Premarket stocks: The Fed may have changed markets forever

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It’s safe to say that the global economy is in a very bad place right now: the vast majority of economists think we’re headed for a recession. But the US market is not worried. Stocks had their best week since mid-June last Friday and continued that rally into Monday.

So what gives? Nomi Prins argues that a decade of free money from the Federal Reserve to the banks created two economies., former Goldman Sachs executive and author of “Permanent Malfunction: How Financial Markets Always Abandon the Real Economy.” Wealthy Americans and corporations benefited directly from years of low rates, which sent money flowing into businesses and stocks while Main Street suffered from lower wages. and low support. Prins says we are now with a “Permanent distortion”, where market behavior and economic prosperity are not correlated.

What’s going on: The stock market has always been unpredictable. Analysts and economists try to predict or apply some kind of rational explanation to market movements, but the truth is that it is often guesswork (strong, educated guesses but still guesswork).

It is increasingly evident in the super volatile, volatile markets we see today. Federal Reserve officials have made it clear that they have no plans to deviate from their aggressive rate hike policy to fight persistent inflation. Economic data is bleak and CEOs, economists and global organizations are ringing alarm bells about an imminent recession.

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But the markets, which have taken a lot of beating this year, are back at multi-month highs. It’s futile to try to apply economic logic to stock markets, Prince told me in a recent interview.

Another command: The Federal Reserve is supposed to keep unemployment and prices under control, but the Fed’s third unofficial duty is to boost markets, Prins said. “We’ve seen it in the last 14 years,” she added. In early 2008, interest rates for overnight bank lending in the United States were set low, near zero, and Fed officials pursued an aggressive monetary easing policy, where they purchased Treasury securities from the United States Government. spilled over into the financial system. This has created a widespread perception in the financial world that the stock market will do whatever it takes, she explained.

Much of this stimulus flowed upward into the markets rather than out of the economy as a whole and created a world where investors depended on the Fed when the broader economy suffered, Prins said.

Trust issue: When the Federal Reserve began raising rates earlier this year, officials publicly expressed how important it was to successfully keep inflation rates low. If the Fed succeeds, they said, Americans need to believe that the central bank is persistent in its fight to keep prices down.

But investors don’t believe it, says Prins. So they consistently seem to think a policy crisis is coming, even when the Fed says it isn’t. They understand, says Prins, that eventually the Fed will return to its long-standing policy of helping markets.

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Meanwhile, he says, it’s Main Street, not Wall Street, that’s feeling the brunt of these interest rate hikes, with rising mortgage and lending rates and a slowing job market.

Recession predictions run the gamut these days, but some are more serious than others. Like this: According to the latest National Business Finance Association survey, nearly two-thirds of corporate economists believe the United States is already in a recession or will be in the next 12 months.

More than half of NABE respondents said they believe there is a 50% chance America will experience a recession in the next year, with 11% saying they believe the nation is already in one, according to a poll released Monday. my colleague Alicia Wallace.

Despite a strong recovery from the Covid-19 pandemic, the US economy has been plagued by historically high inflation for a month. The Federal Reserve has stepped up its efforts to reduce high prices with a series of disruptive interest rate hikes.

The high inflation environment has been the cause Increases in prices by companies – 52% of respondents said their firms’ prices increased in the third quarter – but the latest research shows that some prices are starting to fall. A total of 9% of respondents indicated that prices had fallen, the highest share reported since January 2021.

The survey also showed that the cost of materials in the third quarter was at its lowest level since April 2021.

According to the survey, the lack of raw materials and labor hampers business operations. The number of participants reporting disabilities has remained close to record levels.

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Rishi Sunak, Britain’s third prime minister in seven weeks, will face the huge challenge of projecting stability after a period of historic political and financial market chaos. But his next task — shepherding the country through a recession — is poised to be just as daunting, my colleague Julia Horowitz reports.

Sunak said Monday that his “biggest priority is to unite our party and our country” in the face of a “deep economic crisis.”

Sunak campaigned for the job over the summer, promising to help families deal with the rising cost of living, which is causing many to hold back expenses. He said he would cut taxes, but only once price pressures eased.

Yet the economic outlook has worsened sharply since then – not least because of the market turmoil brought on by the now-abandoned Truss plan for early tax cuts and increased government borrowing.

Investors will be watching closely over the next few weeks for Sunak’s plans to turn things around.

▸ Coca-Cola ( KO ), UPS ( UPS ), Raytheon ( RTN ), Twitter ( TWTR ) and GE ( GE ) report third-quarter earnings before the bell.

▸ Microsoft ( MSFT ), Alphabet ( GOOG ), Visa ( V ), Spotify ( SPOT ) and Chipotle ( CMG ) report third-quarter earnings after the market closes.

Wait: The Conference Board is expected to release its October Consumer Confidence Index, which measures the level of consumer confidence in the economy, at 10 a.m. ET.


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