The stock market's fine with rising recession risk
The S&P 500 is cruising toward a 5% gain in March, which would be its best month since October.
Why it matters: The turn higher for the market — after it was down by more than 10% — underscores what attentive investors have come to understand over the last couple of years. The stock market isn't the economy.
After the initial shock, stocks rocketed higher.
Between March 23, 2020, when stocks hit bottom, and Dec. 31, 2020, the S&P 500 jumped an astounding 68%.
Why? Government actions. The Federal Reserve cut interest rates to near zero and Congress spent gobs of money to keep the economy from imploding. (Stock markets like free money.)
Today, conditions are much different. Inflation is high. The Fed is raising rates, and little additional government stimulus is expected.
Yes, but: We're still seeing the same kind of stocks that led the market higher in 2020 — so-called long-duration stocks that benefit from lower interest rates — leading the market higher right now.
Goldman Sachs' basket of such stocks, an assemblage of health tech, software and IT companies, for the most part, is up nearly 7% this month, beating the performance of the S&P.
The intrigue: This may seem a little surprising as long-term interest rates — essentially the yield on the 10-year Treasury note — are still going up. In theory, that should hurt these stocks because they're supposed to be sensitive to rising rates.
My thought bubble: One way to square the circle? The yield curve.
The market's romp began in mid-March. That's right around the time the Fed started hiking rates and signaling that it would keep doing so in order to pull inflation back — even if that hurt the economy.
That was also when the yield curve really started to crumble. (Translation: The gap narrowed between shorter-term and longer-term rates.)
The bottom line: Essentially, stock market investors may be betting that the Fed's going to hike interest rates hard, which could cause a recession — and eventually return the economy to the sort of slow growth, low-inflation environment that served tech stock investors well for over a decade.