The market will have already rallied by the time inflation is tamed because of the market’s forward-looking nature. On the minds of investors will be a possible recession or the next big thing. There’s always something on the horizon. 

In 2022, a year when inflation was uncomfortably high and stayed there, we had notable rallies on the smallest of signals. Those signals were a hint of a slowdown of rate hikes, news being less bad than expected, or the Fed chair, Jerome Powell, simply saying “neutral”. 

If the current year end rally is a bear market rally, then an assessment on what can possibly cause new lows. 

The other elephant in the room is the increasing likelihood of a recession (yes, there are two elephants in the room). The way the country is hiring and spending now, there is no sign of one. However, interest rate hikes in 2022 have a lag of about 12-18 months. 

Imagine the brakes in your car don’t engage until two miles after applying them. If you’re on a road you’re unfamiliar with, you don’t know if the road stays straight, curves, declines, or climbs. Your braking might be needed but your braking might slow you down when you need speed to climb.

The extent this bear market has already priced in a recession is unknown. I would think the reaction to inflation and rate hikes takes most of the credit so far. 

If there are 100% odds of a recession, the question would be how bad will it be. Remember the big recession of the early 90s? No, we’re trained to live through steep and life altering recessions like 2001 and 2009.  

The IMF is predicting the Euro area is closer to recession than any other region. Outside of that, there is no sign of impending recession. This is not a prediction, just stating the data.

We have two reputable economic forecasters in the Conference Board and the IMF with opposing views. Surprise! We can’t predict the future. 

Let’s say there’s a recession but Russia leaves Ukraine. If inflation goes down and the housing market normalizes. Lots of mixed possibilities where no one can predict reactions to.

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