It was a rough quarter for both stocks and bonds with the broad stock market off -4.9% and the broad bond market -4.3%. Markets are even more negative than that year-to-date. What is driving all of this? Fear of sustained high inflation.
Inflation is a funny thing because, unlike a recession, it effects everyone large and small. Inflation can also trick you into thinking an expanding economy is in recession. How so? Imagine you get an 8% raise, but prices are up 9%. Are you shrinking or expanding? Both actually at the same time.
That is why the market has been struggling with these two things –
- Are we in a recession?
- How high and for how long do interest rates need to rise to get things under control?
In terms of our indicators, very few are flashing a warning in terms of a recession in the near term. As well, it is looking like the inflationary fever is in the process of breaking, and the market believes that peak Fed Funds rate is perhaps as soon as March of 2023.
Outside of inflation, broad US economic fundamentals look good. Bottom line, future Bull markets are built upon periods like this, and we view this period of time as an opportunity.