The FI Mastery Podcast

Why Markets are Primed for a Pullback

August 31, 2023 Peter Donisanu
The FI Mastery Podcast
Why Markets are Primed for a Pullback
Show Notes

Evidence suggests that this year's risk asset rally is likely primed for a pullback.
So now, why now?
Why the glum news after the S&P 500 index posted one of its strongest year-to-date gains in a while?
Well, it's essential to remember that most market activity is underpinned by a narrative or a story that influences price swings either higher or lower.
And this year's rally isn't any different.
To be sure, the consensus view among many investors this year was that the Federal Reserve (the Fed) would finally beat inflation by aggressively raising interest rates.
And, while higher rates are typically a market headwind, investors bet that the Fed's aggressive moves would eventually tip the economy into a recession, prompting policymakers to reverse course sooner rather than later.
Now, the Fed tends to cut rates to get ahead of rising unemployment, which tends to happen during a recession, and so financial markets interpret falling interest rates as supportive of market prices.
And so, while headline inflation has fallen this year, the long forecasted recession has failed to materialize.
Now, in any other situation, this would be a win for households, businesses, and policymakers alike.
But the fact that the US economy continues to hum along even as it's now more expensive than ever to borrow money suggests that the fight against inflation isn't over yet, and the story many investors have been betting on this year likely won't happen as quickly as once hoped.

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