Unless you live in Kansas City, the only topic discussed more this year than Taylor Swift is artificial intelligence (AI). Meanwhile, investors have focused considerable attention on the Federal Reserve (the Fed), after the central bank acknowledged inflation was trending lower and pivoted policy guidance last December.
Investment professionals attempt to summarize what factors are currently driving financial markets. Usually, the narrative covers a few major influences, sometimes ignoring smaller cross currents that have material impact. Occasionally, investors are handed an environment that is easier to navigate, due to powerful forces that dominate across equity and fixed income assets.
Looking back at the pandemic and post-pandemic environment, the economic impact has been unprecedented.
During the last two years, financial markets have taken investors on a wild ride. In 2022, central banks were heavily criticized for being late to act as inflation rates soared to levels not experienced in 40 years.
Over the prior three months, rising temperatures and hot economic growth had equity investors searching for shade. In late July, second quarter GDP exceeded expectations, with an advance of 2.4%.(i) At the same time, initial estimates of “real-time” third quarter GDP, such as the Atlanta Fed’s GDPNow, indicated further acceleration was likely.(ii)
Last year, as the Federal Reserve altered their path of tightening monetary conditions, we noted that overall visibility had become “muddled.” During the second quarter, improving economic data has provided investors with levels of visibility not experienced in some time. It wasn’t immediate since concerns over regional bank stability were still top of mind.
Everything Everywhere All at Once
For investors, 2022 was all about rising interest rates and the impact on financial markets. In late 2021, the Federal Reserve ("the Fed") was still purchasing treasuries and mortgage-backed securities, which was part of their policy response during the pandemic.
Fishing for Confidence at Jackson Hole.
In our October 3rd update, we mentioned disappointment and uncertainty being recent key themes. The factors contributing to present conditions are well-known: high inflation, central bank tightening, and possible escalation in the Ukraine war.
Breaking? Or Just Breaking Bad? As inflation remains an issue around the world, central banks have ramped up their hawkish rhetoric. Will they be able to get inflation under control?
