Why lower stocks could be a good thing
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Illustration: Sarah Grillo/Axios
The stonks are too damn high. One good thing that could happen for America over the coming weeks would be for the stock market to embark upon another significant decline.
Why it matters: A buoyant stock market is constraining the Fed and, ultimately, hurting the country. There's a financial media convention that higher = better, when it comes to the stock market — but that's not always the case.
The big picture: The Fed's big problem is that the economy continues to run too hot, driving inflation well above its 2% target. The current spending spree is fueled at least in part by investors' animal spirits — after all, they've fared pretty well over the past couple of years.
By the numbers: The S&P 500's pre-pandemic record high of 3,387 was hit on February 19, 2020. We're now a comfortable 16% above that level, even after accounting for plunges in the likes of Facebook and Tesla.
- Even meme stocks continue to defy gravity: GameStop, for instance, which was trading at $1 per share pre-pandemic, is now at $22.
- Dogecoin has risen from 0.2 cents to 9.7 cents.
How it works: A stock market fall would help create the tighter financial conditions that the Fed is attempting to engineer. At the margin, it might even make that final half-point rate hike that much less likely.
- Lower stocks would help out those of us who are still saving for retirement, and want to build up our portfolios as cheaply as possible. The best returns come to those who buy low and sell high, which requires stocks to be cheap when they're bought.
There's even a case to be made that a recession could be the the optimal outcome in terms of sustainable long-term growth.
- Fed economists — and many others — tend to believe that predictably low inflation is a necessary precondition for strong and stable growth.
- The faster that we can vanquish inflation, on this view, the healthier the economy will be in the long term.
Between the lines: A falling stock market does make investors feel bad — especially the relatively affluent Americans who are fortunate enough to boast sizable brokerage accounts. They're the seemingly unstoppable consumers who show no sign of getting the message that the economy might be headed into recession.
- If they prefer to funnel their income into newly-attractive cheap stocks rather than spending it on consumer goods, that would help to constrain inflation. They will also have a reduced "wealth effect" from the market.
For hourly workers or anybody living paycheck-to-paycheck, stock-market wealth is generally a hypothetical irrelevance. Falling stocks would do little if any harm to the precariat — and might even help to reduce inequality.
- And because unemployment is so low and laid-off workers are finding it easy to get a new job, few people will find themselves in the forced-sale situation of having to dip into their stock-market savings in order to make up for lost income.
The bottom line: Another correction in the stock market would be salutary in the short term, while being very unlikely to have any real effect on its long-term performance. And if a short and mild recession gets the economy back on its low-inflation track, that could be preferable to a world in which high inflation persists for years.
