The Daily - The Claws of a Bear Market

Episode Date: June 15, 2022

The meteoric rise of the U.S. stock market over the past two years has come to an abrupt end.A steep downturn recently has led to what’s known as a bear market. But what does that mean, and why might policymakers have to hurt the economy to help it in the long term?Guest: Jim Tankersley, a White House correspondent for The New York Times, with a focus on economic policy.Want more from The Daily? For one big idea on the news each week from our team, subscribe to our newsletter. Background reading: Steep downturns of stocks by 20 percent or more are relatively rare, but how long they last could portend damage.The last such drop happened in early 2020 as the coronavirus spread. Here’s what else to know about bear markets.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From New York Times, I'm Michael Bavaro. This is The Daily. Today. There are new fears of a recession after a miserable start to the week on Wall Street. Stocks plunged Monday across the board. Why the United States stock market has been plunging. Economists are tossing around a term you don't hear every day. A bear market. A bear market.

We're looking at a bear market. And what it reveals about growing fears that what's required to fix the economy will end up pushing it into a recession. I spoke with my colleague, Jim Tankersley. It's Wednesday, June 15th, and we are solidly in bear market territory. Bear Market Territory. So, Jim, a bear market. Why is it called a bear market? I want to begin with some trivia.

Well, no one for sure knows, but there are some theories. At least this is what, reading up on it, this is what I have learned. The predominant theory is about the way animals attack. When animals attack, stock market version. So the theory about when animals attack is that bulls, a bull market is a positive market when stocks go up. They attack with their horns sweeping up.

But bears attack with their claws sweeping downward. So a bear market is when the stocks go down. Right, because a bear's claws pull the prey down. It's all about bear claws. It's a bear market is when the stocks go down. Right, because a bear's claws pull the prey down. It's all about bear claws. It's a bear claw... Kind of market.

Kind of market. Okay. And the bear market is the bad market. What defines a bear market, technically speaking? It's when stocks have fallen 20% from a recent peak. So they rise to a certain level, they level off, and then they fall. And if they fall 20% or more, that is technically a bear market and, you know, for practical purposes, quite bad for investors. And just explain that when we say quite bad for investors.

Well, it means a lot of companies are seeing their stock prices decline rather precipitously. It means just enormous amounts of money of corporate value being erased on paper anyway, at least temporarily. And it means that if you are someone who has your savings in stocks and you rely upon those for your retirement or something else, and you suddenly need to get money out right now, well, you're down. You're down a lot from where you would have been if you had sold or been taking money out at the top of the market. So it has real-world effects on a lot of people and real psychological effects on investors, on CEOs, and on economists and the way that they think

about what's happening in the world around us. Right. Because literally a few months ago, in this case, you could open up your retirement account and it would look one way. And then now it's one fifth value of that, which is a really meaningful decline. You've lost a fifth of the value off of it. Yes. Broadly speaking. And what's our best understanding of why we have just entered this unfortunate financial territory of a bear market over the past few days? Well, the short answer is inflation. To back up, we all remember that when the pandemic started, the government gave people a lot of money to help get through the most difficult

times of the pandemic. People had saved a bunch of that money. And then as the pandemic wore on and the reopening began, people were spending money in different ways. They were buying furniture or other goods. And there was this huge demand and there weren't enough goods to meet all the demand. And so prices went up and that created inflation. And the hope had been that it would be receding by now, that we would have hit a high and it would go down. But instead, we keep getting month after month signs that it's at a 40-year high.

For example, last month, we just learned a few days ago, that consumer prices rose 8.6% in May, which is a lot, and a lot more than anyone expected. And markets are starting to freak out about that. Got it. And of course, the government has a tool to deal with inflation, which we talked about a lot on the show, which is raising interest rates.

Yeah, the Federal Reserve, which is the central bank, which is charged with keeping inflation at a 2% target, has been signaling that, hey, we're raising interest rates. They've started raising interest rates and signaling they will continue to raise interest rates in hopes of sort of pulling some spending power out of the economy. When rates go up, fewer people can maybe afford a mortgage or afford a car loan, and so they spend less money.

