I find it strange, and perhaps even a tad disingenuous, that the same bulls who shouted, “don’t fight the Fed!” when the market was going asymptotic to the upside are now telling people to fight the United States Federal Reserve on the other side of the mountain. To these folks, it’s as if economic and market cycles don’t exist.
But, you see, 70 per cent of that three-year bull market was due to the expanded P/E multiple — “animal spirits” — while earnings growth was a two-bit player, accounting for the other 30 per cent. Historically, those relative contributions are reversed. Had that been the case, the S&P 500 would have peaked at the beginning of this year closer to 3,600 rather than 4,800.
Besides, inflation has put real disposable personal income, close to 80 per cent of the economy, into a recession of its own, contracting in six of the past seven months, and at a -4.5-per-cent annual rate. As sure as night follows day, consumer spending will follow suit. The Fed is going to do its best to reverse the situation, but the medicine will not be very tasty, as the inflation shock gets replaced by an interest rate shock.
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