Commentary
SEI Forward
The third quarter prepared investors well for the upcoming Halloween season as several pivotal events heightened uncertainties regarding the direction of the economy.
Third quarter SEI Forward
Trick or treat?
The third quarter prepared investors well for the upcoming Halloween season as several pivotal events heightened uncertainties regarding the direction of the economy, geopolitics, and capital markets. Will central banks deliver the treat of a soft landing, or will subsiding inflationary trends prove to be a temporary trick as stimulus measures and spreading geopolitical tensions act as catalysts for a reversal? Is broadening equity market performance a reflationary treat as the global economy remains robust and financing rates fall, or just the trick of a short-term junk risk rally? Finally, will long-term interest rates treat investors by following short-term rates lower or will the summer rally prove to be just a trick upended by overly simulative monetary policy and every increasing debt levels?
As we enter the final quarter of 2024, the world’s two largest economies are handing out plenty of sweets in the form of easing monetary policies and a broad range of fiscal stimulus measures that should provide ballast to the global economy. U.S. Federal Reserve (Fed) policy-makers delivered a somewhat surprising 50-basis point interest rate cut in September. It is likely to be followed by an additional 50 basis points of easing by year-end. Reductions in the federal funds rate, particularly of this magnitude, are typically accompanied by a decline in gross domestic product (GDP) and rising credit spreads.
This pivot to lower rates, however, comes at a time when third-quarter GDP is tracking at roughly 3%, stock markets are at all-time highs, and credit spreads are near all-time lows. Therefore, while we are not overly concerned with a bit of monetary policy stance adjustment at this point in the cycle, the market’s expectations for more than 200 basis points of additional cuts into 2025 seems, frankly, out of touch. Inflation remains well above target, and employment is showing signs of slack relative to the recent historically tight levels. Long story short, too much candy can be bad for the economy. We see a policy mistake brewing that should provide a short-term boost to risk assets, but also upwards pressure on long-term interest rates.
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