In my weekly market reports and elsewhere in my content, I sometimes make reference to a number of different concepts when describing the state of financial markets. I am aware that some readers and listeners might require a little more clarity in plain English around these terms and so that’s why I have written this post.
“Hard Landing”
What It Means: That the Fed overshoots keeps interest rates too high for too long and only succeeds in lowering inflation and increasing the unemployment rate by means of directly causing a harrowing economic recession.
Why It Matters: The Fed appears determined to get inflation back to its 2% target and to get the labor market “into better balance” as continued record low unemployment can always cause a resurgence in inflation. The tool the Fed used to do this was the hiking of interest rates and keeping them high. But if keeping interest rates high ends up causing a damaging economic contraction then they will have accomplished their goal but will also have broken the economy by doing so. A Hard Landing outcome is extremely negative for stocks and real estate, but may be positive for US treasury bonds (especially longer duration ones).
“Soft Landing”
What It Means: In reaction to higher interest rates, inflation gets back to close to the 2% target and the labor market “normalizes” (unemployment moves higher from its current levels, but not by too much) while economic growth slows, but still remains slightly positive. As a result, there is no recession.
Why It Matters: A Soft Landing is a rare event (the last definitive time one happened was back in the mid-1990s) but if/when it does happen it’s powerfully positive for stocks, bonds and real estate.
“No Landing”
What It Means: That economic growth doesn’t slow and the Fed keeps rates high. In this environment, the economy just rolls on with high employment, solid growth and still-elevated interest rates rates (à la mid-1980s). But No Landing can by definition only be temporary, as eventually the economy will slow from Fed rate hikes and the question then simply becomes by how much. So No Landing essentially just delays the ultimate Hard Landing vs. Soft Landing resolution.
Why It Matters: A No Landing would be a short-term moderate positive for most stocks and a rally would likely keep going, although this scenario risks being something of a negative for bonds and real estate as higher interest rates persist for longer. As for what happens next, it totally depends on whether No Landing is followed by a Hard or Soft Landing.
“Stagflation”
What It Means: Stagflation is the simultaneous appearance in an economy of slow/slowing growth and high/rising prices, sometimes - but not always - accompanied by high unemployment.
Why It Matters: Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another. Policy solutions for slow growth tend to worsen inflation for instance, and vice versa. That makes stagflation hard to fight and potentially long-lasting.
“Immaculate Disinflation”
What It Means: Basically, inflation drops back to about 2% - but growth continues to expand. Historically, every time the Fed (or any central bank) has had to bring inflation down, it has done so by causing an economic slowdown (which often, but not always, results in a recession). But there remains this vision that, one day, an economic miracle will happen and interest rate hikes will bring inflation back to target without causing any economic slowdown plus inflation simply declines on its own without the need for a contracting economy and the Fed can then cut interest rates to further support growth.
Why It Matters: This is the most spectacularly positive of any outcome, for stocks. It’s important to point out, however, that this concept is something of a unicorn as it has never actually happened before.
“Goldilocks”
What It Means: Not too hot, not too cold. Just right. Economic data slows just enough to cause the Fed to end its cycle of raising interest rates and consider cutting, but the economy doesn’t slow so much that we have to worry about a recession.
Why It Matters: The Fed will keep interest rates high until such time as it is convinced by economic data that i) inflation is close to their 2% target, and ii) the labor market has returned to better balance, which means the unemployment rate has to go up. Barring the unprecedented miracle of Immaculate Disinflation (see above), that means economic growth will slow, but if it slows just enough to get the Fed to begin to cut rates, then that increases the chances the economy avoids a recession. Goldilocks data is very much a positive for stocks, bonds and real estate.
“YUC stocks”
What It Means: YUCs are Young Unprofitable Companies, which have negative net income, rapid sales growth and which have been around for less than about seven years.
Why It Matters: Because they don’t generate any net income, YUCs have to borrow money to function. A lot of it. They can get hurt badly by higher interest rates. They spend a lot of money on advertising through big tech platforms like Google, Facebook and Amazon. So if investors begin to tire of financing the YUCs, negative consequences for large- and mid-cap tech service providers and the US economy more broadly could be quite substantial.
WWW.ANGLIAADVISORS.COM | SIMON@ANGLIAADVISORS.COM | CALL OR TEXT: (929) 677 6774 | FOLLOW ANGLIA ADVISORS ON INSTAGRAM