Inflation reduction strategies by the Fed have been working. But the economy is slowing down to worrying levels.
Investors should not be tricked by the bullish markets of the last week. US decrease of inflation, now at 7.7% down from 9.1% in June, is the start of a slug that could end into recession. Market analysts consider it likely for the market to keep its bear pattern well into 2023.
Good signs for investors have been inflation reduction, declared in the past weeks by the Fed, and the ease of Covid restriction in China. The first news meant that the Fed’s strategy is actually working. They have been hiking interest rates for almost the entire year now, but inflation kept rising and analysts were worried it was the wrong call.
The second news meant for investors that the world’s largest market was open for business again. But then it turned out to be a false alarm, as China reported the first Covid death since May and will probably resume restrictions again.
As for the inflation reduction, that too is a false hope. Increasing interest rates slows down the market, as investing in that currency becomes more costly. This should theoretically remove money from circulation, therefore decreasing inflation, but it also slows down the economy.
Will the economy recover with less inflation?
The answer is, unfortunately, no. Not immediately, at least. The Fed now realizes that raising interest rates is a good call as it does actually bring down inflation. This means that they will likely keep doing it until inflation reaches the “ideal” level of 2%.
But in doing so, they will probably run the economy into a recession. In fact, many do not wonder “when” it will happen, but “how deep” it will be.
The most optimistic analysis says that market levels will be the same at the end of 2023 than at the end of 2022. According to Mike Wilson, Morgan Stanley’s Chief Investor, the first quarter of 2023 will see the biggest dive. Then, a slow recovery will follow that will drag us back to today’s levels by the end of the year.
US Chief Investor suggests to start investing in long term treasury bonds. He pointed out that mid and long term yields are the highest seen in a decade, which confirms the change in economic trends.
Others, like the world’s richest man Elon Musk, already said that a recession is inevitably incoming and will last “at least until 2024”.
One thing is for certain, entering the market at the end of January 2023 could be a game changing strategy for new investors. That is, of course, if we don’t go into a recession immediately after.
