Many investors today search for clarity or gird themselves for the worst.

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— “Higher for longer” in Fed rhetoric may be a hidden positive

— Why this time (I know it is dangerous to say) may be different — Unique positives.

 The search for clarity and preparation for the worst

Mariusz Magieln

In times like these it is alway good to have a grasp on history for guideposts. Are things really as bad as they seem? “Ball of Confusion” and “Eve of Destruction” were popular song titles from 1970 and 1965, both extremely fraught times in the United States. Here is a taste of both:

“Eve of Destruction” (1965)

“… I can’t twist the truth, it knows no regulation
Handful of senators don’t pass legislation
And marches alone can’t bring integration
When human respect is disintegratin’
This whole crazy world is just too frustratin'”

“… Ah, you may leave here for four days in space
But when you return, it’s the same old place
The poundin’ of the drums, the pride and disgrace
You can bury your dead, but don’t leave a trace
Hate your next door neighbor but don’t forget to say grace”

Any of this sound familiar?

At the time “Eve of Destruction” was a #1 hit, receiving tons of airplay. During 1965 the Dow Jones Industrials traded in a range between 840 and 960, making an all-time closing  high of 995.15 February 9, 1966. It did not surpass that level until the early 1980s.

“Ball of Confusion” (1970)

“Eve of destruction, tax deduction, City inspectors, bill collectors, mod clothes in demand, Population out of hand, suicide, too many bills, Hippies moving to the hills, People all over the world are shouting, “End the war (the same war we were fighting in 1965–Vietnam!), And the band played on.”  The cyclical bear market that started in 1966 ended May 26, 1970, with the Dow Jones Industrials closing at 631.16, down 36.6% from it previous all-time high. The precipitating event for that low was the Penn Central bankruptcy (6/21/1970). I got my start as a broker October 1, 1970. The Dow closed that day at 760.88. I thought the worst was over. Little did I know … on October 4, 1974 the Dow would close at 584.56 … down 37.2% from the 1966 high (the intraday low was near 560 …a 41% decline).  

The latter decline occurred after the Dow had worked its way nearly back to its ’66 high in January of 1973. It was a double bottom. The secular decline was over and the new secular bull would begin in 1982. At the time and for many years after the 1982 breakout no one would believe the strong up market was real. The Dow was on its way to 11,000 in the next 19 years.

Bottom line on this section: We always live in fraught times. GET OVER IT!

 “Higher for longer” in Fed speak may be a hidden positive

“Higher for longer” rhetoric reinforces fear. What’s happened? Why hasn’t the sharp run up in rates laid the economy low as has been predicted by so many. The lead article in Barron’s magazine this weekend posits (maybe dangerously), “This Time Really Is Different for the Economy. Just Look at the Job Market’s Confounding Strength.”

Barron’s reasons that “By the time the Fed first raised rates last year, the U.S. economy was resoundingly healthy—probably even stronger than many economists believed at the time.”

“Generous fiscal stimulus doled out to counter the economic impact of the Covid pandemic had been particularly helpful for low- and medium-income Americans, enabling them to pay down debts, improve their credit scores, and lock in low interest rates on fixed-rate mortgages and loans. Those workers also saw some of the largest real wage gains among all workers, the Atlanta Fed’s wage tracker shows. As a result, wealth among the bottom half of U.S. families increased by nearly 75% from the first quarter of 2020, when Covid hit, to the first quarter of 2023, according to recent Fed data. And it is holding strong.”

Pure and simple, I believe the Fed’s decision to move rates up so aggressively is a positive as it reflects their opinion that the economy is strong enough to handle it. I was saying this ten years ago as it pertained to the tapering of Quantitative Easing (QE) in (Kort Session #15):

Consider this.  Even though it may be spun to sound like the end of the world, a Fed decision to reverse QE may really be a good thing that could propel the market forward after the initial emotional reaction. First and foremost, Q.E. was put in place to stimulate the economy and grow employment.  It was one of the final Fed measures taken in response to the 2008 financial collapse.  Sub 2% ten-year treasuries were not a long-term goal.  Ergo, if this policy is reversed, it is a strong sign that the Fed believes that the economy can stand on its own… something all would agree to be positive!

So far this theory appears to be correct. The economy has been much stronger in relation to the Fed rate increases than many thought possible.

This time, as dangerous as it may be to say, may be different

There is this notion out there that the stimulus that went into the economy over the last 5 years (a $2 trillion tax cut in 2018 plus $5 trillion in Covid relief is old news, no longer effecting the economy. This totally forgets what the economists call “The Multiplier effect.” “The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital. In effect, multiplier effects measure the impact on changes in economic activity—like investment or spending—will have on the total economic output of something. This amplified effect is known as the multiplier.”  (Investopdia)

The multiplier effect can be hugely impacted by the “Marginal Propensity to Consume (MPC), the portion of an increase in income that gets spent on consumption.” One example given in the Investopedia article above was that if a consumer made $1 additional income, saved 20% and spent the rest, that $1 would end up being multiplied 5 times as it circulated through the economy, ergo 1 dollar worth of stimulus would equate to $5 worth of spending. This is, of course, theoretical but in this light the impact of $7 trillion in stimulus could be $15 to $20 trillion to the economy via the multiplier effect. That is a huge number and may be a way to explain the current levitation of the economy in the face of higher rates. Consider this in the context of the Barron’s article: “As a result, wealth among the bottom half of U.S. families increased by nearly 75% from the first quarter of 2020, when Covid hit, to the first quarter of 2023, according to recent Fed data. And it is holding strong.”

I believe that extraordinary stimulus coupled with the ‘multiple effect’ is what is different this time, and it is a point or concept nobody seems to be talking about. My continued belief is that, excluding recent tech leadership, this market has much further to go. 

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