Quandary: Okay, Bull and Bear. We’re at another one of those points where I don’t know what to do. There are so many worries: inflation, rising interest rates, possible recession, global geo-political conflicts…
Bull: Let me stop you there. Stock prices are rising. It may be one of the oldest cliches in the book, but it’s still true – the stock market climbs a wall of worry.
Bear: Yeah, well, let me throw out another ancient axiom: Don’t fight the Fed. Jay Powell and his pals are determined to crush inflation even if it means crushing stocks. They already are floating the idea of a 7 percent funds rate.
Do you think stocks can compete with those returns, or that the economy can grow when you can’t pencil out a return on investment with that level of debt burden?
Quandary: I understand, Bear, but the fact is that stocks have risen.
Bear: Have you ever heard of a bear market rally? Happens all the time. The bounce we’re seeing isn’t any higher than a basketball dribble compared to previous bear rallies that were followed by stocks sinking even further.
Bull: Bear, we’ve been hearing your story for months now. But guess what? Consumers continue to spend and this is still a consumer-led economy. Look at casinos. Their business is good. In Las Vegas, groups and international businesses are coming back. And if casino companies prosper, so do their suppliers.
Quandary: That’s what I see. Consumers are still spending.
Bear: Look forward, young man. Consumers have blown through their COVID cash. Now they’re running up their credit cards. That won’t last long.
Lower income people have already cut spending. Even $100,000-a-year earners are shopping at Walmart. And all of this talk about spending on experiences sounds good for gaming companies, but the economy isn’t built on experiences.
It is built on products like cars. It is built on buying homes, though that isn’t happening at 7 percent mortgage rates. Believe me, once they run out of money and credit, all of their experiences will just be memories, not building blocks.
By the way, the recession for gamers might already have started. Look at October revenue reports – legacy gaming is starting to decline.
Bull: But you aren’t looking at the improvements underlying the economy. Supply chains are improving, Inflation growth has slowed and…
Bear…Whoa there. You are kidding me, aren’t you? Inflation falls from 8.3 to 8 percent and you call that an improvement? So you die by a thousand cuts instead of 1,100. You’re still dead.
Quandary: Oh, no. Let’s not talk like that. Nobody’s going to die, are they?
Bull: Of course not. Bear here has got to scare you or he’ll be stomped under the stampede of shorts forced to cover their positions as stocks rise.
The fact is nobody sounds an all-clear when bull markets begin. But look at the strength of the underlying economy, the greater efficiencies of companies, their improved balance sheets and you’ll see how stocks can rise leaving bears to look back and wonder how they missed a golden opportunity.
Bear: Or you understand that the economy lags Fed rate hikes by six to 12 months and that a recession is bound to depress earnings, then stock prices. Again, don’t fight the Fed.
Bull: Or you understand that stocks start moving up in anticipation of the end of rising rates climbing that wall of worry before the economic recovery begins.
Quandary: Oh, my. I’m still where we started, not knowing which cliché to believe.
