People Were Expecting A Soft Landing In 2007 And 2000 Too

If investors were betting on a hard landing just a few months ago, they’re now clearly expecting the economy to achieve a soft landing – that dream scenario where the economy slows just enough to bring inflation lower but not so much that it sends us all into a recession. This chart shows how often the phrase “soft landing” has appeared in Bloomberg news articles, and it’s clearly on the rise.

And maybe that’s not surprising: recent data have been pointing that way recently. The thing is, investors were expecting a soft landing back in 2000, too, right before the tech bubble burst. And, again, in 2007, just before the global financial crisis. In both cases, those soft-landing hopes quickly turned into a hard-landing recession reality.

There are reasons why investors get their hopes up for a soft landing. First, economic data are imperfect: there are lags, adjustment factors, and often revisions. That’s not a big issue when the economy’s trending in one direction, but it can send conflicting signals at turning points. I mean, look, economists generally won’t agree that a recession is even happening until it’s long been underway.

Second, it’s the Federal Reserve’s (Fed) job to pilot a soft landing, and so it makes sense that it might be the default outcome. But in practice, it almost never happens: the Fed’s tools for slowing the economy (i.e. raising interest rates) are blunt and don’t allow for fine-tuning. Put more simply, hard landings do always start off as a soft landing.

Of course, there are legitimate reasons to believe that it’ll be different this time, and that those aggressive rate hikes from the Fed won’t cause a hard landing. The economy has shown some real resilience, after all. But there’s a very fine line between a soft landing and a hard one, and little room for error. Remember: just because people expect a soft landing, it doesn’t mean we’ll get one.

At the risk of sounding like a broken record, now’s not the time to load up on speculative stocks. Instead, make sure your portfolio is diversified across asset classes, sectors, countries, and investing styles. And hold some cash – it’s nice to get paid such an attractive return while waiting for better opportunities to come.