Weekly Market Update

Many investors have waited for an ideal market entry point. That’s understandable given there has been a recession “on the horizon” for almost 18 months.

During the interval, they’ve been hoarding cash and shorting equities. Those who stay in cash will experience poor relative returns when markets recover — and 2023’s market action through mid-year demonstrates that a partial recovery is underway.

An “ideal entry point” would be a moment when all macro-economic risk is in the rear-view mirror.

But current circumstances aren’t like 2008 or 2020. We’re not experiencing a singular economic shutdown or a credit crisis that undermined the nation’s financial system.

We’re now in a rolling recession where some elements of the economy are contracting, others are expanding, and the Fed is committed to slowing the economy sharply to reverse stimulus-fueled inflation.

In 2023, investors who accepted the complexity and contradictions of this market and remained invested have earned solid bond market returns and an 11% rise in global equities.

Now that markets are up, investors on the sidelines wonder if they’ve missed “it.”

Such is the lament of the market timer. Missing the pivot points in markets can be quite costly. This is why waiting for the “perfect time” is a fool’s game.

At its meeting last week, the Fed paused its rate hikes and also signaled it’s on track to raise rates further if inflation doesn’t cool fast enough. To confuse investors more, Fed Chair Powell spoke about hypothetical future rate cuts, while noting that core inflation measures have fallen much less than headline inflation.

Core CPI inflation was 5.3% over the past year, but excluding housing, it was 3.4%. In the period after the Great Financial Crisis and the COVID shock, central banks were promising “low rates forever” — exaggerating how long the Fed would stay easy.

This would tend to boost risk taking and economic activity. Promising a long period of tight policy would have the opposite impact. It would “yield more tightening” from the same interest rate level.

But what is clear is this: Inflation is slowing as rapidly as it ever has following a substantial global shock.

The Fed’s current estimate for inflation at the end of 2024 is 2.6%. But even if inflation is low, the Fed will respond to rising unemployment with lower rates.

Ironically, at the time unemployment rises and the Fed eases, we may be at the end of a rolling recession, presaging growth in markets in 2024. Remember, there is a history of inconsistency between Fed statements and actions.