For The Millionth Time, Markets Exaggerate | Seeking Alpha

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Policymakers are far from perfect, but the collective wisdom of the market is not flawless and is prone to exaggerate.

Next string of US economic data should reinforce ideas that a recession is not imminent.

The S&P 500 fell more than 12% in a few weeks. The 10-year Treasury yield fell nearly 40 bps. There were cries that the sky was falling. A recession is imminent, we are warned by prognosticators. The Fed went ahead and raised interest rates on March 21, 2018 and the S&P 500 proceeded to gap lower the next day and continued to sell off the following day. Investors did not like the unanimous decision. Yet far from the apocalypse, the US economy was on the verge of a growth surge.

As the economy rounded out a 4.2% annualized pace of growth in Q2, the Federal Reserve hiked rates again in mid-June. The S&P 500 at the time was at the upper end of the range seen since the January-February slide (~2,800), and again investors did not like the hike and took the S&P 500 down around 3.5% by the end of the month.

The real Fed funds rate was below zero (until H2 ’18). The economy was growing above trend, the labor market was strong (no need to wade into the weeds to discuss the technicalities of the meaning of full employment), and inflation was near the Fed’s target. On top of this, the federal government was providing a combination of tax cuts and spending increases that surpassed what was delivered during the Great Financial Crisis.

 

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