SUMMARY
There are many reasons why market timing is the wrong strategy in a period of high event risk. We believe it's prudent to “mind the gap” by seeking to maintain an up-in-quality bias in both equities and fixed income.
The three consecutive 75-basis-point rate hikes are the Fed’s fastest hikes ever and the largest increases since 1980. The forward curve suggests a further 125bps to come. Comparable to highway accident data, higher speeds and larger rate hikes combine to increase the probability and magnitude of negative consequences.
The Fed is likely to sustain its hawkish measures to crush inflation with limited regard for the time it takes for its medicine to work, likely damaging some markets along the way.
By openly encouraging lower asset prices, whether in housing, equities or foreign currencies, the Fed is leading market participants to become extremely defensive. That defensiveness can not only reduce liquidity and increase volatility, it can change investor behaviors and create negative feedback loops.
The Fed’s determined actions and the continued resiliency of both inflation and US employment growth do not bode well for equity markets in the near term. Remember, historically US equity markets have never bottomed before a recession has even begun – and one hasn’t.
Ultimately, a fall in employment sometime in 2023 is likely to see the Fed suspend its fight against inflation. As we’ve pointed out before, in seven Fed tightening cycles since 1980, the Fed has sustained its maximum policy rate for only seven months on average before cutting rates.
The fruits of long-term economic growth can only be earned in time through patient exposure to innovative companies. So too, must one be patient as the economy works through a difficult period for inflation and monetary policy.
