Update 1/18/2023 Ten-year Treasury yields dropped to 3.38% percent this morning, the lowest level since early September of last year.  The Fed funds rate at that time was about to be lifted to 3.25%, while today the rate stands at 4.50% and is expected to be lifted to 4.75% at the FOMC meeting in early February.  The catalysts behind the move lower in rates since the beginning of the year have been lower inflation readings that have worked to confirm market sentiment that peak inflation has occurred, along with a consequent slowdown in the expected pace of Fed tightening to 25 basis points in February, with a residual increase or two expected by the July meeting.  Futures markets then anticipate rate cutting to commence in the second half of this year.  Today’s data points for retail sales and industrial production were quite weak, and if the December pace in sales

Update 1/04/2023 Last year saw bonds return -13.01% and stocks return -18.11 percent as measured by the Bloomberg Aggregate and the S&P 500.  This resulted in the worst return for a balanced portfolio of stocks and bonds since the financial crisis in 2008.  The two assets classes traded in a highly correlated manner throughout the year.  This reflected the Fed’s efforts to tighten financial conditions in an effort to rein in inflation.  As we enter 2023, the bond market is in a much more favorable position as yields are substantially higher at the beginning of this year, the majority of the Fed’s tightening cycle is almost certainly behind us, and inflation has likely peaked for the cycle and is poised to trend lower in 2023.  The high likelihood of recession in 2023 should result in a substantial reversal of last year’s Fed tightening over time, while at the same time

Comment on Today’s GDP report 12/22/2022 The revised GDP report for Q3 2022 showed the economy grew by 3.2 percent during the quarter.  While the headline number is inspiring, the report is not a sign of broad-based economic resiliency.  Net exports added 2.86 percent to the quarterly total, reflecting a sharp increase in exports and a decline in imports during the quarter.  Falling imports are not surprising given the weakness in domestic demand, but surging exports look very suspect in an environment where China has been under a COVID lock down, Europe is experiencing an energy crisis and where the dollar has surged globally over the first 3 quarters of the year.  We’d look for this contribution to reverse in the coming quarters. Absent this contribution, the economy was essentially stagnant in the third quarter – like the prior 2 quarters.  We continue to see the economy slipping into recession

Update 12/8/2022 The NY Fed recently updated its recession probability model with November data.  The likelihood of Recession over the next 12 months has risen to 38 percent.  Every time the model has reached this level in the past the economy has either been in a recession or one has followed.  While equity markets are down moderately this year, in our view that is a reaction to sharply higher yields, not an expectation of falling earnings that would correspond with a recessionary environment.  That adjustment likely lies ahead next year.

Data Review and Market Update 11/30/2022 Today’s economic reports concerning the labor market continue to paint a mixed picture.  The ADP employment report covering the private sector showed job gains of just 127,000 in November, the slowest pace since January 2021.  In addition, layoffstracker.com shows a sharp rise in layoffs in November above the rising trend during the past 6 months.  However, the Job Openings and Turnover data released by the Labor Department covering October showed overall job openings of 10.33 million, which remains well above the number of job seekers today and will keep the Fed’s concerns about wage pressure and inflation in place.  We anticipate that job openings will decline in the coming months, and layoff data certainly points to a growing pool of available labor.  But the gap between open jobs and job seekers remains too wide at this point to change the outlook for the Fed.

Lower Yields and Equity Prices Lie Ahead  Overview The inversion of the 3-month to 10-year Treasury curve has deepened significantly and when it is this inverted recession almost always follows within the next year. That is our expectation, and once unemployment begins to rise the Fed will likely begin to reverse the rate hikes put in place this year, supporting bond returns while equities would likely move lower as corporate earnings levels would likely be well below current expectations.   Click here