April 2024
In life, 90% of disappointment lies in unmet expectations. In mid-2023, fears that high interest rates were leading the U.S. economy into imminent recession created a significant selloff in U.S. equity markets. This, in turn, initiated a drumbeat of calls for the Federal Reserve to rapidly cut rates. Attracted by 5% yields on risk-free cash holdings, many concerned investors escaped equities altogether in the 2023 selloff— only to see stronger-than-expected U.S. economic performance and tame inflation news drive a 25% advance in the S&P 500 in just six months.
As we entered 2024, the script flipped. Equity investors, excited by a powerful bounce from 2023 lows, desired a soft landing and “immaculate” disinflation. Interest rates in the system were high enough to mute economic growth, slow the labor market, and choke off inflation without causing a recession. The expectation was that
rates would fall off predictably as the economy slowed and inflation waned. The hope was that equities would then be able to continue their upward rally as we returned to the slow-growth/low-rate environment that dominated markets in the 2000s. Instead, investors have been surprised by strong economic growth in the U.S. that has kept rates and prices higher than most expected. An expanding job market suggests this current growth in economic activity is both broad-based and sustainable.