Years from now we may very well look back at February 2024 with fond memories. It may not instinctively feel like it, but we are living in a “goldilocks” time (at least, from an economic / investment standpoint). Let’s take a moment to appreciate it. These times are rare and they don’t last forever. Consider this:
The economy is strong; with low inflation and steady growth.
Economic growth (as measured by GDP) was 3.3% annualized in the 4Q, well above analyst expectations (per CNBC). That comes on the heals of a 4.9% annualized growth rate in the third quarter.
Job growth is also surpassing analyst expectations; recent jobs report showed an increase of 353,000. That was nearly double the consensus forecast of 176,500 jobs.
Inflation is back to an annualized rate of 3.4%... down from a peak of 9.1% annualized in the summer of 2022.
The investment world has recently been kind to stock and bond investors alike.
Bond investors are enjoying attractive yields. The 10-year government bond yield is around 4%, which is well above the average yield over the last 20 years.
Stock investors are enjoying a nice rally that’s taken the market back to all-time highs for the first time since 2021 (as measured by the S&P 500).
Corporate profits are expected to hit a record high in 2024 (as per a consensus of economists measured by FactSet).
This is the goldilocks environment that the Federal Reserve was shooting for when they began hiking interest rates in early 2022. Few thought it was possible to nail the landing (and I was among the doubters) and I suppose that the debate will continue for some time, but in this moment (even if temporarily) the Feds have to be feeling pretty good about their decisions.
That’s great. But… what’s next?
The stock market valuation is already factoring in interest rate cuts and strong corporate profits; hence the recent all-time highs. The bond market is pricing in continued lower inflation and few economists are expecting a recession in 2024. CNBC reports that “More than three-fourths of economists — 76% — said they believe the chances of a recession in the next 12 months is 50% or less”.
How long can the economy and markets continue to remain in the “Goldilocks” environment? We’ve seen this scenario before with two dramatically different outcomes.
Perhaps this is a repeat 1995.
The Federal Reserve raised rates 7 times in 1994 to slow down a hot economy. The economy cooled in 1995, but avoided a recession. The Feds made a couple of rate cuts in 1995 and 1996 to “normalize”. The S&P 500 went on an absolute tear, posting five consecutive years of 20%+ returns. In hindsight, we refer to this time as the “dot-com” bubble. But before the bubble began, the economy briefly sat in a similar “goldilocks” environment.
Never mind the fact that S&P 500 fell by nearly 50% in the 3 years following the dot-com bubble.
Setting off another speculative bubble is an extreme scenario, but there are some similarities based on the current hype surrounding the use of artificial intelligence and the recent performance of the technology sector.
On the other side of the coin, there are plenty of examples where rate hikes were followed by brief periods of time that felt rather “goldilocks” but were, alas, short-lived. The Federal Reserve hiked rates 17 times from 2004-2006 and nothing broke (at least, not immediately). 2006-2007 felt rather “goldilocks”. The S&P 500 was up 13% in 2006 and another 11% through October of 2007. Then the wheels came off. Markets seized up and the S&P 500 fell more than 50% over the next 15 months.
Both 1995-1999 and 2006-2009 are very extreme examples. The coming years will likely fall somewhere in-between “massive bubbles” or “epic meltdowns”. The next 3-6 months will give us clues, but we likely won’t have answers for even longer. We will be watching closely and make adjustments as needed.
Regardless, let’s enjoy this moment. This is the goldilocks moment that the Federal Reserve was shooting for.
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