Stocks have had a tough five months since 2022 began. Even though the Federal Reserve succumbing to the volatility in the market is not something that markets are not accustomed to, for the time being, the contrary has happened, and with a compelling justification.
The Federal Reserve has repeatedly warned against the current market conditions. Senator Janet Yellen even weighed in on the topic on June 2nd, claiming that she was mistaken about inflation being temporary and that the White House has many methods in place to address the issue.
Nevertheless, June 2nd marked more comments on the condition of the market, with Jamie Dimon, the CEO of JP Morgan giving some strong views on the subject. He warned investors to ‘brace yourself,’ warning that a confluence of inflation and the enduring conflict in Ukraine might lead to a market crisis later this year. “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way,” said Dimon.
Investors tend to heed warnings from Jamie Dimon, as these are quite hard to come by. The mere act of banks preparing for pain could possibly, in turn, exacerbate the situation. Game theory explains why central banks will prefer to underestimate signaling of recessions, as the Central Bank’s mere mention of the likelihood could inadvertently enable the scenario to unfold. Should investors respond in preparation for pain, as the Central Bank has warned, the beginning of pain is marked already, causing a domino effect in which instigates a pain response from the masses. This may very well be the reason why markets were so turbulent in trading for the first six months of the year.
This is not to say that the market is heading for a catastrophic collapse. While there is always a likelihood that circumstances might take a turn for the worse, it is quite difficult to predict such outcomes. While the beginning of the 2008 financial crisis had market participants spearheading the downward spiral and the subsequent recession, as of the information available it likely seems that this current situation resembles a bear market as the policies of the Federal Reserve are amended. Nonetheless, the situation will unfold one way or another; after all market shocks signify nothing more than history repeating itself.