2-minute read
You want to know what is one of my least favorite things about the stock market?
What’s that?
When good things happen in the world and the market pukes.
What’d you mean exactly?
Do you recall this headline from a few weeks ago?
No, but you gotta love to see it.
Or do you?
Yeah…
One guy that didn’t love to see it? Mr. Market. The S&P 500 proceeded to lose more than 1% over the next two days.
You’re gonna cry over a 1% loss when the market is up 19% this year?[1]
Sure am. We went from, “No one wants to work anymore!” to “Why the hell is everyone working?!”
This already seems like a non-story.
I hope you’re right, but there’s somebody hanging at the bar putting out a weird vibe.
Who might that be?
The Fed.
Them again, eh? Pretty tired of talking about those nerds.
So am I but unfortunately, they’re a prominent character in this movie.
And what role are they playing?
We’ve scrolled their online dating profile before, so no need to rehash basics. But what they’re trying to prevent is the economy from overheating.
What does that mean exactly?
In the words of economists much smarter than me, overheating occurs, “when the economy reaches the limits of its capacity to meet all of the demand from individuals, firms and government.”[2]
Then what happens?
The fear of the Fed is that the labor market is ‘too strong’ which can bring on unsustainably rising wages leading companies to rise prices. This is the so-called “wage-price spiral”.
But I thought the fed’s goal was full employment…?
You’re learning! And yes, you’re right. But if they have these fears and attempt to prevent them from happening, they do have levers to pull.
Like what?
Most notably, they will continue to raise interest rates. This is intended to ‘cool down’ the economy which could mean job losses and less overall business development.
And the market is okay with that?
Nope! The consensus on Wall Street is that the Fed is overly aggressive. They believe the Fed should be more hands off and not jump to conclusions.
More Americans working = Fed intervention = Wall Street disagreement = falling stock market?
Yes, that’s it.
That’s dumb.
Couldn’t agree more. But it’s the world we live in. Stocks are liable to fall on good news and rally on bad news. How will this post-COVID world play out? It’s anyone’s guess. But I can guarantee this won’t be my last complaint about an illogical stock market.
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[1] S&P 500 return as of July 21, 2023 (https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview)
[2]https://www.centralbank.ie/consumer-hub/explainers/what-does-overheating-in-the-economy-mean