April’s Empty Cup of Stock-Market Crashes, Recession, Rising Interest Rates, and High Inflation

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    The Nasdaq Composite suffered its worst month since October 2008, the month following the financial collapse of Lehman Brothers, AIG (American International Group), and the majority of the U.S. financial system. Congress did not at first approve TARP (Troubled Asset Relief Program), but following some insignificant tweaking and significant stock-market declines, it reverted to the original position and passed the bill. It was a period of financial-market panic.

    The current state of calm appears odd. The FAANG stocks–Facebook, Apple, Amazon, Netflix, and Google (which ought to be renamed MAANA, appropriate since Facebook Meta and Google are Meta as is Google Alphabet)–had tooth fractures. Collectively, they shed around one trillion dollars’ worth of value during the month. Netflix, one of the most powerful stay-at-home stocks during the pandemic, fell by 50 percent during the month. Its Alphabet shares are at 19.2 percent. Apple along with Facebook have both lost more than 10 percent. Amazon has lost 25 percent. However, nobody seems to be worried. It may be a steep drop, but it's quite orderly.

    One of the major reasons for the market sell-off was the recognition that the time of manna from Heaven, as easy cash flowing from the Federal Reserve (the Fed), is over. It is expected that the Fed will increase the interest rate in increments of 50 basis points during its next meetings. Bank of America analysts see the Fed increasing rates in the same proportion at the following two meetings and then increasing the rate by a quarter of a percentage point at each meeting after that. Although we've been predicting higher rates for several months, the market has only recently come to this conclusion. On March 1, predictions of the Fed funds rise suggested a 90-percent likelihood of a quarter-point rise and a nil chance of a half-point increase at the meeting in May.

    The majority view has reaffirmed that the Fed did not keep pace with rising inflation during the past few months as it believed the inflation would not be permanent but would diminish as the country’s wounds from the pandemic were healed, which brought an accelerated recovery that was faster than anticipated. This policy mistake means that to bring the inflation rate to a manageable level in the near future, the Fed will be required to increase rates quickly and at higher percentages. The likelihood is that the real rate–referring to the interest rate after inflation–will rise to positive territory. That could result in a Fed target that is higher than what it has been for decades. The result could plunge the economy into a recession. Some experts believe that the possibility of a recession is likely, but others think it can be avoided through a soft landing. A tiny group believes that a recession is essential to control inflation.

    The downturn in the first-quarter GDP certainly heightened the discussion of the possibility of a recession. In some ways, it could be a good thing to have entered the midst of a moderate recession, which could slow consumer and business demand and lessen the pressures on inflation. However, there's no evidence in the first-quarter contraction to suggest that. In fact, consumers' spending was impressive, as was demand in the business sector. The labor market widened. The main reason for the decline in the overall figure was the increase in imports and the depressed demand for exports, along with the necessity of reducing inventories following the accidental Christmas build-up at the close of the year. The economy slowed, but not in a manner that slowed the inflation rate. Thus, the low growth rate will not cause the Fed any pause this week.

    The most significant danger of a recession is consumer psychology. At present, consumer spending remains strong due to the fact that the economy is booming and wages are growing (although not quite as fast as prices). These are the sole sources of support for the already low consumer mood. If the Fed's rate increases hurt employment and slow wage hikes prior to the taming of inflation with the required regulation, consumers’ moods may plummet to record lows. The outcome could be a recession more severe than what even the most optimistic pessimists have predicted.

    If you find that to be a bit negative, we'll remind you that we kicked off this article with a description of the biggest drop in stock prices over the last few decades. It's clear that the market is reflecting that negative outlook.

    It could be direr. Here's how writer Edna St. Vincent Millay described the month in her poem “Spring”: 

    To what purpose, April, do you return again?

    Beauty is not enough.

    You can no longer quiet me with the redness

    Of little leaves opening stickily.

    I know what I know.

    The sun is hot on my neck as I observe

    The spikes of the crocus.

    The smell of the earth is good.

    It is apparent that there is no death.

    But what does that signify?

    Not only underground are the brains of men

    Eaten by maggots.

    Life in itself

    Is nothing,

    An empty cup, a flight of uncarpeted stairs.

    It is not enough that yearly, down this hill,

    April

    Comes like an idiot, babbling and strewing flowers.

     

    There's some peace in knowing that we'll leave April with a clear appreciation of what all the chatter accomplished and that it wasn't all in vain.

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