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Market Strategy 5/09/2022

  • John Stoltzfus
  • May 9, 2022

“Free Money” Is Not “Easy Money”

The process of moving monetary policy forward is neither insurmountable nor is it a cinch

Key Takeaways

  • With 436 or 87% of the firms in the S&P 500 having reported, Q1 earnings are up 7.8% from a year ago on revenue growth of 14.2%. Thus far in the season, 77% of firms have posted positive surprises.
  • This week we consider that the end of “easy money” is not at hand, but rather the end of “free money” is.
  • We’ve updated our “Maximum S&P 500 Drawdowns” table to show the broad market’s current decline of 14.04% through May 6, which exceeded its previous max decline of 13.3% on April 29.
  • Economic data released last week suggest that the economy continues to show relative strength even with slowing tied to the consumer and businesses response to current inflation levels.
federal reserve

Who said the end of the “free money” period that resulted from emergency efforts by the Federal Reserve and political fiscal stimulus to counter pandemic economic risk would be easy? The equity and bond market volatility experienced stateside and elsewhere around the world over the past few weeks and since the start of the year makes sense when placed in context of more normal periods in market history.

Over the course of a little more than 14 years sequential crises, which include the Great Financial Crisis, the COVID-19 pandemic and the current geopolitical crisis brought on by Russia’s incursion into Ukraine, have strained the fabric of the global economy with risks that have demanded dramatic inflows of liquidity into the economic landscape to support the economy and the markets and to offset risk that could have caused deep recessions or even skirted a depression.

Over the course of the past decade successive efforts of providing liquidity to offset deflationary risk tied to the aforementioned crises have engendered an environment in which many bond issuers barely paid for the privilege of borrowing money and lenders and bond buyers were given little to compensate them for the normal risks of lending money. Stocks and real assets got a substantial boost from the liquidity feeds in the process. The addition of fiscal stimulus along with central bank monetary policy stimulus in the pandemic crisis is what in our view led to an overstimulated economy stateside and elsewhere which in turn has led to problematic levels of inflation not experienced on the back end of the Financial Crisis.

Quotation from Aenean Pretium

For now the markets would seem to us to remain hostage to a “what have you done for us lately” sentiment…

In our view much of the angst felt in the markets today stems from not taking the current situation in context of what is likely a well-justified end of “free money” but not an end to relatively “easy money” considering the deeply embedded secular trends in the stateside and global economy that are driven by technology and what is likely to be a much broader level of globalization as firms globally move away from a one and two country global supply chain to a much broader diversified global supply chain for a host of manufactured goods and strategic commodities and oil. The process of that diversification has been ongoing if too slowly over the course of the past five years since the tariff wars initiated by the Trump administration and now further defined by the Biden administration.

Easy money or “easier money” is what happened in the crises that pre-dated the recession driven by the Great Financial Crisis (GFC) which began in 2007 and at its peak threatened the global economic order. Since 2007 the effects of unprecedented levels of emergency funding of the stateside economy by the Fed and by other central banks in their respective economies led to what we define as “free” or “near free” money for borrowers.

It was the GFC that took the Federal Reserve’s benchmark rate down to the lower limit or zero and set a precedent which lasted some eight years until December 2015 when the Federal Reserve began a rate hike cycle that lasted until December 2018 (it consisted of nine tightenings or hikes of 25 bps each).

Those nine hikes in aggregate led to a stock and bond market correction with a near bear market decline in the fourth quarter of 2018 by the S&P 500 and which sent the yield on the 10-year US Treasury to a peak of 3.25% in November 2018. The stock market hit a bottom in late December of 2018 and rallied after the Fed pivoted its policy ending that hike cycle. The Fed subsequently eased three times in 2019 in July, September and October of that year until the pandemic crisis stateside toward the end of the first quarter of 2020 saw the Fed cut its rate to a band of 0% to 0.25% in two separate cuts in March of that year.

The Fed this year (2022) in response to inflation which has become persistent has raised twice so far: in March and in May (25 and 50 basis points respectively). With inflation as pegged by the CPI at around 8.5% expectations are that the Fed could raise somewhere between 6 and 9 times in total this Fed funds hike cycle before it is able to put inflation in check.

The 40-year high levels of inflation currently felt stateside sourced in a problematic series of economic re-openings around the globe plagued by COVID-19 and variant resurgences, China’s “0” tolerance to variant outbreaks within several of its major cities (and reluctance to use more effective vaccines from the West), along with global supply chain disruptions aggravated by the aforementioned are at the core of the challenge the US and global economies are experiencing.

US Economy Showing Resilience

The US economy and markets have shown remarkable resilience relative to the challenges extant as evidenced in job growth, corporate revenues and earnings and health of the consumer.

Last week saw better than expected job growth in the non-farm payroll number and growth (if somewhat slower) in the ISM manufacturing and services indexes as well as continued relative strength in the S&P 500 Q1 reporting season with 77% of companies reporting results above expectations.

This week investors will focus on the CPI numbers on Wednesday and the PPI on Thursday. An earlier survey of economists by Bloomberg looks for both headline numbers to move slightly lower suggesting that inflation may have peaked in March. On Friday investors will look for clues as to the direction of consumer sentiment in the University of Michigan survey.

For now the markets would seem to us to remain hostage to a “what have you done for us lately” sentiment that appears to run through the market’s constituency that feeds off of good and bad news on a day to day basis looking for a catalyst to drive the actionable idea of the day. Over the course of this quarter we’d expect economic data and corporate news to persist in providing enough positive offsets to negative news as efforts by the Federal Reserve, the business community and the consumer to navigate the challenges at hand succeed in climbing the current proverbial wall of worry.

John Stoltzfus headshot

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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