Evan Simonoff
Evan Simonoff
THE BIG PICTURE
Weisman says these benign environments show some patterns , such as a few quarters of GDP growth “ with a zero handle ” and a month or two of negative job growth . While companies can shed some jobs , as financial companies and tech businesses have done the last few years , they don ’ t go into full downsizing mode in these cases .
The last traces of the pandemic economy — like revenge travel — seem to be wrapping up as airlines warn of a slowdown and companies like Disney expect theme park traffic to moderate . But this is mostly the normalization of the business cycle .
The last time the spread between the Personal Consumption Expenditures Price Index , the central bank ’ s favorite inflation indicator , and the fed funds rate was this wide was in 2007 . And Invesco ’ s Kristina Hooper says that 2007 was not a year to emulate .
Kristina Hooper is chief global market strategist at Invesco .
PHOTOGRAPHY SOURCE : INVESCO
The classic recession signals — like too much labor , excessive inventories or credit bubbles — aren ’ t flashing . However , Bank of America CEO Brian Moynihan took the unusual step of going on Face the Nation in August and urging the Fed to start cutting rates , saying higher interest was inflicting pain on lower- and middle-income consumers and implying that delinquencies and ultimately defaults would be the result . Still , Moynihan did not predict a recession .
Some fear the Fed risks remaining restrictive for too long . Kristina Hooper , the chief global market strategist at Invesco , contrasts the central bank ’ s hikes in 2022 and 2023 with its tightening policy in 1994 , when it raised interest 300 basis points and kept it at that higher level for five months . The difference is that back in 1994 , the federal budget was about to get balanced ; now it ’ s approaching $ 2 trillion .
This time the Fed has raised rates 500 basis points to a level it ’ s remained at for 13 months ( so far ). “ Does normalization lead to abnormalization ?” she asks , citing warnings from Home Depot and other companies that consumers are slashing their spending .
Her view is that when the Fed reverses its direction , the psychological impact on consumers and businesses will be positive . The last time the spread between
the Personal Consumption Expenditures Price Index , the central bank ’ s favorite inflation indicator , and the fed funds rate was this wide was in 2007 , not a year to emulate , she says .
The question of why the Fed was able to raise interest rates at a pace only rivaled during the Paul Volcker era without triggering the recession many economists predicted is an open one . Numerous once-reliable indicators — from the yield curve to the rate of change in the cost of capital to the Sahm rule ( which measures the acceleration in unemployment )— support the odds there should have been a recession by now .
Yet the economy has been more robust than it was in the previous two decades . Why ? One likely answer is the wealth effect from extraordinary fiscal and monetary stimulus and asset inflation , according to Rob Arnott , chairman of Research Affiliates .
The massive increase in stock market and housing wealth , coupled with pandemic psychology , spawned an aberration in consumer behavior , Arnott says : “ People were spending like there was no tomorrow ,” partly because they feared , rationally or not , that there might “ not be a tomorrow .”
Virtually everyone interviewed for this article thought interest rates were too high , and some said Fed Chair Jay Powell , like many of his predecessors , waited far too long to start hiking rates and then overreacted . However , it is also clear that as monetary policy is used more and more frequently , its efficacy is declining .
Take the most problematic sector of the economy — housing . Many affluent Americans have bought their homes with hefty down payments or all cash . Those who borrowed locked in ultra-low mortgage rates , so the upshot is that the percentage of homes without a mortgage sits just under 40 %, a historic high .
For many of these homeowners , the surge in interest rates has been little more than a chance to finally earn a respectable return on their cash for the first time in more than a decade . But folks under the age of 40 seeking to buy their first home find themselves living in the so-called vibecession with few options besides entering bidding wars for highly appreciated properties or continuing to rent .
Neither presidential candidate has addressed the problem of deficits or unsustainable entitlements . “ One candidate wants to run $ 3 trillion deficits as far as the eye can see ; the other wants to run $ 2 trillion annual deficits ,” Arnott says . “ The problem is I ’ m not sure which is which .”
Weisman says that ’ s why bond investors should expect a steeper yield curve once the Fed starts cutting rates .
A weaker U . S . dollar is also likely . Hooper thinks that could benefit both developed small-cap companies , cyclicals , international stocks and emerging market debt and equities .
16 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER 2024 WWW . FA-MAG . COM