble will require a pullback not only in stock prices, but also home prices.  

“The Fed supported the markets for about 15 years, but now has an incentive to prick the [wealth] bubble and cause financial asset prices and home prices to deflate as a way of addressing inflation, Toews said.”

Hard Landing or Crash Landing?

Undoing the ‘wealth affect’ or making consumers feel less well-off to discourage spending and bring down inflation will also rely on the Fed’s ability to restore the demand and supply imbalance in the labor market to cool wage growth.

“As long as you have faster wage inflation  … the Fed won’t come close to getting anywhere near 2% or 3% inflation,” Chief Strategist at Spouting Rock Asset Management Rhys Williams told Investing.com in an interview on Friday.

While acknowledging the tight labor market is a “tough” issue for the Fed, Williams said there is “potential that in 2023 that the ‘great resignation’ becomes a ‘great application’ as you’re not going to have so many job openings available.”

“That’s already starting to happen … it's concentrated now in blockchain technology and software companies, some internet-based companies but it's going to get broader as the year unfolds,” Williams added.

As consensus toward a recession gather steam, many are debating whether a deep or mild economic slowdown is ahead. For some, the excess household savings built up over the years and lack of major capital expenditure by businesses, will likely prevent a major recession.

“We didn't really have the mother of all capex spending cycles to generate a lot of excess capacity and the consumer is strong,” Williams said. “Those two factors are probably what prevents a major recession.”

Latest comments

The tin can has finally come to a dead end.
Raising rate hikes won't help...it's gas and diesel that's *******the economy...stop blaming politics, there hasn't been a stimulus check in over a year and ctx already stopped this is CORPORATE GREED.
"Inflation is always and everywhere a monetary phenomenon. " Quit listening to the idiots on TV and learn something substantial about economics.
shorting? starting to look intriguing 🤔
Yoir shorting just now? Gee aren't you an invest,emt wizz
incoming lame duck season quack quack
Tuyệt vời
Tuyệt vời
Tuyệt vời
Tuyệt vời
on Monday, once the Markets go up ..the headlines will be very positive...
with a fed meeting on Wed, you can bet on down market on Mon and Tues
can you provide some help in money I lost my bank balance and I have family please if you rich than help
can you provide some help in money I lost my bank balance and I have family please if you rich than help
"Jerome. it will be impossible for me to get reelected if the market is in the tank."
They have failed miserably in their mandate to keep inflation at 2%… terrible job…
The cover should stop its plans to raise interest rates immediately because it is not necessary. The only solution is to produce and import oil, there is plenty of oil everywhere. It was enough to scam people, I won’t leave.
we're already in recession for half a year already.
Economy is still strong. You don't know how it will all play out. Nobody does..
Economies are usually strong before a recession.
QT will suck up the excess liquidity and you will see devasting affects of QT and 9-10% interest rates.
Everyone knows this and is leveraged on Short TLT. You included.
Little wonder the 'crats hate the right to self defense from tyranny.  They are tyrannical.
Right. Remember when they stormed the Capital with a violent mob, overrunning police, in an attempt to interrupt a 250 year tradition of peaceful transfer of power because the did not like the expressed will of the voters? Any group that would do that are indeed dangerous tyrants. You think the people should be armed in order to shoo t them?
 as more and more investingations reveal stuffing of public ballot boxes by hired mules or 20,000 missing ballots in AZ for instance, you may start to re-evaluate why people were incensed over the "most secure election in history".
@kris and yet, no prosecutions, no convictions. Maybe you are being duped. Please tell me you haven't donated any money to these grifts.
Powell will not press the "carnage" button. He created the mess. Flooding the streets with blood would be his professional suicide. The next Fed chair WILL press the button. So we have 4 more years of this mess to get messier before the tanks came to the street
tanks ? ok i am gonna buy some general dynamics
Inflation is a tax on everyone that effects us low wage earners the most… this is not an accident or mistake… the democrats must try to increase their base and make as many dependent on government as possible… this isnt a bug in the system… its the feature…
Market crash is needed. Housing is unaffordable for over half of Americans. Rents are higher then the average mortgage. Garbage tech stocks WAY overvalued. We need this. I hope it's worse than '08. Then we get rich.
Yee housing is a joke!
great Job. Fed. because of your brilliant judgment, a lot of people will be suffered.
Inflation is caused by government greed and the supply chain backlog.. oh did i mention our dead president?
Ha! You mean Trump. He caused this. A presidents policies take years to have an effect.
You're wrong. it doesn't take 2 years to take effect. I think this is caused by Fed because they acted very slow.
Everybody knows to keep giving only painkillers to a cancer patient is not gonna work. Yet that's what FED's been doing since 2009. And now we see what happens.
So they have to destroy the poor and middle class to save the poor and middle class lol. Powell shouldve been canned. The fed is going to destroy everyone but the rich and the rich will profit from the downturn
it is not more fang but mang... wink wink
They have to; to get Rates back to 1% so the government doesn't go broke.🦉
Huh? We’re $30 trillion in debt. Almost all from war. $7 trillion alone on Iraq when the interest is added. Every interest rate increase incurs higher payments on every bond issued. We’re going to drive right past recession into depression.
Thats what this guy think but fed will not raise rate as they suppose to & keep everyone floating .
their pensions, their retirements, their mid-terms
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