Streetwisenheimer

 

Wall Street Journal Streetwise columnist James McIntosh has a quick valuable piece of thinking on where markets are headed. He admits like everybody else that he was wrong going into 2023. He takes some time to figure out what exactly or possibly was wrong in people's projections and how that can be fixed or if a lesson is there.

We have to decide why the economy defied expectations, he writes in the December 30, slash 31^st edition.

There are four competing explanations he continues.

Issue one: Inflation was transitory. The Federal Reserve Bank was widely chastised for its assertion that inflation was transitory. At some point they figured it wasn't exactly as transitory as they thought and they started raising rates. Then it was transitory, and they discussed backing off next year. Some people think the rate raising was overdone and will be quickly reversed. I don't. I expect a steady course that stays in traditional bounds of interest. Let’s face it, the economy was resilient, and can continue that way.

Issue two: The government filled in the gap with massive spending. In an election year that is not expected to change but the Republican Party has more and more difficulty sticking to the script. So who knows? A pullback in government spending could be nearer. But, the economy was resilient, and can continue that way, it's not only because it's the wish of Pres. Biden.

Issue three: The rate hikes did not bite into spending. Homeowners had refinance at very low rates. The only people threatened were ones with floating rate loans, auto loans and credit cards [why do those never go down? Why does no bank see fair credit card interest as a potential selling point?]. Maybe that's the reason the economy was so resilient. There must be loan-burdened zombie companies about to shut down. Maybe government spending was the reason it was resilient. But the other Issues had influence and … Let’s face it, the economy was resilient, and can continue that way.

Issue four: The Fed offset its own tightening because it didn't shrink the money supply as intended. Which was going to be a step to buttress the rate hikes. The grey swan event of Silicon Valley Bank crash caused the Fed to take a different course. Fed special lending program for banks expires in March. The central bank’s flexibility contributes to the idea that US economy will continue to be resilient.

The political temperature of the US is not quite so good. If Trump wins, Wall Street will be glad, cause it makes them feel glad. World on Fire only concerns a few.

Put it all together, Streetwise McIntosh writes, and the outlook is for weaker growth and lower rates. That means a mix of outcomes, possibly off-setting in the long year but highly volatile at points [what was a happy ending in Nov-Dec 2023 could be reversed and then recast, with the smart money making hay.

The weaker growth is bad for stocks - the lower rates are good for stocks. Wall St Babies will cry for their bottle. The end of this story advises that it is riskier to buy stocks when they are expensive – which they are, depending on how you measure - because they offer little margin for safety to absorb bad News. In the first three trading days of the Year there's little guidance there to help discern direction. - B.B.