“We gotta get as much data as we can, and it behooves us in a moment where we followed the strangest business cycle in history with one of the strangest credit conditions that we've seen in decades.”
-Austan Goolsbeee, President of the Federal Reserve Bank of Chicago, Bloomberg Interview, 5/16/23
Shifting from Quantitative easing to Quantitative tightening is unlikely to be smooth Source: ISI
How high, then, might Treasury yields go? Let’s put together the pieces. Supposed the Fed’s short-term interest-rate target, adjusted for inflation, averages about 1% over the next decade. Inflation averages 2.5%, and the bond risk premium is one percentage point. In sum, this suggests a 10-year Treasury note yield of 4.5%. And that’s a conservative estimate: Given historical neutral short-term rates, the recent persistence of inflation and the troubling US fiscal trajectory, all three elements could easily go higher.
To some extent, this is what the Fed needs to happen, to slow the economy and get inflation under control. That said, it’s been so long since long-term rates have reached such heights that further havoc is all but guaranteed. There’s just one possible silver lining: With any luck, a reawakened bond market might force US politicians to finally get the country’s fiscal house in order. The sooner the better.
Equity valuations are high and market breadth has been narrow
Chart Sources: Strategas Research Partners, Goldman Sachs
Disruption: 1962 JFK vs U.S. STEEL & 1987
Expectations are for a very tight labor market
Source: John Authers, 7/7/23 Bloomberg Article, “Bond Markets Want to Break Free”
In the 1960’s, Roy Amara, a Stanford computer scientist, futurist, and President of the Institute of the Future, famously coined the following adage, that was to become Amara’s Law:
“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
The top 7 companies in the S&P 500 account for 25% of the index's total earnings, the math below implies that by 2029 they would account for 35%*
In the words of Herb Stein, former Head of The Council Of Economic Advisors and Professor at UVA, “IF IT IS NOT SUSTAINABLE, IT WON’T HAPPEN”
*Assumes the rest of the S&P grows earning by 7%
“The trouble is that the inflation monster has not truly been tamed. In both America and the Euro area core inflation exceeds 5% and governments are adding fuel to the fire by running budget deficits of a scale typically seen during deep economic slumps.”
Source: The Economist
Chart Sources: Evercore ISI
“Portfolio Management is like steering a ship, you need to know when to hold your course and when to adjust your sails.”
-Empirical Research Partners