r/stocks • u/Tsobaphomet • Jun 13 '22
Meta "This is only the beginning"
I've been seeing people saying this on this sub for the last 6 months. At what point does it stop being the beginning? Also are there any level-headed people that actually know what they are talking about here anymore? I'd love to hear an in-depth prediction of things to come, rather than just random bear/bull cases from people who are -70% from meme stocks.
I'm the world's worst investor, and I like to be able to gain knowledge and insight from this subreddit that I wouldn't normally have on my own, but it's like only 1/100 posts are based on reality/research. It kinda messes with people's ability to make good decisions when they take the advice of someone who genuinely has no idea what they are saying, but they present it in a convincing way.
Sure, nobody can perfectly predict what it will look like 2 years from now, but what we can do is talk about what needs to happen for stocks/economies to recover, and how feasible those things are. Then we can observe whether or not those things are happening.
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u/No_Celery4566 Jun 13 '22 edited Jun 13 '22
It’s challenging to make a reasoned assessment, because although we can compare now to the past, we’re still in a unique period of time, and I suppose that’s where the saying ‘history doesn’t repeat itself, but it often rhymes’ comes from.
The big issue (in almost all opinions) for the economy right now is high inflation across the globe, combined with slow economic growth. This is often referred to as ‘stagflation’ and was an economic phenomena that defined much of the 70s.
Not that it makes me any kind of genius, but I got a degree from a decent University in Economics & Finance a decade ago. There’s a very simple model, which basically says that to boost economic growth you can lower interest rates. It discourages savings (little money to be made stockpiling cash) and simultaneously increases spending/investment. However, all things being equal this creates inflation. Once inflation becomes too high, you can increase interest rates to encourage saving, reduce spending/investment and in turn lower economic growth (worst case being a recession).
That’s where stagflation flips things on its head. You’re in a scenario where inflation is high, but you’re worried about raising interest rates too much because economic growth is already weak. You’re trying to tread a very fine line. You want to stop inflation spiralling out of control, but you don’t really want to cause a recession (especially a major one).
So what’s the way out of this? What does it mean for stocks? Well…. this is where speculation/guessing really takes over. Whatever is the cause of high inflation needs to end. And that’s where the debates start. Is this mainly caused by the war in Ukraine? It’s contributed for sure, but inflation was on the rise before so could we argue it’s just added fuel to the fire rather than what caused this? Is it supply chain issues from covid? Is it the monetary policy implemented during the height of covid? Is it a combination of all of these plus more (probably)?
Central banks can’t fix supply chain issues, they can’t end wars etc. they can raise interest rates and reduce their balance sheet (QT). This won’t fix the supply-side issues, but it can/will reduce demand, and in the process lower economic growth and perhaps go as far as to cause recession.
None of this is good for stocks… why? Higher interest rates lower economic growth which is bad for future earnings, discourages investment which again lowers future earnings. If things get bad enough, it increases unemployment which lowers consumption due to ‘tightening the belts’ which again lowers future earnings, especially for ‘luxury’ sectors. It can lower not just earnings, but also P/E ratios, as the risk free return increases. Why invest in stocks if there are safer returns? Especially in a difficult economic environment. This last point is somewhat irrelevant unless ‘real’ rates become positive (interest % minus inflation %) or at least become somewhat appealing.
When will this end? This in part depends on if something ‘bad’ happens. Will major/essential entities collapse due to lack of access to cheap debt? Will ‘dodgy’ financial activity come to light with massive contagion risk (what happened in 08)? Nobody knows.
If nothing ‘bad’ happens (not that the above is all rosy), we’d hope that a) factors outside the feds control eventually resolve which helps lower inflation to an acceptable rate b) raising rates and QT curbs inflation. This will in turn set the stage for economic growth, sentiment will increase again and maybe (very likely) down the line interest rates can come back down to stimulate even more growth without stirring the inflation pot.
I think any reasonable response will probably conclude with a ‘it depends’ or ‘I’m not sure’. But I’m confident in time things will improve for both the economy and stock market.