Will the Fed Engineer a Soft Landing? History Offers Clues.
Economists say that the Fed engineered soft landings in 1984 and 1994. Will 2024 be different?
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There is a rather spirited discussion taking place in the market these days. Are we in for a soft landing or a full-blown recession? I am not an economist, but I did ask the other day exactly how many times the Fed has engineered a soft landing.
Naturally, the economists have differing answers, but it’s basically 1984 and 1994 with the possibility of 2018. There is a rather large disagreement on whether 2018 was one. So, I thought today we’d go back and look at 1994 because I remember that year as I was managing money at Cargill then.
There was a mortgage crisis—oh, clearly not a crisis as we would see in 2008 because the market was much smaller then. Kidder Peabody was the ‘Lehman’ of that period, being one of the biggest players in the mortgage business. They did subsequently get taken out because it was unsustainable.
When the Fed hiked rates in February 1994, things got a bit rocky in the market. You can see it on the chart of Microsoft from back then with that slide in early February. But tech stocks bottomed and had a terrific rally in the spring.
In early June, tech stocks started pre-announcing missed earnings for that quarter (you know how bad it is when they announce a month before the quarter even ends). Keep in mind this was pre-internet so the tech stocks were mostly pc related (side note: it’s hard to find tech stocks today that were around then in the same iteration).
Again, look at Microsift’s six-week slide that summer. IBM, also a big name from then had a similar plunge.
We see that that quarter was a buying opportunity but we did not know then that the Fed would go from hiking to easing six months later. What I do recall, was that summer the chatter about a recession coming was loud and getting louder. No one talked about a soft landing. In fact I’m not even sure we knew that phrase existed.
The Bank Index that I use was created that summer, but it doesn’t matter what it did in the first half of the year because you can see that tumble that lasted from August to Thanksgiving. It was relentless except for that respite in October. Keep in mind the S&L crisis of the early 1990s was still fresh in minds.
You can imagine the recession and bearish chatter that we heard that fall. It didn’t help that Orange County, California declared bankruptcy in the aftermath of the mortgage market debacle earlier in the year.
So, sure, that turned out to be a soft landing, but it’s only clear in hindsight. And it certainly wasn’t clear then that tech stocks would come out the big winners (that became much clearer in 1995). So, if you are watching this market and thinking ‘recession,’ I can tell you when we went through that soft landing in 1994, there was an awful lot of recession chatter. What’s more, is that the market was difficult to trade because there were tape bombs all over the place.
As for Tuesday’s market, it was an index-led rally, with breadth being flat on a day the S&P has tacked on 24 points. That means the indicators haven’t changed much. The Overbought/Oversold Oscillators continue to go down toward an oversold condition. And to update you, the Hi-Lo Indicator is down to .47.
