Teetering on the Edge of a Bear Market
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Been Down So Long, It Looks Like Up To Me is the title of a 1966 novel by Richard Farina, who apparently borrowed it from a blues song titled “I’ll Turn Your Money Green.”

The song contains a promise:

If you follow me, baby
I’ll turn your money green
I show you more money
Rockefeller ever seen

Farina’s title is a pretty good description of the stock market lately. The major indexes were each down by less than one percent today, a respite from the recent steep sell off that almost seemed like an up day. The Dow Jones Industrial Average only lost 0.75 percent! The S&P was off by just 0.58 percent. The Nasdaq only lost around a quarter of a percentage point! Break out the champagne, boys! We stumbled but didn’t collapse today.

The truth is that stocks are pretty close to collapsing. The S&P 500 is down around 19 percent from its January close. That puts us just one percent away from the official marker of a “bear market.” To put that in context, the S&P collapse during the initial phase of the pandemic was 34 percent from peak to trough. Those who can still laugh are saying the market has turned their 401(k) into a 301(k).

The Philadelphia Fed’s manufacturing survey certainly did not add any reason to be confident. Just as the New York Fed’s index did at the start of the week, the Philly Fed gauge unexpectedly plunged. The general conditions index came just shy of falling into negative territory, indicating that growth is near a standstill. Even worse, this month’s special questions indicated that inflation expectations have become unanchored and are moving quickly upward. Back in February, firms said they expected 5.5 percent inflation over the next year. In the most recent survey, they said they are expecting 6.5 percent. Expectations for annual inflation over the next ten years jumped from three percent to 3.5 percent.

This should be setting off alarm bells inside the Federal Reserve. In the Fed’s view, inflation expectations are themselves a powerful influence on actual inflation. Ever since the current bout of inflation took off, Fed officials have been trying to reassure the public that inflation will not become a long-term problem because inflation expectations remained anchored. The persistent inflation and the high price of gasoline—which has hit an all-time high every single day this week—appear to be finally moving expectations away from their former anchorage.

Rising home prices are usually a sign of economic strength, but they make a different impression in an inflationary environment. So, when the median price for a home sold in April hit an all-time high, that was generally seen as troubling news. It’s not that investors are expecting a housing crash; it’s just that the escalating prices of existing homes is another sign of an economy overheated by demand and starved for supply. The volume of sales fell all the way back to the lows last seen in June 2020, when much of the economy was on lockdown. And keep in mind that when a family sells their home for an outsized gain, they’re typically also buying a home at an inflated price.

Walter E. “Furry” Lewis, the Memphis bluesman who wrote “I’ll Turn Your Money Green,” included these words in his song:

If the river was whiskey
Baby, and I was a duck
I’d dive to the bottom
Lord, and I’d never come up

Sometimes that’s just how the market and the economy feel, and you wish someone would come along and turn the money green once more.

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