Lately, clients have been asking us one question: how are longer-term bond yields moving higher when the Federal Reserve is cutting interest rates?
New Year, Same Fluctuating Economy
Trick or Treat
Chocolate-loving parents may be in for a sour surprise as they rummage through their children’s Halloween candy this year. With cocoa prices double the levels seen last year, food companies are getting creative, reducing the size of chocolate bars and adding more non-chocolate treats to their Halloween candy bags for sale. Trick-or-treaters weren’t the only ones to experience an eventful week, as an action-packed capital markets provided investors with their own bag of surprises to unpack.
Faster Growth, Slower Inflation
In the last few days, the powerful rotation from growth stocks to value stocks, highlighted in our colleague Alex Harding’s article last week, continued.
Fiscal Irresponsibility
We frequently receive questions from clients regarding the sustainability of U.S. government debt. According to the U.S. treasury, the American government has run a budget surplus only four times in the last 50 years, with the most recent being in 2001.
The End of an Era
Would you have believed us if we had told you on January 1 that the S&P 500 would be up nearly 10% year-to-date after last year’s 25% jump?
Seasons Change But History Remains
As the seasons change and we move into fall, the focus shifts from summer vacation to back to school and football. And just like the calendar, the markets stay true to history. The S&P 500 is down over 3% this month, led by technology stocks which are down 7%. While there is some angst, these declines are normal.
Is China's Economic Dream in Trouble?
Gracing the cover of Time Magazine in 2017, famed political author and Eurasia Group founder, Ian Bremmer claimed “China Won.” This statement was not necessarily controversial, as economists and political pundits all but guaranteed a new age of geopolitical and economic dominance led by the fast-growing nation.
When Is A Surprise Not A Surprise?
For years, our clients have worried about the ballooning debt situation with the U.S. federal government. Fitch Ratings, which is one of the three main credit rating agencies, verified these worries earlier this week when they lowered the U.S. government’s credit rating from AAA to AA+. While many called this a surprise move, others have been expecting this for some time.
Last Hike of the Season
As expected, the Federal Reserve raised its target interest rate this week by 0.25% to 5.25 – 5.50%, marking the eleventh increase since March of 2022, bringing the interest rate to its highest level in 22 years.
The Recession Expectation Conundrum
The U.S. economy continues to defy one of the most anticipated recessions. Since January, investors and economists have been on edge as economic indicators started flashing red, particularly the purchasing managers index (PMI) and the leading economic indicators (LEI). Both metrics are closely watched as they have been reliable in foretelling downturns.
Better Late Than Never
On Wednesday, days before the U.S. is projected to run out of money to pay its bills, the House passed the Fiscal Responsibility Act of 2023 in a bipartisan effort. The final vote of 314- 177 received support from 149 Republicans and 165 Democrats. With both sides making concessions, it’s not surprising to see members of each party voicing their displeasure with the deal.
A Year Like No Other
The recent intensity of economic and earnings data matched the temperatures outside this week. In absolute terms, inflation remains too hot and while there is some evidence of moderation, the Federal Reserve doubled down on its commitment to return inflation to its 2.0% long-term target, suggesting further interest rate hikes through the end of this year.
Fear and Greed
Both fear and greed were on full display this week as the Federal Reserve raised the federal funds rate 50 basis points and announced that additional 50 basis point increases would be needed in the future. Fed Chairman Jerome Powell stated that the U.S. government would stop buying as many bonds on the open market in the coming months, effectively shrinking the Fed’s balance sheet and removing some liquidity from the system.
Mixed Reviews
This week, there was a plethora of economic and company-specific news for investors to digest. Specifically, the release of first quarter U.S. GDP, reported quarterly earnings by major technology companies and the unanimous vote by Twitter’s board to approve Elon Musk’s offer to take the company private. In response to this news, the market declined 4%, with all of the weekly losses occurring Friday afternoon.
Return to Ordinary
In our Outlook 2022 publication titled "Extraordinary to Ordinary" we highlighted that more volatility would be a feature of 2022. Volatility was extraordinarily high in 2020 during the zenith of the COVID-19 crisis and well below average during the robust economic recovery of 2021. This year we expect an environment of more normal volatility.
Demand-Driven Disruption
Americans are buying more than ever before. Despite supply actually surpassing above pre-COVID levels and dockworkers unloading ships as fast they can, the supply chain is unable to keep up with record consumer demand. Furthermore, the supply-demand gap may worsen as we head into the peak of holiday shopping season.
Not Your Father's Stagflation
Inflation continues to be in the news and is top of mind for clients. This week, the September Consumer Price Index was reported 5.4% over the previous year, an inflation number well above where it was reported prior to the COVID-19 crisis.
Are We There Yet?
“Are we there yet?” is a familiar back seat refrain that often occurs during long, summertime road trips involving bored children and their beleaguered parents. As we transition through our second COVID-affected summer, this frustration is also felt by investors and other market participants who long for some return to “normal.” Surely, we must all be there by now, right?
Inflection Points
Earlier this month in an interview with 60 Minutes, Federal Reserve Chair Jerome Powell indicated he believed the U.S. economy “seems to be at an inflection point” due to widespread vaccinations and previously enacted stimulus measures. He added his expectation that the economy would begin to grow “much more quickly” and that the pace of job creation would accelerate.
COVID Economy
We have been closely monitoring the recent uptick in COVID-19 infections across the country and in Europe. The path of the virus is the most important factor in the economic recovery and the thing that we know the least about.