Forget a soft landing. The market’s best hope is a “growth” recession

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Investors are waking up to the harsh reality of how much pain the economy can be in. they have to endure while the Federal Reserve continues its fight against stubbornly high inflation.

The Fed darkened its tone at last policy meeting of the weekwarning of serious economic difficulties ahead, and markets finally took the central bank at its word.

The S&P 500, already in a bear market, saw another big drop on Friday. The Dow briefly dipped into bearish territory, closing at its lowest level since 2020.

But while investors have been torn between whether the Fed will pull off a “hard” or a “soft” landing, there is a third middle ground where everything feels about bad for an extended period of time. At this point, that economic purgatory may be investors’ best hope.

What’s going on: The Fed has had the same goal since it began raising interest rates to fight inflation in March. wants to achieve a soft landing — that Goldilocks ideal of cooling the economy enough to lower prices, but not enough to trigger a recession. But the idea has become increasingly untenable as inflation rates remain stubbornly high while economic data softens.

The new target seems to be a so-called growth recession: a prolonged period of poor growth and rising unemployment. The pain is sharper and lasts longer than that of a soft landing, but a “growth” recession does not push the entire economy into contraction as a proper recession would. It looks like a recession and it feels like a recession, but it’s not a recession, at least not officially.

Updated economic projections from the central bank last week showed that it expects to land on this scenario. Policymakers revised down their forecasts for economic output through the end of 2024 and raised forecasts for the unemployment rate from their last projections released in June.

Last week, Fed Chairman Jerome Powell acknowledged that the dream of a soft landing is over. “Reducing inflation is likely to require a sustained period of below-trend growth,” the president said after announcing another interest rate hike of three-quarters of a percentage point. “It is very likely that there will be some weakening of labor market conditions,” he added.

A growth slump is still painful. In a best-case scenario, said Joe Brusuelas, chief economist at RSM US, five to six million U.S. jobs would have to be lost to bring inflation down to the Fed’s 2% target.

Declaring the recession might just be an academic exercise anyway, said Kevin Gordon, senior manager of investment research at Charles Schwab, as people are already suffering economically.

Low-income Americans are experiencing negative real wage growth, investors are losing big money across multiple asset classes, homebuyers are being squeezed out of a housing market that is too expensive, and renters are struggling to pay their rents. .

The bottom line: High house prices, struggling tech stocks, high inflation and war in Europe are weighing on investors. The new warning from the Federal Reserve that it is not afraid of causing economic pain adds to the noise. Goldman Sachs and Bank of America lowered their annual S&P 500 targets last week.

“We can expect continued market turmoil for some time,” said Brad McMillan, chief investment officer at Commonwealth Financial Network.

But there is a positive side. “The Fed is performing surgery right now on the economy,” McMillan said. “In the short term, it’s painful. But in the long run? It is a recovery process that lays the foundation for a healthier economy and markets.”

Britain’s new government announced a broad rescue plan the british economy of the recession on Friday.

Announcing the biggest tax cuts in 50 years at the same time he increased spending, Finance Minister Kwasi Kwarteng defended the government’s focus on growth despite persistent inflation problems as a “new approach to a new it was”.

The markets made it instantly clear that they were not big fans of the approach, reports my colleague Julia Horowitz.

Sterling tumbled below $1.10 in mid-afternoon, hitting a new 37-year low against the dollar, before falling to its highest level. the lowest level in history against the US dollar early Monday. UK government bonds have also sold off strongly, sending yields soaring.

Investors expressed confusion at the unconventional approach that would see the government borrow tens of billions more to stimulate spending, much as the Bank of England tries to cool the economy to reduce inflation. The central bank on Thursday pushed its key rate to its highest level since 2008. It was the seventh interest rate hike since December.

new prime minister liz truss defended the controversial announcement of his government in a exclusive interview with CNN’s Jake Tapper on Friday. Truss told Tapper that by cutting taxes, his administration was “encouraging businesses to invest and we’re also helping ordinary people with their taxes.”

Marc Benioff and Elon Musk have something in common.

the sales force president and co-CEO, love Twitter. If it were up to him alone, she told CNN’s Poppy Harlow in an interview, she would “absolutely” buy the social media platform.

But unlike Musk, he won’t actually make an offer.

“I will never buy Twitter,” Benioff told Harlow. “Just because I want something doesn’t mean I’m going to get it… I’d like to go have a sundae right now with three scoops of ice cream, fudge sauce and whipped cream and a cherry. But I won’t have it.”

Your comments come in the middle of Twitter’s legal battle with Elon Musk, who offered to buy the company but later backed out of the deal, reports my colleague Paul R. La Monica.

Still, he thinks there could be a big unrealized upside for the company. Twitter, he said, “is the biggest, least realized, least monetized brand” in tech, adding that “it’s an amazing company, an amazing brand, an amazing platform, and it can do amazing things for the future.”

Salesforce considered a Twitter deal in 2016. But it didn’t, as Salesforce investors resisted the deal. idea of ​​a twitter takeover.

Salesforce finally did another big deal, buying the work collaboration app Slack for $27.7 billion at the end of 2020.

Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan and Cleveland Fed President Loretta Mester speak.

Later this week: US Consumer Confidence, US New Home Sales and End of Q3.

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