Global markets in focus

As inflation falls, focus turns to a new market cycle ahead

2023年4月12日
brian-levit
ブライアン レヴィット
マーケット・ストラテジスト
As inflation falls, focus turns to a new market cycle ahead
Key takeaways

Inflation falls
Today's US Consumer Price Index report showed that inflation, while still elevated, is coming down rapidly.

Impact of tightening?
Investors now turn their attention to the potential economic impact of the Federal Reserve’s aggressive tightening over the past year.

Looking ahead
Near-term challenges for markets may remain, but beyond the next few months, I believe it’s time to look ahead toward a new business and market cycle.

 

The prolonged period of policy uncertainty that has weighed on markets since fall 2021 has likely come to an end. Today's US Consumer Price Index report showed that inflation, while still elevated, is coming down rapidly.1 The moderation in inflation extended beyond commodities and goods to include services such as shelter costs, medical services, and used autos. Markets (at least initially) are enthused. As always, markets don’t trade on “good or bad” but rather on whether conditions are getting better or worse. The inflation story is getting better. If anything, the focus on inflation is now passe.

Investors now turn their attention to the potential economic impact of the 500 basis points of policy tightening that the Federal Reserve implemented over the past year, a record in terms of magnitude and time.2 The impact is still unknown. What we do know is that policy tightening has historically ended in financial crisis (check) and recessions. The banking crisis appears contained for now (the rally in bonds isn’t hurting3). The economy has been resilient, but I believe a recession is likely coming, particularly with all those banks tightening lending standards.

Investors can take some solace in that the market had already priced in a mild recession (S&P 500 Index was down 25.4% from Jan. 3, 2022, to Oct. 13, 2022).4 It wouldn’t be unexpected to retrace some of the recent gains as the economy rolls over. Tactically minded investors may still want to be defensive here. Importantly, markets have tended to perform well in the 1- and 2-year periods following peaks in inflation and the end of tightening cycles.5 Inflation peaked in June 2022. The Fed tightening cycle is now likely over. This is typically how new market cycles ultimately begin. 

In short, near-term challenges for markets may remain, but beyond the next few months, I believe it’s time to look ahead toward a new business and market cycle.
 

Footnotes

  • 1

    Source: US Bureau of Labor Statistics, as of 4/12/23
  • 2

    Source: US Federal Reserve, as of 4/12/23
  • 3

    Source: Bloomberg, L.P., as of 4/11/23. Based on 10-year Treasuries.
  • 4

    Source: Bloomberg, L.P., as of 4/11/23
  • 5

    Sources: US Bureau of Labor Statistics and Bloomberg, L.P., as of 4/11/23, based on S&P 500 Index performance in the 1- and 2-year periods following peak inflation in February 1970, December 1974, March 1980, December 1990, and July 2008.

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