And that's a way that the Fed controls demand in the economy and brings the price of things down. Right. And we've talked to our colleague Gina Smiley about this. It's kind of complicated, but what the Federal Reserve actually ends up doing by raising the interest rate is in some sense it kind of hurts the economy in order to help the economy. It has to make it a little harder for lots of people to borrow money and spend it in order to bring inflation down. It feels counterintuitive, but it's a provenly effective system. Right. But the problem this time is it hasn't been effective enough yet. And so the Fed is having to start talking about raising rates even faster. And that is what markets are really worried about. And why are they so worried about that?

Well, if you pump the brakes too hard, you pull too much consumer spending out of the economy and you could push the economy into recession. That's the really big fear that a lot of investors are reflecting here is that the Fed is going to make what economists call a policy error here and go too fast and push the economy kind of off a cliff. Got it. So investors fear, which has led them to sell stock and put the stock market into a bear market, is that the Fed is about to basically overreact to inflation by perhaps over raising interest rates and therefore damage the economy, send us into a recession. Right. Or even that the Fed, in order to get inflation down,

the inflation problem is so bad that the Fed, in order to get inflation down, the inflation problem is so bad that the Fed is going to have to put the economy in recession to do it. Almost like putting the patient in a coma briefly to try to, if we're going to extend the metaphor, to try to make things better. And so that has a lot of other very bad effects if you do that. And so I think investors are reflecting either the Fed's going to do too much and get it wrong, or just the amount the Fed has to do to tame inflation is just going to be really bad for the economy. Right. And when we say recession, to continue with our economic 101 series here, we're using this very technical definition of when the economy

shrinks rather than grows over a series of quarters, that's not considered a good thing. No, it's not. No one wants a recession. And I should just say, there's no guarantee we're headed for one this time. I haven't talked to any economist who says we're definitely headed for one.

Got it. But even if we are, there's different types of recessions. What some people inside the Biden administration think of as a capital R recession, a pretty bad one, a really bad one, or a small R recession, maybe a less bad one. Okay. So help us distinguish between the capital R recession and the lowercase r recession. So the capital R recession is the sort of recession we've experienced a lot in American history, where a whole cycle of bad things happens. The economy starts to contract. It's not growing, it's getting smaller. So there's

less money to go around, fewer people go to shops and go on trips and spend money. Businesses have to lay people off. Millions of people probably in this scenario would lose their jobs. The unemployment rate spikes. And that in turn gives a whole other batch of people who now have less money to spend. And so they can't shop and that it just can be a downward spiral of economic activity. And it can take a long time to recover from for an economy. And this is sort of what we saw in the 2008 financial crisis recession. And it can take a long time to recover from for an economy. And this is sort of what we saw in the 2008 financial crisis recession. And it can be very, very debilitating for particularly people on the edges of the economy, people with not a lot of money in savings, people who could be evicted, lose their homes,

lose their jobs. It can be life-changing in a very bad way for people. And you obviously want to avoid a recession like that. Right. That's clearly not the kind of recession, if we're going to go into a recession, that the Biden administration would want us to be in because it's horrible all around. Yeah, absolutely not. Nobody wants that as a person who experiences the economy. Nobody wants that as a president whose fortunes are tied so much often to the state of the economy. Nobody wants that as president whose fortunes are tied so much often to the state of the economy. The Biden administration would much prefer if there is going to have to be a recession, they would much prefer sort of the small R recession, much lighter touch across the economy.

Okay. And what does the lowercase R recession look like? Describe its characteristics. Well, it starts with the fact that inflation comes down as part of this shift into recession. And people notice that. They feel good about that. Growth maybe turns negative, but maybe people don't feel that as much. Maybe it's just sort of, technically speaking, the economy is contracting for a few quarters, but it doesn't feel like the brakes have really been slammed. There aren't big layoffs. There isn't a huge pullback in consumer activity. If anything, people are just feeling good about the fact that their salary is keeping up with the rising cost

of living finally. And, you know, in a best case scenario here, particularly for the administration, it's kind of something that if you're on the margins, it very much could still be dangerous for you and put you in a bad spot. But for most Americans, they don't feel it that much. Got it. So this would be as gentle a recession as one could possibly imagine. as one could possibly imagine. Yes, this is a sort of theoretical, gentle recession that is sort of a recession in statistics only for most people. And is there a good example of this kind of recession in our modern history?

