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Capital Market Review

  • Capital Market Review
  • January 2023
  • Iron Capital Advisors

Fourth Quarter 2022

Does the Fed have any real power?

Wall Street strategists are far more bearish than Wall Street analysts. The strategist community sees the current situation as driven by the actions of the Federal Reserve; the theory goes that the Fed raising rates will cause economic activity to slow down, the economy to go into a recession, and the market to crash. This argument seems logical, but it ignores a significant factor and makes some assumptions that might not hold true.

First, it ignores the fact that the market has already dropped well into bear market territory. Secondly, it assumes that Fed actions have a significant impact in the real economy.

How does the increase in interest rates impact companies? There are two possible ways. First: If they sell a product that requires most customers to use financing, but most businesses do not sell products that are so expensive that their customers must finance them. Second: If a company must borrow a great deal of money to run its operation, the interest expense on that debt would cause earnings to go down. In the manufacturing days of the 1970s and 80s this was true, but is it today?

Analysts, on the other hand, see the world from the bottom-up, and it simply does not look so bad from that view.

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