We've reverted to normal, and, all things considered, it's not so bad.
Why it matters: For the first time in well over a decade, it's hard to look at the stock market and declare that it's being artificially boosted by ultra-low interest rates.
The big picture: The S&P 500 is having a bad morning on Thursday, bringing it to a level roughly 13% below the all-time high seen in January. But it's still up 25% from the pre-pandemic high, and up 270% from the 2007 pre-financial crisis high point.
Between the lines: Higher interest rates mean that far-away profits are worth much less than they were just a few months ago. More generally, they also tend to tame animal spirits and reduce risk appetite. (There's less incentive to swing for the fences if you can't get a guaranteed risk-free return.)
By the numbers: It turns out that both markets and the economy are surprisingly robust in the face of interest rate shocks. Stocks continue to trade at a healthy valuation of 17.7 times earnings, above the "fairly valued" benchmark of 15 times, while the labor market is still extraordinarily tight.
The bottom line: The markets seem to be pricing in a soft landing — one where the economy remains strong, while stocks revert to being a vehicle for long-term savings rather than short-term speculation. That's a huge vote of confidence in Jay Powell's Federal Reserve.