There isn't anything great like this. Most of the time when we have recessions, the unemployment rate goes up. It goes way up. And that's an important part of this, is that the more people are thrown out of work, Most of the time when we have recessions, the unemployment rate goes up. It goes way up. And that's an important part of this is that the more people are thrown out of work, the more that you get these bad knock-on effects. We've certainly had short recessions in our modern history. And we've had recessions that economists consider mild, like, for example, coming out of World War II. But even those saw people thrown out of work. And that, again, really is the sort of

start of a spiral that can take a while for an economy to recover from. So the Fed and the administration are really trying to thread a needle here. And like I said, we just don't have a lot of examples of that working out the way they want it to. We'll be right back. So, Jim, just to recap everything you've told us and explain where we are. We're not in a recession, but inflation is really high, and investors fear the government's plans to lower it by raising interest rates will send us into a recession, which is why we're in a bear market.

How much power does our government, the president, the Federal Reserve, actually have over which version of a recession we enter if we're going to enter one, whether we enter the capital R recession or the lowercase R recession? Well, the government has a lot of power, particularly the Fed. And the Fed is kind of constantly searching for the right mix of policies to achieve that result of the lower R recession, or ideally for the Fed, no recession at all, a so-called soft landing. And so they do, they have a lot of power because they are the ones who control interest rate policies. It's just not a power that they can necessarily fine-tune to exactly the level they want. Explain that. Yeah, it's sort of like if you're a character in a video game and you can fire a really big fireball or a really small fireball,

but you can't fire a medium-sized fireball, that may be what the Fed has here. It can raise interest rates. It can raise them as fast as it wants to. It can try to communicate by telling the market, this is the path of interest rate increases that we expect in the future. It has all of these ways of trying to signal what it's going to do and to generate the response it wants from investors, from consumers, from the broad economy. But there's no

guarantee that the reaction from the broad economy is going to be exactly what the Fed wants, because it's not pulling, you know, X amount of demand out of the economy. It's just trying to bank shot some changes in people's behavior that will produce the outcome it wants. Right. For example, I think a lot of us of a certain generation remember in the 1970s, the Federal Reserve raised the interest rates over and over again to try to tamp down historically high inflation. And I'm sure at the time it looked like their only goal was to tamp down inflation. But in the process, they made borrowing costs so high that people weren't buying houses. Because people weren't buying houses, people weren't building houses.

And people weren't building houses, there weren't jobs in the housing industry. On and on it went. And that triggered a really bad economic cycle. Yeah, actually, we ended up with two recessions right in the early 80s, kind of a quick one right at the start of the 80s, and then another one. And yeah, those were both cases where the Fed did what it felt like it needed to do to stop inflation. And the result was millions of people losing their jobs, a downward spiral in the economy. Now, the economy recovered. That's the good news. There was roaring growth by the mid 80s. But boy, it was a hard road to get there. And that was definitely a case of the Fed pulling on the brake as hard as it thought it needed to in order to bring inflation down, which it finally did. So, Jim, when you talk to people in the White House, which you do, you are a White House reporter, about how they think this balancing act will play out, raising interest rates but not tipping the economy into a terrible recession, how do they talk about it? Well, it starts with the president. He has made, I trust the Federal Reserve to do what is right on inflation, his number one talking point on what is the number one economic issue of his presidency right now.

