Booyah Breakdown

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Booyah Breakdown: Landing Fear

Tracy Byrnes

I struggle to find a moment in life when a hard landing is a good thing.

On a plane? Clearly, I'd take the soft landing. Fall out of bed? Again, I'd hope for something soft to cushion the blow.

The only time I can see value in a hard landing is when my son cannonballs into the pool. Then, he is clearly looking for a very big, hard landing to amp up the splash factor.

So as far as landings go, I'd take soft any day.

Especially in the markets.

The hard vs. soft landing debate is a hot topic among the pundits these days.

Even Cramer's talking about it. In a Dec. 1 video on TheStreet.com TV, he said that he always wants "a soft landing because it is better for more stocks than a hard landing. A soft landing makes it easier to find the bull markets wherever they might be."

And in his CNBC "Stop Trading!" segment that same day, he said that it's easier for bears to craft a hard-landing scenario, referring to slow sales at bellwether retailer Wal-Mart (WMT Quote) and the continuing decline of automakers such as Ford(F Quote) and GM (GM Quote). But he added, "none of this is new, and investors should shake off the negativity to look for an entry point in well-positioned sectors."

While Cramer too is looking for a soft landing, many of you still don't know what he's talking about. Clearly, he's not shopping for a goose-down pillow or a cashmere blanket.

Well we're here to clear up the confusion and help you understand the difference between an economic hard landing vs. a soft one.

OK, but first, where are we landing from?

The top, baby! The market has been on fire. The Dow Jones Industrial Average is at all-time highs, and the economy has so far been able to weather a tough housing market.

But you know very well that what goes up must come down. It's your typical business cycle.

So if we do fall, will it be a downhill slalom plunge or a nice leisurely bunny hill through the mountains?

Hard vs. Soft

Let's start with the downhill slalom that slams you into a tree, a.k.a. your hard landing.

The economy has been en fuego. But with that growth comes inflationary pressures.

Here's why: People have money to spend when things are good. Then retailers start to push prices up, because people are willing to pay more. So if a pack of gum is $1 this year, inflation will cause that same pack of gum to be a $1.10 next year. So as inflation arrives, you can buy less with your money.

But we obviously don't want to get to a point where it costs $5 for a pack of gum. So to keep inflation under control, the Federal Reserve starts to raise interest rates. That means it costs more to borrow money, and investments in business may decline, thus slowing down the economy.

The Fed hiked rates 17 consecutive times before pausing earlier this year. Unfortunately, there could be a year lag between when the Fed made the hike and when the market actually feels the effects, reminds Brad Sorensen, the head sector analyst at Schwab's Center for Investment Research. For all we know, these numerous rate hikes, or the Fed's current stance of keeping rates the same, could backfire.

If that happens, the economy could fall into a recession. Then we'd see a significant decline in industrial production, unemployment would increase, and the economy would stop growing. And that could last anywhere from six to 18 months.

A soft landing would be much less extreme. We'd actually still have mild growth quarter over quarter. We'd just ease things down a bit.

In a soft-landing scenario, inflation would remain low. The Fed might actually cut rates to keep the money flow moving, says Fred Ruffy, an analyst at Optionetics, an investor-education Web site. Then the economy would cool off gradually and not fall into a recession.

Clearly, this is want the Fed wants.

The Big Debate

So where are we now?

"The Fed believes the economy is growing at a pace that can be sustained without increasing inflation," says Sorenson. "It wants to bring it down but not force us into recession."

And for the most part, that's what's happening, as evidenced by the stock market's strong gains, growth in corporate profits and low unemployment.

The housing market is the big unknown. It was rocketing, which is why the Fed started to raise rates in the first place, and was credited with picking up the economy after the tech bubble burst, a.k.a. very hard landing in tech.

But the housing sector has since turned downhill. And the question now is, how far will it fall? And how widespread will the damage be?

The bond market also is serving as a point of confusion. In very simple terms, when stocks are up, bonds are usually down. But they're not. Bonds are up, and people keep putting more money into the bond market, says Ruffy.

This disconnect has the bond market folks worried that a hard landing is on the horizon. So while some signs point toward a soft landing, the bears would have you believe otherwise.

The bottom line, though, is that unless you trade Treasuries, this whole debate shouldn't really affect your investment choices. Just continue to do your homework, and you'll make good decisions. Regardless of how you think the market will land.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting