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Assessing the Economic Cycle

Assessing the Economic Cycle
Bond Prices vs Equity Prices, TLT (Blue) vs SPY (Green) 2018-2023

Macroeconomic Order of Operations

  1. Rates rise
  2. Equity prices decline
  3. Consumer demand slows
  4. Company earnings fall
  5. Layoffs occur
  6. Wage growth slows
  7. Inflation falls to target

In my opinion, the economy is between 2 and 3. Equities have recently been under pressure, as consumer demand slows. Rates will not rise much more but will stay higher for an extended period. The sell-off in long-term bonds has occurred but equities have remained resilient in 2023. Equity and bond prices usually don't experience large divergences over many years, since the cost of borrowing is or will eventually be reflected in all equities. Order is more important than timing here, and I'm betting that Powell doesn't want to be remembered as the guy who let the inflation genie back out of the bottle.

The opinions expressed are for informational purposes only and should not be considered advice; individual circumstances may vary, seek professional guidance before making any financial decisions.