For instance, major stock indexes fell in ‘22 but that was mostly driven by higher discount rates - so most large cap stocks still price in low risk of earnings declines and recession. In these sorts of circumstances it's best to look at what is implied by market pricing and compare that to the plausible range of outcomes to get an edge.
If economic momentum continues, it will sow the seeds of the tightening needed to generate the economic slowdown needed to reverse it. And the longer that the economic strength persists, the more inflation pressures will build and the greater the pressure for the Fed to tighten further. Most of the disinflation is coming from the goods sector and will eventually roll off bringing inflation back closer to elevated service sector inflation. The labor market remains tight, and that means that growth and incomes are likely to continue given the current economic momentum. The trouble is that this dynamic is unlikely to persist for too long. Put together, it looks like the perfect picture of goldilocks - decent growth, secularly low unemployment, moderating wage growth and low inflation. Inflation also moderated as transitory inflation in supply-chain constrained sectors has shifted to disinflation. If anything, recent months show strengthening. There is little indicating an immediate recession. While some more cyclical sectors of the economy have softened - like construction and manufacturing - the rest of the economy continues to grow and moderating inflation has supported expanding real demand. Positioning For The Implausible Outcomes Priced InĪs we predicted last year, the US cycle has moved much more slowly than most expected.Major US Asset Classes Are Down, But Still Pricing In Improbable Outcomes.The US Economic Cycle Has Played Out Much Slower Than Most Expected.Unlimited’s perspectives on what the first part of 2023 will bring for the economy, its path from the current not-too-hot, not-too-cold state, and the implications on markets.
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