By Thomas Martin, CFA, Senior Portfolio Manager
Consistency—Not. If the market was on the stand, the prosecutor might be saying, “So let me get his right, Mr. Market, just last week you said that there was not going to be a recession, and the week before that, you said there was, and now…well, now, you’re saying that maybe we are going to have a recession. Which is it?”
To which the defendant replies, “My story keeps changing, yes, that’s true Mr. Prosecutor, but it’s not because my story is inconsistent, it’s because the facts are inconsistent. The facts keep changing, sir, and my story changes to stay consistent with the facts.”
Narrative Volatility. We have the VIX to measure equity volatility and the MOVE to measure interest rate volatility, but we have no analogous measure for “narrative volatility.” The word “narrative” as applied to the descriptions of what is going on in the markets has crept into the (over)usage lexicon over the last few years, and is a great way to keep in mind that we are constantly trying to tell ourselves stories to help us understand a confusing reality. Sometimes these stories have longer-term staying power and stick around for a while. Other times, like lately, they seem to flutter back and forth on the winds like a butterfly. Market pundits, in the meantime, do their best to capture their rapt audiences’ imaginations with stories designed to jolt investors into some sort of action, sometimes through dire warnings, and the more dire the better. There are almost always competing narratives, but there is usually one that can be considered the consensus, and it, by nature, tends to be slower to change. Not so much lately though, as the consensus has had the feel of changing more frequently. Thus, increased narrative volatility.
What’s in play…is still the same old stuff, however. The sub-narratives. Still starts with inflation, which is closely followed by employment, the consumer, interest rates and the U.S. dollar. All with intertwining plots that influence each other. And sentiment, the animator of the story.
The last page. What we would like to know is how it turns out. If we could flip to the end. Where it says how stocks and rates ended up. We are trying to guess the arc of the story between here and there. Where we end up is thought to be largely dependent on whether and when we have a deep recession, a mild recession, or no recession.
Twists and turns. Inflation has been hard to get right. The consumer has been hard to get right. Corporate behavior has been hard to get right. The Fed has been hard to get right. An earlier narrative was that the Fed was moving so far so fast, they would kill inflation and also kill consumer spending and the economy in the process, and that it would happen early this year and then the Fed would have to pivot and cut rates later this year. Then the story was that the rate increases would cool inflation but not kill employment too much, and there would be a mild recession or soft landing. The Fed would still have to pivot, but maybe a little less. Then the story was that inflation would slow just enough that the Fed could pause, but couldn’t pivot, but that the consumer and employment would be fine, and we wouldn’t have a downturn (“no landing”) at all (how exciting). And then the story changed to that the Fed is going to have to push out the pause until later this year, and will overdo it and then have to pivot later, but we will have a recession now, except that it will be in 2024 (you know, next year). The markets sold off, the markets went up, the markets sold off. And somebody said something about running out of oxygen.
What to do. The changing incoming data and the changing perceptions around what is happening and what is going to happen are in-line with GLOBALT’s market outlook. We are generally positive on the economy and that the peak is in view on the rate cycle. We do, however, note that the volatility of potential outcomes for the future remains very wide and is based on very real, unsettled, fundamental factors. We are maintaining our conservatively positive positioning as we work our way through this.
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