The latest terrible news for the stock market: The economy is booming again
— almost certainly can't get more painful, and have even shown signs of improving.
Finally, financial market conditions have been easing of late. Bank of America's Global Financial Stress Index, a broad measure that tries to capture the health of the stock and bond markets, has improved for over a month and is now where it was at the time of the June Federal Open Market Committee meeting. A stock-market rally and improving corporate debt markets don't exactly scream"a recession is nigh.
One way recessions work is through an element of surprise: Companies assume things will be OK, and when an economic shock hits they scramble to dump products, halt big investment plans, and stop hiring new workers. But this time, the opposite is true. The recession talk has been so pervasive that almost all companies are girding themselves for a downturn. So if a recession doesn't come and the economy speeds up, what happens? The process works in reverse.
For the average American, this resilient economy is a double-edged sword. On the one hand, the start of 2023 will seem great. Household finances and the labor market will be strong. But the happy New Year could result in pain down the line. Even with improving supply chains, a mad scramble by companies to catch up with higher-than-expected consumer demand would keep inflation higher than the Fed's 2% goal. This, in turn, would force the central bank's hand.
And if American households are going to eventually face the payback of this stronger-than-expected economy, then markets are going to take it even worse. That's because investors are taking the Fed's current tone softening one step further and pricing in interest-rate cuts by the end of 2023. But given the strength of the economy and likelihood of a slower-than-expected decrease in inflation, there's little to no chance the Fed will be cutting by this time next year.
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