Breitbart Business Digest: Dow 40,000

Party On

Jerome Powell might want to look away from the stock market. It’s making a mockery of the idea that financial conditions are sufficiently restrictive.

Dow Jones Industrial Average has surged past the 40,000 mark on Thursday, after rising around six percent so far this year. It’s up an astounding 23 percent from its recent nadir in October, back before the Federal Reserve pivoted away from rate hikes.

Remember when Powell got tough with markets back at the Fed’s annual econopalooza in Jackson, Wyoming, in the summer of 2022? The Fed chair insisted that the central bank would “keep at it until the job is done,” warned that there would be pain to come, and said that the risks of stopping hikes prematurely outweighed the risks of monetary policy becoming too restrictive.

Powell even went so far as to invoke Paul Volcker, pointing out that the last time the Fed had to fight inflation that had soared so high “a lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year.”

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said in his brief remarks at the gathering. “The historical record cautions strongly against prematurely loosening policy.”

The Dow sank 1,000 points after that speech. The S&P 500 dropped 3.3 percent, and the Nasdaq dove 3.9 percent. Those declines came on top of earlier downdrafts in anticipation of the hawkish speech. By the end of the year, the major averages had clocked their worst annual performance since the near collapse of the financial system in 2008.

Tellingly, the federal funds rate was around 2.3 percent when Powell gave that speech. That’s just over half of today’s rate. But monetary policy is not really about the current rate. It’s about the expected direction of rates. So, even though rates are much higher than they were in the summer of 2022, the stance of monetary policy is arguably much looser because the market is convinced—as is Powell himself—that the Fed’s next move will be a rate cut.

The Recession We Never Had

Since September of 2022, the Dow is up around 40 percent, the S&P 500 is up 48 percent, and the Nasdaq has soared 58 percent.

This climb was almost unthinkable just a few years ago. The prophets of doom were everywhere. The Wall Street consensus was that the Fed’s hikes would throw the economy into a recession in 2023. Bloomberg’s economics team at one point raised the odds of a recession in 2023 to 100 percent. It was inevitable!

Here at Breitbart Business Digest, we took the other side of that prediction. We doubted the Fed’s determination to push rates up to truly restrictive levels. We could see that Biden’s fiscal profligacy was still fueling excess demand, and excess savings was enabling the boom in consumer spending to continue. Unemployment was ultra-low and vacant jobs plentiful, adding to household income and confidence to stoke even more consumer demand. So, we said there would not be a recession.

Of course, the much-dreaded economic downturn never came to pass. The Fed made it clear in early 2023 that it was slowing down the pace of rate hikes and then stopped hiking in July. For a few months, it held open the possibility that it might hike one more time, but markets could already see the top of rates on the horizon. By the winter of last year, it was clear the Fed was ready to pivot toward cuts.

Of course, it’s not all the Fed’s pivot driving stock euphoria. Many investors now expect a productivity boom from artificial intelligence advancements. This enthusiasm has particularly benefited the Magnificent Seven tech giants, with Nvidia at the forefront, its market value soaring past $2 trillion after a 99 percent rise year-to-date. Microsoft, which is not exactly a young company, has been buoyed by its partnership with OpenAI, rising 13.5 percent this year, its market value levitating at $3 trillion. Meta shares are up 36.63 percent this year. Amazon’s up 22 percent. Alphabet has gained 26 percent. (Apple shares, we should mention, have climbed less than three percent since the start of the year, in part because investors don’t see a big AI play there.)

The recent rally, however, has not been confined to technology. It’s broad-based. Industrials are up 10 percent year-to-date and 28 percent from a year ago. Utilities are up 14 percent so far this year. Materials stocks are up seven percent. Consumer staples are up more than eight percent. Consumer discretionary stocks are down since the start of the year but up an eye-popping 27 percent from 12 months ago.

Is a Crash Coming?

What could go wrong? The unseen specter haunting the market is the prospect of a return to Fed hikes. Resurgent inflation could force the Fed back into rate hiking mode, which would almost certainly bring down some of the more lofty valuations we’re seeing today. If the market thought the fed funds rate needed to climb to seven percent, would the S&P 500 be trading above 20 times earnings?

But that hardly means a crash is inevitable, much less imminent. As Powell’s recent speech in Amsterdam made clear, the Fed is very far away from re-pivoting toward hikes. It would likely take many months of climbing inflation to push the Fed off its cutting bias, which means the market can likely continue to climb. What’s more, the labor market is showing no signs of serious weakness, consumer spending remains resilient, and there’s a good chance that November’s election could bring relief from the threat of tax hikes and ever-mounting regulatory burdens.

Whenever an economy or financial market is described as Goldilocks, everyone always mentions that eventually the bears show up. They discover that Goldilocks has rampaged through their abode and find her sleeping in the little bear’s bed. But people often forget that—at least in the most common versions of the fairy tale—Goldilocks escapes, getting away with all her mischief. It was “just right” after all.