Divergent Opinions

Major stock indices opened lower, reversing yesterday’s rally. At the moment, the Dow is down 450 points, and the S&P 500 is off by 2%. Copper and oil are ticking up, whereas gold and silver are down. The bond market is also selling off, partially offsetting yesterday’s rally. James Bullard, president of the St. Louis Fed, says investors are finally coming to grips with the Fed’s determined effort to fight inflation by raising interest rates. Expecting another 1.25% of interest rate hikes this year is the “right interpretation.”

We’re hearing widely divergent opinions on the economic & market outlook from Wall Street strategists & economists. I suppose that makes sense given elevated uncertainty and the fact that economic data are really conflicted. Also, we don’t really know when or whether the Federal Reserve will pause rate hikes as inflation moderates. Below I’ll highlight three different opinions recently expressed by well-respected experts.

Wharton professor and author Jeremy Siegel says inflation is falling faster than most people think. While it’s obvious commodity prices have already retrenched, government statistics obscure the fact that home prices and housing costs are also falling. “If you go on the ground with real estate brokers, they say prices are softening. And remember, housing is 40% of the core [inflation] index. Will you see that in the official statistics? No. Because of the way the government does the official statistics, they put it in very lagged. So you’re going to see housing prices continue to rise, rise, rise there. But on the ground, they’re not.” He reasons that if the Fed decides to acknowledge this, “they will not have to go more aggressively.” If the Fed refrains from further interest rate hikes, “we might get that soft landing that everyone else thought was impossible.”

On the other hand, billionaire investor Stanley Druckenmiller says the most likely scenario for 2023 includes a “hard landing.” He explains that the Fed is trying to quickly unwind a decade’s worth of over-stimulus, which created asset bubbles. In addition, he’s more focused on the fact that headline inflation (CPI index) was last reported above 8%, which is near a 40-year high. He has little faith that the Fed can avoid a costly policy mistake. They’ll continue raising rates, driving the economy into deep recession next year.

David Rubenstein, founder of private equity giant Carlyle Group, says investors shouldn’t wait for a market bottom before buying stocks. The fact is, many stocks are trading at a discount, representing good long-term value. And we’re closer to the bottom than the top. Acknowledging that it may take another six months to see real progress on inflation, and the stock market may fall further, he cautions against trying the time the absolute bottom. He says we aren’t currently in recession, but that can’t be ruled out.