Regardless of what the White House was to spread, the United States economy is in a recession. This is falling in line with the EU and China, two areas that are seeing extreme economic hardship.
Whatever the technical definition, we are in for a slog. In my view, this is going to last towards the end of 2023, most likely into 2024.
The good news is we are already more than 6 months in. However, that still leaves a lot of pain ahead.
So what does this mean for the economy and, worse, markets? This is what we will try to uncover.
The Fed Is Doing What!!!
We are in a recession and the Fed is hiking interest rates. This is the exact opposite of what Central Banks do in these instances. For this reason, it is going to prolong whatever we are in for. There is no way around it.
At this point, since the Fed is "data dependent", we can expect it to raise rates at the September FOMC meeting. This is likely going to be the last one.
However, the Fed does not do anything quickly. They are like an oil tanker when trying to maneuver. Therefore, even if the Fed comes to its senses and realizes that it is looking backwards instead of ahead, it still will be months to reverse course.
That is because the Fed has to foreshadow everything. The reality is the Fed really cannot do much about rates. Thus, it has to manage expectations and try to get the market to do the heavy lifting.
What this means is a flipping to easing could hit them quickly, but will not happen until the first quarter, at best. Odds are they announce towards the end of the year, or even the first part of 2023. After that, it takes a couple quarters to really feel the impact.
Here we are in September and the Fed is still on the inflation has to be tamed since we have a hot jobs market kick. It is looking up as the economy is showing major signs of cracking.
Markets Precede The Economy
The good news for market participants is that markets move faster than the economy. In fact, the stock market tends to bottom about 2/3 the way into a recession. That means we could see things kicking off come the first or second quarter of next year.
For cryptocurrency addicts, this is something that could also be in alignment. With it being the risk off trade, when things are on the downward slide, it is best to stay home. However, when things reverse, we could get a very powerful bull market ensuing.
One area to watch is bonds. The fixed income market tends to come ahead of stocks. This makes sense since risk is put back on in stages. Once we see a recovery in bonds, then the appetite for greater returns come be on tap.
As we can see, it is likely down the road a bit. Do not be surprised if we slog lower as the equity market starts to assess the economy. Earnings are going to be important for the 3rd quarter. If they disappoint, we could see a bloody October (it is the time of years for a bloodbath in equities).
All of this is going to affect cryptocurrency. It does not operate in a vacuum and we cannot ignore the major trends around us.
This is for informational purposes only. It is not financial advice.
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