Which is inflation. Yeah, right, exactly. The key to his whole strategy is, I trust the Fed, I'm not going to tell them what to do. They're independent, and I think they're going to get it right. So there's a reason for that, not just to show that he's unlike former President Trump, who liked to tell the Fed what to do and pop up all the time. But it's also, the president is trying to signal to the market, to investors, like, hey, I think the Fed has this, so you should take what it's doing as highly credible to arrest inflation. He's hoping to kind of coax that softer landing by getting the market to kind of buy in to what the Fed wants.

And when administration officials talk about it, that's sort of the way they talk about it, is they're not worried too much about people raising the possibility that we might go into a recession because they think that's a sign people are taking the Fed seriously. And they hope there isn't a recession and they believe the Fed can pull this off without a recession. Would it be fair, Jim, to say that if the president and his team had to choose,

and it's not clear that they do have to choose, but if they had to choose, given how worried they are about inflation, that they might prefer a lowercase r, gentle recession, that really solves the inflation problem in this country, to a situation in which there's no recession of any kind, but the terrible inflation we have right now stays in place. It's really hard to say which of those two, what I think that the White House would call those both kind of nightmare scenarios they would prefer. But I will say this, they are very cognizant of the fact that for a lot of people, even though the economy does not appear right now to be in recession, for a lot of people, it feels very bad. They know that inflation is outpacing wage growth for a lot of people, which means they can just buy less. Their dollars are going less far now. And they know that's bad economically.

They also know it's very bad politics for President Biden. So they would like to see that end. I mean, I think they would much rather see that end without a recession, because recessions do bad things for presidents too. But, you know, if the inflation we have just continues for several more years, I think it'd be very difficult for the president to be reelected. Which might be an argument for doing whatever it takes to lower inflation, even if it causes a recession. This is a White House that still believes the Fed can bring inflation under control

and the economy can keep growing. It really believes that there does not have to be a recession. And so that is what they are trying to communicate to people in the economy in hopes that it comes true. Right. But of course, the bear market that we're in, as you have told us, Jim, suggests that investors don't see it the way Biden does. They think that lowering inflation almost by definition means hurting the economy and probably even sending us into a recession.

The way I'd put it is investors see a higher chance of recession now than they thought a couple of weeks ago. And they definitely seem to see a higher chance of recession now than they thought a couple weeks ago. And they definitely seem to see a higher chance of recession than President Biden seems to right now. What they are telling us with this bear market is that they don't see nearly the chance of avoiding recession or even that small R recession as maybe the White House does at this point. Right. They're worried about the big capital R recession. Yeah. A bear market is a sign that the claws are swiping down to show us that that capital R recession may in fact be on the way. I appreciate you somehow bringing it back to the claws, Jim.

Thank you very much. As always, we appreciate it. Thank you for having me. Later today, officials at the Federal Reserve are expected to announce a significant increase in the U.S. interest rate by as much as three-quarters of a point in their latest and most forceful attempt so far to lower inflation. In interviews, economists told The Times that such a sharp hike increases the likelihood of a recession. We'll be right back. likelihood of a recession. We'll be right back. Here's what else you need to know today. On Tuesday, the most powerful Republican in the Senate, Minority Leader Mitch McConnell of Kentucky, endorsed a bipartisan deal on a set

of gun safety laws, paving the way for its passage. For myself, I'm comfortable with the framework, and if the legislation ends up reflecting what the framework indicates, I'll be supportive. Support from McConnell, a longtime defender of gun rights, is seen as a form of permission for the rest of the Senate's Republicans to eventually vote for the legislation, which would represent the most significant federal gun control measures in decades. And Russian forces appear to be on the verge of seizing the strategically important city of Severodonetsk in eastern Ukraine. That would allow Russia to consolidate control of the region

and claim a major victory after months of setbacks. Russian forces have destroyed the last bridge that linked the city to Ukrainian-controlled territory, making it far harder for Ukrainian forces to defend. Today's episode was produced by Rochelle Banja, Muj Zady, and Eric Krupke, with help from Michael Simon-Johnson. It was edited by Mark George, with help from Michael Benoit, contains original music by Rowan Nemisto, and was engineered by Chris Wood.

Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Michael Bilboro. See you tomorrow.