As inflation turns the corner, and markets anticipate a soft landing and easing of financial conditions, markets have rallied throughout the year. Below are YTD returns ending Nov 30th 2023.
Is the market right or complacent?
When compared to historical inflationary spikes, we certainly appear to be over the inflation hump. It’s entirely plausible that inflation continues to drift downward. This would provide a tailwind for asset prices.
Take note, however, that external factors remain that could support higher-than-normal structural inflation. For example, a drought is affecting water levels in the Panama Canal is hindering global trade and causing shipping costs to rise. This could factor into prices. As the planet heats up how many more supply shortages could we expect?
Another important consideration for the soft-landing narrative is that a soft-landing has been expected before every hard-landing. We are at/near the peak of the rates cycle and the economy remains strong. Similarly, during previous peaks the economy also remained strong, but not for long (grey bars in chart below represent recessions).
There are signs that it’s too early to crack open the champagne. Employment indicators are starting to weaken and that’s almost always a harbinger for a weaker economy.