Author: Hannah Viller Møller
The BRB Bottomline: Recently, the stock market has experienced big wins. Economists argue that this increase can be correlated to the fact that, in October, the consumer price index went down to 3.2 percent. The slowed consumer price index is rooted in a campaign by the Federal Reserve, which wishes to “kill inflation” by lowering rates. There is a big debate among economists concerning whether this upward-moving stock market can be backed by economic indicators.
The stock market is soaring, but some economic enthusiasts do not believe that the economic data and information supports this because, at the same time, there is a rise in unemployment, high interest rates (and therefore increased housing costs), and more bankruptcies. According to economic forecaster Gary Shilling, there is a 30 percent chance that the stocks will crash. Moreover, he argues that a recession is likely and that the world economy will face significant consequences when or if the commercial real estate bubble bursts. In other words, the economy in the United States is leaning toward a recession. Some economists assume a possibility that the S&P 500, a value-weighted portfolio of the 500 largest US stocks, will reach its lowest level since COVID-19 within the next year. Others look at the S&P 500 from another perspective, emphasizing how the S&P 500 increased by 1.9 percent on November 14, 2023. Ultimately, there is a big question mark when it comes to the stock market. How is it possible to see an improvement in the stock market while economic indicators are implying the opposite: something that looks more like a recession?
Rise or Fall of the Stock Market?
Many investors are currently focusing on the fact that inflation is decreasing. Building beliefs based solely on looking at inflation rates can build up hopes and make investors believe that the next move from the Federal Reserve is to lower rates. Investors expecting lower rates has a psychological impact as well and can lead to a rise in the stock market. Moreover, expectations can impact the market rate of interest, which will go down. However, some economists believe that one should not only focus on a decline in inflation; it is too simple. Instead, one should go beyond the idea of a decrease in inflation and look at other factors and economic indicators as well. For instance, investors should consider looking at: the rising default rates on credit cards, the current inverted yield curve, the rapid decrease in bank lending, and lagging economic indicators such as a high amount of unemployment. Also, one should notice and reflect upon the current largest bubble, which is commercial real estate; this might be a bubble that is likely to pop soon.
These economic factors mentioned above indicate a recession, but why are so many people not paying attention? Can it be seen as overly complicated to make sense of our economic world in a more broad and realistic way? Why are investors choosing the simple version by only looking at the fall in inflation when analyzing an economic situation and giving predictions for the current and future stock market? Finally, depending on how one decides to interpret economic information and what kind of data to look more closely at will lead to various understandings and predictions when it comes to the stock market.
Future of the Stock Market & The Fed
There is much uncertainty when it comes to the financial market. Investors are speculating on the stock market and whether the stock market will keep rising or, in the worst-case scenario, crash in the near future. This ambiguity in the stock market makes it hard for investors making financial decisions. The same uncertainty applies to the Fed, which has the power to decide the interest rate. Actions from the Fed can impact the economy worldwide. Many individuals are speculating on how the Fed will set the interest rate. For how long time will the Fed keep focusing on beating inflation with high rates? Will the Fed surprise people by raising the rate more significantly? Or, is there a chance that the Fed will lower rates soon? It is Jerome H. Powell (chair of the Federal Reserve) who has the power to decide interest rates. Powell and the Fed have a dual mandate and wish to ensure price stability while keeping unemployment at the lowest possible level. As a rule of thumb, the Fed is aiming to achieve an inflation target of 2 percent. Lastly, the Fed wants to ensure its credibility when making decisions and, in some cases, this can put more pressure on the Fed to lower interest rates as they are aiming to meet their inflation target. Actions from the Fed play a crucial role in our economy, and the recent fall in the consumer price index also illustrates how the Fed’s efforts for higher interest rates are working: higher rates can lead to price stability and can therefore help stabilize the overall economy.
Take Home Points
- The stock market is rising, but many economists question how this is possible after looking at economic data and leading economic indicators.
- Even though the stock market is going up, economic forecasters such as Gary Shilling argue that a recession in the United States is likely.
- A lot of uncertainty makes it hard for the Fed to make decisions on whether to change current interest rates. The Fed’s goals are to maintain their credibility, beat inflation, and set rates accordingly.
- Economists can forecast and make assumptions on how the future stock market will look. However, nobody can predict the actual future stock market.