April 2024 Market Update

Since the FOMC’s December pivot, inflation data has not cooperated with the federal reserves desired outcome. The consumer price index quit declining in June 2023 at 3.1%. Down from a peak of 9% in June 2022. The data has trended sideways for nine months, with the most recent 2024 CPi data rising back up to 3.5%, anxieties around the fed’s ability to achieve price stability and a soft landing are beginning to form.

At tomorrow’s FOMC, the fed is expected to leave interest rates unchanged while potentially tapering quantitative tightening, the pace at which the fed reduces the size of its balance sheet. Tapering quantitative tightening could be viewed as slightly stimulative while the outlook for interest rate cuts remains data dependent. Although recent inflation data has been discouraging for market participants expecting interest rate cuts, alternative economic data such as the Chicago PMI, reported this morning at 37.9 versus expectations of 45, suggests the breadth of corporate earnings growth is deteriorating and disinflationary effects are beginning to appear.

In addition, Q1 2024 GDP data surprised to the downside last week at 1.6%, missing expectations of 2.2%, and down from 3% in Q1 of 2023. Many market participants which have been claiming “rising interest rates are economically stimulative” appear incorrect, as over the last year CPi remains elevated at 3.5% and GDP has declined to 1.6%. If rising interest rates were economically stimulative, GDP would be flat or rising not declining by 46% year over year.

The economy expands and contracts with credit. Credit markets appear to be in the largest bubble of the past thirty years. Market participants are not requiring compensation for adding credit and duration risk in corporate debt. However, now that economic growth is slowing while inflation remains sticky, we expect credit spreads to begin rising and for market volatility to follow.

A pullback in credit will likely pull inflation data back down and force the banking and real estate sectors to write down valuations on assets in distress, which would likely lead to a larger overall market decline that forces the fed to cut interest rates upon the realization of falling economic growth.

According to the Taylor Rule, the federal funds rate is too restrictive for growth (GDP) and inflation (CPi) to remain stable, and both should continue to decline until the federal funds rate is cut down to meet the Taylor Rule rate. The federal reserve should not cut the federal funds rate down to meet the Taylor Rule rate, until inflation (CPi) is sustainably back down to two percent.

Employment is the final leg holding market confidence together. However, under the surface of the low headline unemployment rate, the economy has lost two million full-time jobs in the past nine months. In addition, the chart below, provided courtesy of Danielle DiMartino Booth, former federal reserve insider, suggests after BLS revisions to employment data through Q3 2023, the jobs market has weakened significantly. This data points to an employment recession. As this realization sinks into the market it will likely justify the Feds December pivot.

This is not a good environment for risk assets.

Our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re steepening and select low duration U.S. equities. Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy.

We remain patient and focused on managing risk through 2024.

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