What didn't crash the markets

FRI, MAR 27, 2020

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF FRI, MAR 27, 2020 • 11:07 ET

DJIA		21699.33
		-3.78%	-852.84

S&P 500		2544.20
		-3.26%	-85.87

NASDAQ		7549.55
		-3.18%	-247.99

EDITOR'S NOTE

There's a lot of awful news out there, so let me mention something a little more hopeful: that it took all this awful news to crash the market.

Here's what I mean. For years we've been hearing from certain critics that this market is built on sand, that it's all artificial, that it can't be trusted, that the economy is on the verge of a recession, etc. This crash hasn't proven them right--it's proven them wrong.

It took, in fact, a global pandemic that brought the U.S. economy to virtual halt to crash the market 40%. It took millions of Americans being ordered to stay home to end the longest expansion in recent history. It took the worst health pandemic in at least fifty years to (hopefully temporarily) halt full employment.

There was a notion after the Great Recession that the Fed needed to get GDP back up to its previous run rate, to essentially restore the path we had previously been on. I was skeptical of this. The previous path had been fueled by an unsustainable housing bubble and massive bank leverage. If we had to be on a lower, slower "new normal" growth path as a result, so be it.

This downturn is different. The risk now is actually that we let a temporary growth shock permanently lower GDP, or in other words, our collective standard of living. I think we should try to get back to our previous growth path, which is exactly what Michael Darda of MKM Partners has been calling for.

His chart below shows the difference: the black line is the growth path we were on going into the coronavirus crisis. If we don't try to get back up there (which is the grey dotted line), we risk staying on the lower red line. ("NGDP" simply means "nominal" GDP, and he uses it to emphasize that getting back up to the previous growth path will be a mix of both real growth and price inflation.) In practice, that means trying for better than 4% nominal growth for awhile until we get back on track.

Bottom line--and I asked BofA economist Michelle Meyer about this on the show yesterday--the Fed could, and arguably should, "target" a return to the black line growth path in place of its usual 2% inflation target for awhile. While it's true this could be a little tricky at first to communicate, I do think people could look at the image and understand what the goal is. It would probably be more understandable than the controversial 2% inflation target the public doesn't understand and Wall Street doesn't believe.

See you at 1 p.m!

Kelly

P.S.--The Exchange is now a podcast! Click to subscribe.

Kelly Evans
Twitter: @KellyCNBC

Instagram: @realkellyevans

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