Here’s something you’re not likely to hear from a commercial airline pilot the next time you fly: “Ladies and gentlemen, this is your captain speaking, please make sure your seat backs and tray tables are in their full upright position and that your seat belt is correctly fastened, as we prepare for a no landing.”
This term, “no landing,” has been introduced of late in market terms, because it’s a great way to help us understand what the potential outcome in the market might be, and how the Federal Reserve might react to the data.
Now, since the beginning of the year, market watchers like me have been trying to determine if the Fed’s monetary policy engineering will ground the economic airplane via a “soft landing” (a slowing of the economy enough to quell inflation while avoiding recession, the most positive outcome for equity bulls), or a “hard landing” (an abrupt slowing of the economy that pushes it into recession, which is the most negative outcome for the markets).
Yet what if the immediate answer is neither a soft landing nor a hard landing, but rather, a “no landing”?
What I mean by this is, what if the economic data is such that the economy stays up in the air (to use the plane metaphor) and doesn’t even come in for a landing? Now, this possibility was brought to my attention via my “secret market insider,” the man whose research provides the backbone data in my Eagle Eye Opener daily brief.
This theory was given more credence after the January jobs report came in ridiculously high, with some 517,000 new non-farm payrolls created in the month, along with the unemployment rate falling to 3.4%, which is a remarkable 53-year low (yes, you read that correctly).
Here, the no-landing scenario means that economic growth stays strong, and inflation once again starts to creep higher. What this would look like is data rebounding, and specifically job adds stay strong, service measures of the economy stay in expansion territory and manufacturing and housing bounce back in the coming months.
The question then becomes: What would a no landing mean for markets?
The most important development for markets would be that the very real possibility of numerous additional Fed rate hikes would come back on the table. That would then bring us back to a 2022 situation, where markets begin to price in an ever-higher terminal fed funds rate, which should weigh on stocks and bonds.
Additionally, a no landing ultimately just delays, but does not actually avoid, the hard vs. soft landing debate. The reason why is the Fed will keep raising rates until it feels confident growth is slowing and that it won’t put upward pressure on inflation.
That means a no landing would not be a sustainable positive, because it just ultimately delays that point where we get to peak hawkishness and where the market can reasonably expect the Fed to pivot to a more supportive stance for the economy.
Now, if you are somewhat confused by the reemergence of this no landing possibility, well, you are not alone. This market has become more confusing for investors thanks to the posture from the surprisingly not-hawkish recent Fed decision and press conference by Fed Chairman Powell, and that aforementioned hotter-than-expected jobs data, as well as other hot economic data.
As you likely know if you’re a reader of my newsletters, what the market hates more than anything is uncertainty. And given the possible no-landing scenario, the definitive answer regarding soft landing or hard landing is as uncertain as it’s been during this cycle.
To help us gain some certainty on this “soft landing, hard landing, no landing” question, I will provide a few thoughts on what each of the scenarios mean for stocks. So, as the data come to us in the weeks and months ahead, you won’t be blindsided by whatever that data tell us.
Hard Landing: For this scenario to play out, the unemployment rate will have to rise sharply, economic growth will have to fall faster than inflation and the market will start to price in a terminal fed funds rate under 4.875%, as that will mean the Fed has overshot the target and crashed the economy into the ground. This would be very negative for markets, and it could possibly send the S&P 500 down to support as low as 3,300.
Soft Landing: For this to occur, which is what the Fed and the markets want, the unemployment rate will need to start rising, preferably somewhere between 4% and 5%.
Economic growth needs to cool, but only slightly, and inflation needs to cool down even faster than growth. The metric to watch here is the Consumer Price Index (CPI), as it needs to fall to 5% in the first half of the year. Terminal fed funds will be in the Goldilocks zone of 4.87-5.125%. A soft landing likely means a rally in the S&P 500 into the mid-to-upper 4,000s.
No Landing: This is definitely the most curious of cases, and it will be characterized with a continuation of the extremely low unemployment rate that stays below 4%, economic growth data that stays strong and inflation that, at best, levels off. In this scenario, terminal fed funds consensus would spike above 5.125%. This would also put pressure on the S&P 500, keeping it locked in a range between 3,500 and 4,000, essentially “trapping” traders in a holding pattern, waiting for the economy to land — soft of hard.
One thing to note here is that the key to whatever scenario plays out will be the economic growth data. If the data remain strong, then the peak fed funds rate will be higher than 5.125%, and that will become a headwind on stocks.
If the data rolls over from here, then the peak fed funds rate will likely stay at or even below 5.125% (soft landing), and that will not put an additional headwind on stocks. Bottom line, the Fed has told us that it will follow the data, and so it behooves us to follow that data as well — and that’s exactly what we’re doing in my newsletter advisory services.
A Little Black Spot
There’s a little black spot on the sun today
That’s my soul up there
It’s the same old thing as yesterday
That’s my soul up there
–The Police, “King of Pain”
Over the past several weeks, I feel like a little black spot has been tattooed on my soul by the recent events in my life. And while that little black spot continues to shrink in emotional prominence, I never want it to go away. You see, the little black spots on one’s soul are there to tell us that life is a package deal, complete with exaltation and sorrow at the extremes. And since I am a man of extremes, I embrace this reality. And if you want to really feel your life in every moment, I recommend you do the same.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,
Editor, Successful Investing & Intelligence Report
P.S. I will be holding a subscribers-only teleconference on Feb. 23 at 2 p.m. EST entitled “Piloting the Economic Plane – Enjoy the Ride or Jump Out?” The event is free to attend, but you have to register here. Don’t miss out!