The Great DebateSooooo....
Are we going to a have a recession or not?
If so, how deep?
Why is good news bad news?
Why is bad news good news?
Great questions that form the heart of the debate. So let's break it down.
Monetary theory over the past 50 years or so has clearly stated that the effect of changes in monetary policy such as changes in the interest rates have long lags. Meaning that it takes a while before we see the effects. This is certainly true for this round of interest rates hikes by Central Banks. Yet these banks say they are all "data dependent" meaning that they are ignoring monetary theory and loooking at today's data to make decisions.
So the problem the market is facing now is whether due to the lags, interest rates don't need to go up anymore and Central Banks just need to wait for the economy to catch up with the lag from past rate hikes. Or, will the Fed increase rates too much based on current data and cause a massive recession and when it does lower rates it will take a while before the positive effects are felt in the economy.
Tough call to say the least.
So in the meantime, since the Fed says its data dependent, everytime there is good economic news, the market gets scared that the Fed will raise rate even more and with the lag create a big recession. Hence the good news becoming bad news for the market. Conversely, bad economic news suggests that the economy is catching up to the lag and the Fed doesn't need to raise rates any more and so that means that a major recession has been averted and perhaps even the whole market is already fairly priced. Hence, bad news becomes good news.
For now, the end result of this "debate" is volatility. A market rally followed by a week of declines.
From my perspective and experience in these things over the decades is that, as I have said before, The Fed is behind the curve and started too late to raise rates and the result of that is that it has sown the seeds of a 1970s style inflationary expectations which leads to an inflation wage spiral. The other thing I am looking at is that the combination of the war in Ukraine resulting in two years (assuming the war stops planting nex tSpring) of very little food being produced there combined with food producrtion shortages elsewhere caused by the peak in oil prices earlier this year raising fertilizer prices plus droughts in many parts of the world that we will see more inflation that is difficult for the Fed to stop.
So for now, I see more rate hikes than the market has priced in right now and so I will take keep lots of dry powder to take advantage of low share prices if my scenario pans out. Right now the market is pricing in further hikes of about 50 to 100 basis points. My scenario is double that.
Anyway as mrrb would say - "Time will tell!!"