Axios Markets

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⛅️ Hey, it's Emily. It's a new day and we're in a new phase. Today we unpack the Fed's big slam on the economic brakes. Matt explains what the stock market wants next. I have a real estate update — and, uh, the scoop on what gets you hired into the C-suite these days.

⏰ Join Axios' Neil Irwin, Courtenay Brown and Felix Salmon today as they break down what the Fed move means for the economy at 1pm ET on Twitter Spaces. Tune in.

Today's newsletter, edited by Kate Marino, is 1,032 words, 4 minutes.

1 big thing: The stock market kind of wants a recession

Illustration of a hand turning a frowning face upside down into a smiling face.
Illustration: Aïda Amer/Axios

The best hope for stocks right now is a recession that crushes inflation and allows the Fed to slow, stop or even reverse rate hikes, Matt writes.

Why it matters: Down 20.5% so far in 2022, it's the ugliest year for the S&P since 1962.

  • The drop vaporized $9 trillion in paper wealth, delivering a psychological shock to millions whose retirement is mostly in stocks.

Driving the news: Facing persistent inflation, the Fed delivered its largest rate hike since 1994 yesterday.

  • Such an increase is like stomping on the country's economic brakes — sharply increasing the risk of recession.
  • Despite the recent beating shares have taken, the Fed's announcement was greeted with open arms by investors. The S&P 500 rose 1.5%. The Nasdaq rose 2.5%.
  • A fresh inflation scare this morning — natural gas costs surging because of Russia — is poised to reverse yesterday's rally.

The big picture: A huge rate hike that threatens economic growth sounds like a bad thing for stocks — but with inflation still rising, it isn't.

  • Essentially, investors are saying they prefer a sharp, Fed-induced economic slowdown if it quickly gets inflation under control. In theory, that could allow lower rates to return after inflation is vanquished.
  • Low-interest rates have been rocket fuel for the stock market over the dozen years.

Context: While Americans often see the stock market as an economic indicator, the linkage between economic growth and stock market performance is surprisingly weak, and, some academics say, nonexistent.

The intrigue: But don't recessions hurt corporate earnings? Wouldn't that make stocks fall?

  • Earnings are one ingredient in stock prices. And they tend to fall during recessions. But recently, interest rates — essentially the yield on the 10-year Treasury note — have played a more important role in establishing stock prices than earnings.
  • That's because interest rates largely determine the valuation multiple — otherwise known as a price-to-earnings ratio — investors use to determine the price they're willing to pay for those future earnings (effectively, the price of a stock).
  • Higher rates = lower valuations, and vice versa.
  • So, even if earnings fall, stock prices can still rise, if valuations surge. Those valuations are largely determined by interest rates — and those rates are largely determined by the Fed.

The bottom line: The sooner people think the Fed can stop raising interest rates, the better it will be for stocks.

Go deeper.

2. Catch up quick

🚨 Revlon files for Chapter 11 bankruptcy protection. (CNBC)

📈 European gas surges in escalating energy crisis. (Bloomberg)

🍼 Storm halts Abbott Michigan baby formula plant. (Axios)

3. 🏠 Current mood: Deteriorating

Data: NAHB; Chart: Jacque Schrag/Axios

The housing market is moving into a new phase, and it's not quite clear yet what that means in terms of home prices, Emily writes.

Driving the news: Homebuilder confidence declined for the sixth straight month in June, dropping to its lowest level in two years, though it's still in positive territory, according to the National Association of Home Builders/Wells Fargo Housing Market Index released yesterday.

  • Real estate companies Redfin and Compass both announced layoffs this week, as the market cools.

Why it matters: The real estate world is responding to the Federal Reserve's rate hikes. Mortgage rates are skyrocketing — the 30-year is now hovering around 6%, per Mortgage News Daily — and discouraging home buyers, especially first-timers.

  • "You're seeing a changing housing market," said Fed chair Jerome Powell at the press conference yesterday.

Zoom out: Homebuilders ramped up to respond to the pandemic-driven demand, and right now there's a big backlog of unfinished single-family homes — 815,000 units under construction, according to census data, a number last seen during the 2006 boom.

  • The buildup is partly due to supply chain issues slowing down the process. Where pre-COVID it took about six to seven months to build a home — now it could be close to 10.
  • The uncertainty for builders: What happens with these homes as they come on the market in the current high-inflation, high-rate environment? There's going to be some "margin compression," is how Dustin Jalbert, a senior economist at Fastmarkets RISI, puts it.
  • The new mood means builders will likely slow down. "Affordability is a real challenge here for the market, and so the writing's on the wall now," Jalbert says.

What to watch: Prices. As Powell noted yesterday, the inventory of finished homes is still pretty small relative to demand, so home prices might keep going up for a while. "It's a complicated situation," he added.

4. Be nice and you could become a CEO someday

Data: Russell Reynold Associates; Chart: Axios Visuals

Turns out some of us might have what it takes to run a giant public company: social skills. CEOs with such skills are increasingly in demand, finds a new analysis just published in the Harvard Business Review, Emily writes.

Why it matters: People skills have grown in importance as CEOs are increasingly expected to respond to not just shareholders and board members, but employees, customers, the public at large, regulators, activists, and more. The upheaval of the pandemic has made it even more crucial that leaders are good, empathetic communicators.

  • The most wanted soft skills include a high level of self-awareness, the ability to listen and communicate, and "the capacity to infer how others are thinking and feeling," the authors write.

Details: The researchers began this project three years ago, analyzing nearly 5,000 job descriptions between 200o and 2017 provided by executive recruitment firm Russell Reynolds. The help-wanted ads were for CEOs, as well as the other big C's — the chiefs of finance, information, human resources and marketing.

  • There was a 27% increase in C-suite job listings emphasizing social skills in the time period the authors examined; while listings that emphasized hard skills declined by 38%.

The big picture: Though more recent data wasn't yet available, it's safe to say these skills are only in more demand now, says Raffaella Sadun, a professor at Harvard Business School who co-authored the paper.

What to watch: While these skills are in high demand, companies haven't quite figured out how to screen candidates for empathy and self-awareness. "The recruitment process has not caught up," says Sadun.

Go deeper.

5. 💬 Quoted: "strong action"

"We thought that strong action was warranted at this meeting. And today we delivered that."

Fed chair Jerome Powell, on the central bank's 0.75 percentage point hike yesterday.

🏊🏼‍♂️ 1 thing Matt loves: Lake swimming. It's summer and I'm lucky enough to live near a little pond where I can sneak in a dip during lunch. It works wonders. (Especially when the markets are this hectic.)

Also, if you're reading these, and they make you think of anything you love that makes your life better, we'd love to hear about it. Email us.