How reflexive is the economy to the stock market?

The Nasdaq is down 10.4% since its high just three weeks ago, but when you look at the broader picture, it’s a minor correction after a stunning rally.

Nasdaq Weekly

If stocks can stabilize here, this episode will quickly be forgotten.

The problem is that we may see more selling, and here are the reasons:

  • AI has driven a lot of trading, and rethinking that could lead to big sales in the Mag 7 market.
  • The Fed is unlikely to agree to market pricing of 50 basis points easily.

I think we’re going to see some kicking and screaming from the market before the Fed finally listens, at which point the market will be further behind the curve. I don’t think Fed officials will give up easily because of a stock market rout.

What if the market goes down further?

This is where things get interesting. The stock market is more exciting than ever. He is Economy. A generation ago, the economy and the stock market were more separate, but now they are increasingly intertwined with the electronic and financial economy.

I think the stock market rally over the past 20 months has been a tailwind for U.S. growth, but a pullback would be the opposite. Again, it would take more than 10% in the Nasdaq (and perhaps more than 20%), but if it happens at the same time as job losses, it could spark a recessionary mindset that would be difficult to overcome, especially at a time of political uncertainty in the U.S.

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