Market Perspectives
Zevin Asset Management
Q3 2024 Market Outlook

Maybe it really is different this time. A typical business cycle usually consists of an overheating economy followed by higher policy rates imposed by central banks. This eventually leads to a slowing economy, and in 6 out of the last 7 monetary tightening episodes in the U.S since 1970, the economy has fallen into recession. Higher lending rates slow consumption, leading to layoffs, which further slows consumption and more layoffs, and so on. However, this cycle has been different so far. When the Fed began raising interest rates in 2022 to fight inflation, the personal consumption response was much more muted than usual, thanks to previous emergency pandemic stimulus. The U.S. economy has slowed somewhat in response to tighter monetary policy, but employers have been mostly reluctant to implement significant layoffs with the fresh and painful memory of the 2020-2021 pandemic reopening when consumer demand rebounded sharply but employers had a hard time finding workers to satisfy demand. So-called “labor hoarding” has become a significant attribute of the current economic cycle, which has contributed to the relative strength in the labor market, consumption, and the economy in general.

Market Perspectives

Japan: False Dawn or Land of the Rising Sun?

“Fall down seven times, get up eight” is a Japanese saying of resilience and perseverance. It also succinctly describes the pattern of the Japanese economy over the last 35 years. The Japanese real estate and equity bubble burst in December 1989, and since then the domestic economy has fluctuated between deflation and reflation with 45% of monthly inflation readings indicating falling prices. This situation is unique to Japan, which has been one of the weakest economies among the G7 countries over this timeframe. Japan has repeatedly experienced “false dawns” over the last 35 years where its economy appeared to be escaping the cycle, only to have economic recoveries fizzle out.

Q4 2023 Market Outlook

A lot can change in a year. A year ago, investors were mourning the worst performing year for equities since 2008 and the worst year for bonds in recorded history. There were convincing arguments from notable investors about the end of a decade of easy money, low rates, and a strong global economy. Certainly, the era of low rates may be over or taking a long pause, but it’s clear that we continue to wait for a much-anticipated recession, a recession we could characterize as “chatted up” based on sentiment and past precedence (an inverted yield curve, rising rates, high energy prices, and high inflation). This is reminiscent of the old joke that economists have predicted nine of the last five recessions. Talk of a certain recession has been slowly replaced with talk of the probability of an actual recession, a soft landing, or even no recession at all.

A Silver Lining to the 2024 Outlook

What a difference a year makes! According to the Merriam-Webster dictionary, the word of the year for 2023 was “authentic,” which is certainly a major improvement over “gaslighting,” which was the 2022 word of the year. Transitioning from the negativity of “gaslighting” in 2022 to the positivity of “authentic” in 2023 was mirrored in the global economy and financial markets.

Q3 2023 Market Outlook

“We are navigating by the stars under cloudy skies.” That was how Jerome Powell, Chairman of the U.S. Federal Reserve, recently described the central bank’s task of taming inflation. We can’t think of a more accurate way to describe the central bank’s job, but those words don’t exactly instill confidence in the single most important organization responsible for steering the largest economy in the world.

Millennials’ Angst

The recent trend in U.S. residential housing conditions is downright discouraging for those trying to buy a new home, and even worse for those looking to buy their first home. Ongoing supply shortages in the housing market have pushed the median price for an existing single-family home 50% higher than pre-pandemic levels. Meanwhile, the Federal Reserve has been lifting interest rates for 18 months in its effort to cool inflation, which has resulted in a 23-year high in mortgage rates. Rising house prices coupled with rising mortgage rates mean housing affordability has become very unaffordable.