Today it seems the market dropped because most investors believe that the Fed's continuing to raise rates would cause a hard landing. I think the talk about increases in the number of job openings caused today's decline, not the Fed.
I believe if the Fed don't raise rates enough, uncontrolled inflation will cause the hard landing the Fed is working to prevent.
If the Fed is too dovish, investors would stop buying bonds, especially long bonds, until the price of bonds declines enough to bring the rates up. Low bond prices increases the cost of borrowing for everyone. Investor calculations of the time value of future dividends and the future growth would cause today's investors to expect higher dividend yields, lower P/E ratios and higher growth rates. Prospects of long term growth becomes less valuable. The increased risk of default also reduces the value of growth stocks that don't have any earnings yet.
With a 3 percent yield and stock P/E of 18, the bond market would crash and the stock market would bottom at a lower price if investor's future goal of a $1 million portfolio would be only enough to pay the phone bill or spend the whole thing on a cheap used car. Investors would probably hold out until the Fed's rates are above the rate of run away inflation and most bond rates are near or above the rate of inflation.
Today the Fed raising rates causes stock and bond prices to decline slowly and recover sooner if we have a controlled soft landing. This way the real value of stocks and bonds should be worth more by time you retire?
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