SUMMARY
While many investors may have experienced the worst of the bear market in 2022, we do not believe it is “all clear from here” and continue to err on the side of caution in fully invested portfolios.
- Today’s bear market rally looks very different than a cyclical bull market. Cyclical bull markets are typical in periods when the economy can grow at an above-trend pace. Such growth requires labor market slack after a recession or contraction. This allows the labor resources to be redeployed in the economy at a faster, non-inflationary rate. This is not such a moment.
- In recent weeks, strong equities and credit markets have effectively provided easing while the US Federal Reserve continues tightening. The odd aspect of the early-year performance for financial markets is that “lower quality” assets have led the rally.
- Looking at reams of objective data, one can see today’s economy as a glass half full or half empty. Conflicting and confusing (even incredible) data have been reported recently. Could the historically most reliable signal of a future recession – the inverted yield curve – fail us this time?
- There is enough history and current evidence to suggest that underneath the animal spirits of January lurk the latent impacts of the strongest monetary medicine ever given to a modestly growing economy. The Fed’s dramatic turn toward monetary restraint begun just 11 months ago is still working its way through the economy.
- While the underlying data for the labor market have held up stronger than expected, corporate profits have been weaker and declined sooner than even we anticipated. With analyst estimates showing a “recession already over,” this makes the likelihood of a Goldilocks outcome less plausible, in our view. Either growth will slow sharply, or the Fed is likely to stay restrictive until unemployment is materially worse.
