It's driving everyone crazy, trying to figure out the right way to look at markets. It's not usually this hard. Here's the central problem: The two biggest issues are inflation and interest rates, and on both there is an enormous range of potential outcomes for this year. On inflation, some believe it will moderate because high prices for cars, gasoline, housing will result in some demand destruction, others believe it will take several years to untangle. On interest rates, half the traders loves the Federal Reserve talking tough to get inflation under control, and the other half is afraid hiking rates too fast will lead to a growth slowdown and demand destruction. No wonder everyone is so frustrated. One trader quipped to me, "I can't figure out if we are a catching a falling knife, or grabbing a rocket taking off." What does this mean for stocks? Unless the inflation story moderates very quickly, some are worried about the implications for stocks later this year. There is a narrative developing that it is going to be very hard for stocks to rally back to old highs in this environment. That's because the Fed wants to slow inflation, but big stock rallies create a wealth effect that fuels inflation. So big rallies makes the Fed more comfortable hiking rates. So instead of the old Fed put on stocks — that the Fed will help the markets if they fall apart — some say there is now a Fed ceiling. In other words, the chances the Fed will keep raising rates is higher when stocks are higher.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, March 11, 2022.
Brendan McDermid | Reuters
It's driving everyone crazy, trying to figure out the right way to look at markets. It's not usually this hard.