Insights & Advice


A dud of a stock market

A squashed or melted Peeps marshmallow bunny


“If stocks don’t fall, the Fed needs to force them.”

—Bill Dudley, former NY Federal Reserve Bank President (2009–2018),
on how far the Fed should go to get inflation under control, in his Bloomberg op-ed.


Dudley may no longer be a member of the Fed, but I believe he is communicating a message from them. It is not that a stock market crash would deflate inflation. Dudley refers to a concept I introduced in a previous column describing the death of the “Fed put.” As I said in January 2022, and as Dudley noted on April 6, 2022, the Federal Reserve is okay slowing down the economy to fight inflation, even if it crushes the stock market.

What should an investor do?

“Don’t fight the Fed.”

—Martin Zweig, in his book “Winning on Wall Street”

In 1970, Marty Zweig published “Winning on Wall Street.” For a half-century, investors have been following a piece of advice offered in that tome: don’t fight the Fed. The logic is simple and works conceptually: investors should be more defensive when the Fed is slowing the economy and more bullish when they are stimulating it. Admittedly, it’s just an arrow in the quiver when figuring out how one should invest. And there are often massive time lags when it comes to the Fed and stock prices. Nonetheless, Fed accommodation (or lack thereof) should be considered.

Given that the Fed is in the mood to slow the economy without a care for the stock market, we should pay more attention to it than usual. And not just because of Dudley. Lael Brainard, the Fed governor awaiting Senate confirmation for Vice-Chair, recently said that the Fed must reduce its balance sheet “rapidly.” I don’t want to get wonky about the Fed’s balance sheet. Just know that since March 2020, at the beginning of the pandemic, the Fed’s assets doubled to nearly $9 trillion. That matters to investors because, in large part, that massive liquidity spike drove stock prices higher. Well, if stocks went up because the balance sheet increased, what do you suppose that will mean for the markets when it decreases “rapidly?”

While I believe Dudley conveys the message for the Fed, Brainard is the Fed. She is respected well enough to be considered a sort of co-chair with Jerome Powell. She is also regarded as one of the most dovish of the bunch. Investors should listen when she says it’s time to slow down the economy.

At some point, I am going to tell you that I am making moves in my portfolio to (yet again) get more defensive. Currently, with markets not far from record highs, I remain (reasonably) fully invested in U.S. equities in many of my portfolios. I expect it will be easier for you to pull that proverbial trigger if you’ve considered all the evidence up until that point. Rarely is there a radical economic change that demands a trade. Instead, it’s usually the result of aggregated data considered over time.

The comments of Dudley and Brainard aren’t much different from what I’ve been warning about for months. However, when it comes from them, it’s much more serious than the ramblings of some crazy man with word processing software. Their comments changed things. There has been a shift. Where once I was merely watching for signs, Dudley and Brainard started the countdown. The clock has started. It’s only a matter of time until the Fed forces stocks to fall.

Whispers in the Air

On March 14, 2022, I calculated that there was about a one-in-seven chance of a recession occurring, probably by the end of 2023, if not sooner.

However, a lot has changed since then, not the least of which is the Russian escalation in Ukraine. Also, inflation expectations have increased. Yes, inflation was already high, but Federal Reserve surveys showed that households expected it to subside. Now, more consumers expect prices to continue rising briskly, which makes higher prices remain sticky because buyers accept it as opposed to fighting it. That makes it more challenging for the Fed to bring down inflation and increases the odds of a policy mistake.

Additionally, rising interest rates are hurting the middle class. And credit growth is increasing for lower income households because it’s becoming more difficult to pay for the essentials.

Conversely, I could make a strong case for no recession: strong jobs growth, high corporate profit margins, yet-to-be-spent funds from the American Rescue Plan Act. However, there are whispers in the air about a coming recession. When people and businesses expect a recession — whether one is coming or not — they behave differently. They protect their balance sheets for a rainy day and curtail spending and investment. The sheer increased rumblings of a recession increase the chances of a recession.

The odds of a “real” recession between now and the end of 2023 have jumped from one-in-seven to two-in-seven. (Or three-in-10, if you prefer — my modeling is not that precise.) The odds of at least a mild recession (one in which economists argue whether we were even in one at the time) feel like a done deal. But nothing in life is inevitable, so let’s call it five-in-seven.

However, as I stated earlier this month, the crowd is so bearish that I feel the smart trade is to bet against the consensus. My finger is on the trading trigger; I may get more conservative with my equity allocations throughout the next couple of weeks or months. Did somebody say “sell in May?”

Allen Harris is the owner of Berkshire Money Management in Dalton, Massachusetts, managing investments of more than $700 million. Unless specifically identified as original research or data-gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Full disclosures. Direct inquiries: email hidden; JavaScript is required.


This article first appeared in The Berkshire Edge on April 18, 2022.