The economy is doing well for now: Consumers are still spending, the labor market appears to be cooling slightly, and inflation is tiptoeing back from its multidecade highs. Yet August was a bad month for the stocks, and September isn’t any better. What gives?
Yet if the economy does slow—even without a recession, as appears to be the case—then stocks would have to begin pricing in below-trend growth, “a process that would involve downward earnings revisions, and lower markets, without approaching/pricing a hard landing,” he notes. In other words, investors aren’t wrong to be optimistic about the economy, but “recoveries have typically only turned into expansion when they are supported by monetary or fiscal policy.” Needless to say, the fact that the Federal Reserve’s strategy for a soft landing rests on real interest rates being higher for longer doesn’t support this case. Therefore, he expects leading indicators will at least pause, which would put downward pressure on the market as growth expectations stall.