Fed is probably going to keep raising rates (you know because they tell us exactly their plan v. publicly). Inflation is starting to get under control and I think the Fed has tools in this inflation cycle it didn't for Volcker. Especially the overnight repo arrangement. Fed can crowd out demand for available credit in a freaking hurry these days instead of having a long and variable lag. I see inflation (by way of PCE measurement) normalizing to 2% target "sooner" compared to prior inflationary cycles.
When I look at this St Louis Fed graph, I don't see any activity in overnight repo. Do you have a different set of data showing the usage and impact are dramatic?
https://fred.stlouisfed.org/series/RPONTSYDRecession? The history says rate hikes are highly correlated to bear markets and recessions and no bear market in the last 70s years has ended without the Fed LOWERING rates. But consumer sentiment remains strong and the various surveys of market expectations show all time or near all time high expectations for recession and market declines. Sounds like a clear contrarian flag to me! And really, isn't the nature of recession that it essentially MUST happen when no one thinks it can? If the people in halls of power are all scared and putting on hedges, doesn't that ensure a break-evenish scenario? So, my PREDICTION for this thread is there will be either very mild and short recession or none at all, e.g. Fed negotiates a 'soft landing'.
Historically rising rates and Fed tigthtening (meaning QT or open market actions) have lead to recession 7 of 7 times. I'm investing in recession as the more likely scenario based on historical data.
I've heard 2009-2019 called the longest bull market in history, and I would argue the S&P 500 doubling from 2019-2021 is part of that bull market. You can also see it in bankruptcy rates, which stayed the same in 2020 and fell in 2021. I would argue the business cycle demands a bear market, to clear out the zombie companies that have existed on free money for years.
You could be right about the contrarian sentiment, as the market expects recession in Q1/Q2 of 2023. But what if that recession is delayed? Several past recessions took longer than the market currently expects (17, 18, 22 months), which would put recession in 2023 Q4 give or take a month. I haven't been following analyst predictions recently, but I know Credit Suise has an equity strategist with this view as well - a delayed recession, meaning avoid defensive stocks a bit longer.
This would perfectly spoil everyone's views - including mine. I have some profitable put options that expire in 6 months, others than expire in 2 years. I might need to shift my investments to longer term, to wait for a delayed recession. It's also likely earnings come in lower than expected, so there's hope for 2023 Q1 disappointment.
I also predict this 1% fall in CPI every 2 months will not last. Everyone expects inflation to fall rapidly, and I think that is true to a limit. Some expect 2% within 12 months, and I think consensus is 3-4%. The last study I read followed Fed officials and market watchers, and found their record of tracking inflation was terrible. You could actually beat them by assuming inflation would the be same as it is now. Following that theory, I should expect inflation closer to 7% than to 3.5% ... meaning I should predict inflation over 5% by the end of 2023.
Wage growth is accelerating. In the next 3 months I expect wage growth to climb above falling CPI-U inflation. Many workers have felt screwed for decades, and now unemployment is the lowest in 50 years - they finally have the upper hand against corporations. Between real wages being negative for the past year, and past sentiment, I expect wages keep rising through 2023. That, in turn, will put upward pressure on inflation, and keep it from falling rapidly back to 3%.
