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AFTER A BRIEF HIATUS…

I have not posted anything to this blog because I have been attending a corporate governance seminar at Wharton this week. It was a fascinating seminar on board governance and management and took deep dives on team construction, succession planning, and contemporary ESG issues. Some of this material may make it into another post, but as I was eating breakfast this morning, I was focused on some of the economic releases and their impact on the economy.

In the last few weeks, I had posted a notion that the Fed could be painted into a corner that did not provide room for rate-cut decisions. Inflation remains sticky and the longer it stays at higher levels, the greater the probability that the Fed may have to act to quell inflation. As I write this note, the 10-year Treasury bond is hovering around 4.7%[1]. For investors, the increase in Treasury rates makes a multi-asset portfolio more attractive because the income from the bond allocation is now high enough to mean something, and will also serve to help cushion portfolios from equity market volatility.

At the moment, there are still strategists clinging to hope that we will see the first interest rate cut in June. From our perspective, it is going to take a lot more than weakness in the stock market to get the Fed to react. We think there will need to be considerable evidence illustrating that inflation is meaningfully slowing down, and that will provide the cover the Fed needs to justify the start of an interest rate reduction cycle.

Of the many things I have learned over the three decades of my career in the markets, the most notable is the need to go to the “next level” in understanding economic statistics. It is interesting that many still cite the ongoing low unemployment rate as a true sign of economic health. In absolute terms, that view is correct because the unemployment rate is indeed low in absolute and relative terms. However, when one looks beneath the surface, we see a slightly different and less healthy employment environment. I have read recent research citing that the technology sector is seeing job cuts and also a much bleaker outlook. The stimulus-driven COVID-19 environment was coupled with low interest rates. This combination of factors allowed companies to materially increase headcount and employment spending. It became a sort of golden agreement for techies as they job-hopped and named their terms. All parties must end, and it appears that the Nomadic coder may become a rarer breed!

Ultimately, we are seeing more job creation in lower paying and lower skill jobs. If this pattern continues, the lessening of consumer spending driven by job uncertainty in higher-paid positions could cause the economy to slow. As we know, the dual mandate of the Fed contains inflation and employment. If the economy slows and the employment market becomes bleak, that could also be the type of environment to inspire and spur Fed action. These next few months will help that picture become clearer.

[1] Source: Bloomberg

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