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Higher Rates. Just Like Everyone Predicted.

Most of us are terrible market forecasters. Even more of us won't admit it. Ego is a massive thing in life - let alone in the financial industry. I get it, I've been trying to dissolve mine for years. I attended a meditation retreat last year, it wasn't my first and won't be my last. During one process I purged my ego from my body. It was like nothing I have ever felt before. I did it. I completely dissolved my ego - amazing. I would continue to meditate and reflect for months following only to realise that it would take someone with an ego to convince himself he's dissolved his ego. And so, the journey of personal growth continues.

You see, just when you think you've got it all figured out, the universe will show you why you are not there. And I think that's the whole point, there is no "there", there is no end point - neither in our personal journeys and in financial markets, it's all a process, a never-ending process.

Last year was a perfect example of investors having it all "figured out" - hard landing, recession, and as a consequence, a bear market. It was the most anticipated recession in history, even though we haven't had it yet. This year, it was rate cuts. In fact, as many as 7 rate cuts in 2024. Today, most experts don't see rate cuts until the second half of the year. Here are interest rate predictions from Wall Street.

Just take a look at how interest rate expectations have changed over the last few months.

The Fed has now kept interest rates constant for 10 months since the last hike in July 2023, higher for much longer than we usually see. It normally takes 8 months from the last Fed hike until the central bank starts cutting.

Next, there's the stock market. Investor sentiment is at multi-year highs, and professional money managers are allocating to stocks at the highest level since January 2022, which was also the last peak in the stock market.

The S&P 500 is currently down 5% from its record high. That means the market is in its biggest drawdown since November. Even a strong year in the stock market can become very stressful. By the way, the current sell-off comes as investor sentiment has reached multi-year highs. There’s an irony in the market pulling back just as sentiment heats up.

Why are rates higher? I think it boils down to a very simple fact - the economy is strong. Consumers are spending money, which is keeping inflation a little higher than expected. To add to this, the US is adding 200,000 to 300,000 jobs per month!

What do we make of all of this? To be honest, who knows. It could be that this sell-off is short-lived, and the market quickly recovers, and everyone who piled into stocks lately feels good about themselves. Then again, it would also be totally normal to see prices fall much further before turning up again. I mean, the average drawdown in any given year is 14%, so things could get much worse before they get any better, which would be totally normal.

We spent so many years in a low interest rate environment. We needed a global pandemic to spark inflation. Supply side inflation led to demand side inflation. Goods inflation led to services inflation. Inflation is higher than it has been post GFC at around 3.48% (certainly well and truly lower than its peak of 9.1%). As a consequence, rates are higher than they have been (post GFC). Should we expect both inflation and rates to fall back to post GFC levels? I don't think so. Maybe we are in this higher for longer regime?

All of this speaks to how unpredictable and treacherous financial markets can be over short periods of time - I'm yet to meet anyone who actually has it all figured out. Although I do meet many who have figured it out after the fact - it was so obvious, wasn't it? I believe that investing over the long-term has largely been solved. Yet it doesn't change the fact that it remains a journey. With all its ups and downs, it will continue to pull you in and teach you a lesson or two along the way. Remain centred, grounded, calm, and focus on where you're going. Enjoy the journey.


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