By Tim Courtney, Chief Investment Officer
Globally, several economies, particularly Japan and the United Kingdom, have entered recessions1 triggered by rising interest rates intended to mitigate inflation.2 While there was a meaningful chance of this happening, it underscores the influence of monetary policies worldwide. The rate adjustments are taking effect, slowing activity to control inflation.
What is very interesting in the U.S. is that despite government agencies and investors having an abundance of data at their immediate disposal, they are still very unclear about where the economy stands. For example, inflation accelerated to 9% in 2022 and many were caught off guard. The Federal Reserve began reporting on an inflation measure called “Super Core” inflation, which showed inflation at a lower level in 2022 and supposedly better reflects the true inflation level. Inflation does indeed start to fall, but in January and February of 2024, Super Core inflation increases by 8.2% annualized. Numbers are jumping all over the map.
What is likely happening here is that the extreme changes in monetary and fiscal policy over the past four years are creating very noisy markets. In addition to the noise, certain areas of the market are starting to break, notably in commercial real estate. The transition from remote work to office life is progressing slower than anticipated, causing high vacancy rates and pressure on loan refinancing.3 Even “location, location, location” cannot save many of these properties.
But where some assets are breaking, others are holding. The residential real estate market shows signs of stability, providing some reprieve to consumers. Interest rate increases made to tame inflation have not brought housing prices lower but slowed the increase.4
However, while housing is stable, consumer debt is also a growing concern. The auto market, for example, after witnessing significant price hikes and shortages in 2021-22, is now seeing a spike in loan defaults as consumers struggle to manage higher payments.5 Similarly, credit card defaults are on the rise.5
The labor market is also evolving, with workers demanding higher compensation for fewer hours worked, although the number of workers quitting their jobs has been falling. Higher compensation is one reason the Super Core inflation has been rising, as it focuses on services rather than goods.6
As we’re all well aware, we have gone through four years of big changes. Interest rates, inflation, real estate, labor markets and government spending all have gone to and/or from extremes. It’s like watching a car swerve uncontrollably, veering from one lane and back into another. The data is quite noisy, and it is hard to make sense out of what economists and investors are seeing. We've seen other economies slip into recessions, but the current data in the U.S. is mixed and volatile. In this environment, our role is to make sure we remain diversified and disciplined on the prices we’re paying for assets. If you have any questions about your portfolio, please contact your Exencial advisor.
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