Investment Newsletter – November 2023
According to the White House Council of Economic Advisers (CEA), The study suggests that in 2020, approximately 80% of the inflation rise was attributed to supply shocks. However, in 2021, a notable improvement in supply chains played a crucial role in causing a decline in the inflation rate. The study highlights that this enhancement in supply chains acted as a force to reduce inflation, as measured through sector-level supply shocks, particularly in the latter part of 2021 and throughout 2022. From a policy perspective, the researchers draw a significant implication, asserting that in a world characterized by more frequent supply shocks, whether at the sectoral or aggregate level, higher inflation is expected. This holds true even in the presence of restrictive monetary policies. The study challenges the effectiveness of sustained high-interest rates, as imposed by the Federal Reserve, in mitigating inflationary pressures. The assertion is that the conventional approach, often referred to as ‘going the last mile’ to achieve the Federal Reserve’s target of 2% annual inflation, may prove challenging given the current economic dynamics. Furthermore, the study indicates signs that inflation may be on the rise again, despite the ongoing high-interest-rate environment.
Presently, while it would be unprecedented for the Fed to implement another rate hike after a prolonged period, it’s essential to acknowledge the possibility of such a move. The prospect of inflation persisting at levels that are more enduring than initially anticipated may necessitate a shift toward a more stringent monetary policy. Consequently, this scenario suggests that yields are positioned at the lower end, influenced by the upward pull from increased short-term rates and the persistence of robust nominal GDP figures.
During periods when the Federal Reserve is raising interest rates, stocks often experience positive performance, and bond yields typically increase. This trend is indicative of an economy running above its trend, leading the Fed to raise rates as a precaution against inflation. The primary objective during such rate- hiking phases is to moderate economic growth and bring it back to a sustainable trend. Given that the economy is heavily reliant on debt, higher interest rates usually result in growth below the trend and, in some cases, lead to a recession. The term “soft landing” is commonly used to describe the desired outcome during rate hike cycles, despite the recurrence of such cycles over time.
When the Fed transitions to rate cuts, stocks typically exhibit poor performance, and bond yields continue to decrease. This outcome is expected because the Fed’s previous rate hikes may have been excessive, leading to a shift from a hoped-for soft landing to a more challenging economic scenario, possibly a hard landing. This historical pattern highlights the delicate balance the Federal Reserve seeks to strike in managing the economy through interest rate adjustments.
BofA’s Michael Hartnett has repeatedly made in his Flow Show notes, namely that 2024 will see elections in countries covering around half the world’s population. In today’s Chart of the Day by the Deutsche Bank strategist, he looks at this back over 220 years and shows that this is set to be the year with the biggest percentage of elections across the globe. Also interestingly, it will be the polar opposite of 2023 which was one of the lightest years in the last four decades.
