Investments

Another year has passed since the Federal Reserve began their monetary tightening campaign to slow the rapid rise of inflation. While inflation has moderated significantly over this time, economic activity has remained surprisingly resilient. A “Soft Landing” seemed far fetched in 2022 with inflation peaking over 9%, but the likelihood of a normalization of the rate environment without the need for a recession has steadily grown over time. As shown below, outside of a soft start to 2022, GDP growth has persistently been above long-term averages.

This November presented Americans with one of the most contentious battles in recent history. After months of preparation between the two contenders, and the anxiety that built up amongst their respective supporters, over 100 million viewers were gripped to their TVs to watch the final showdown. I’m not referring to the 2024 presidential election, but to the much-anticipated boxing match between the legendary “Iron Mike” Tyson, and the YouTuber Jake Paul. Despite all the bluster between the two leading up to the match, Paul backed his words and showed that he was able to execute in the ring and emerge victorious.

The long-awaited Fed easing cycle officially kicked off with a 50 basis point cut to the Federal Funds rate in September. Despite the aggressive tightening in monetary policy over the past 2 years, markets have broadly performed well with the S&P 500 trading at all-time highs and credit spreads trading at historically tight levels. The prospects of further easing as the economy remains resilient has further bolstered the case for a Soft-Landing economic scenario.

After months of innuendo and data dependency, the Federal Reserve is ready to start lowering interest rates this month. In his speech at the Jackson Hole Economic Symposium, a high-profile annual gathering for central bankers and economists, Chairman Powell was clear that inflation has eased and the labor market has cooled enough, such that “The upside risks to inflation have diminished. And the downside risks to employment have increased…

Equity markets have experienced a strong first half for 2024. Despite some sticky inflation readings in the first quarter, inflation has continued to moderate while economic activity remains resilient. Stocks have responded positively to the growing likelihood of interest rate cuts by the Fed as a soft landing for the economy has become the consensus view. 

The economy has delivered seven quarters of sustained expansion since the second half of 2022, and it looks like the trend will extend through the remainder of the year, despite the continued headwinds of sticky inflation and high interest rates. GDP growth forecasts have actually increased, and commensurately, recession fears have fallen, with most economists now considering a recession unlikely to occur this year.

The first quarter of 2024 saw a continuation of the strong market momentum experienced towards the end of 2023, as the soft-landing narrative retains its place as the consensus view.