Instead of a repeat of the "Roaring 20s" from a century ago, this decade is now looking more like a no-recession 1990s boom economy, according to UBS Global Wealth.
For a brief patch in 2021, markets were abuzz with talk of another "Roaring 20s" playing out. However, that optimistic sentiment waned as inflation climbed above 5% and the Federal Reserve shifted away from dismissing it as "transitory" to expressing concerns about its long-term impact.
Then came the rate shocks of 2022, which resulted in the S&P 500 SPX experiencing a 19.4% loss, marking its worst yearly losses since 2008. The monumental losses also hit the approximately $25 trillion Treasury market.
"Fast-forward two and a half years, investors are now grappling with an economy that grew 4.9% in 3Q, despite the Federal Reserve raising rates by 525 basis points since March 2022 and Treasury yields reaching their highest level in 16 years," wrote a team led by Jason Draho, head of asset allocation, chief investment office Americas, of UBS Financial Services Inc., in a recent client note.
Contrary to Expectations
"Both outcomes are contrary to the consensus forecasts at the beginning of the year."
The 1990s as a Template for Today's Economy
UBS suggests that while a "Roaring '20s" scenario aligns with their bull case, the 1990s may offer a more fitting template. During this period, the Federal Reserve implemented a series of rate hikes before eventually experiencing a soft landing and implementing modest rate cuts. UBS's team anticipates similar outcomes for 2024.
In the 1990s, this soft landing paved the way for a boom characterized by accelerated growth, increased productivity, and disinflation. However, considering the differences between the current economic climate and that of the Clinton administration, it is crucial to analyze the impact of factors such as the $33.4 trillion U.S. debt and domestic social tensions.
The UBS team acknowledges that there is something consequential happening in the U.S. economy, surpassing ordinary cyclical fluctuations. This fall, increasing benchmark rates have placed pressure on U.S. stocks. Nonetheless, the 10-year Treasury yield saw a slight decline from its October peak of 5%, falling to approximately 4.63% on Monday.
As of Monday, the S&P 500 has recorded a year-to-date increase of 15%, while the Dow Jones Industrial Average has risen by 3.6%, and the Nasdaq Composite Index has surged by 31.7% since the beginning of January, according to FactSet.
Read: Wall Street on Edge: Recession Fears Resemble the Volcker Era
Wall Street is currently gripped with a level of anxiety about a possible recession that hasn't been seen since the Volcker era. The stock market is experiencing turbulence and investors are on edge, fearing the potential economic downturn.
The Volcker Era
During the Volcker era, which spanned from 1979 to 1987, the United States faced significant economic challenges. Volcker, as the Chairman of the Federal Reserve, implemented strict monetary policies to combat high inflation. These policies triggered a series of recessions and led to significant volatility in financial markets.
Parallels with Today's Economy
The current unease on Wall Street draws parallels to the Volcker era for several reasons. First, there is a growing concern about inflationary pressures as the economy continues to recover from the impact of the COVID-19 pandemic. This has raised speculation that the Federal Reserve may tighten monetary policy sooner than anticipated, which could potentially slow down economic growth.
Second, the stock market's recent fluctuations have further heightened fears of a recession. Volatility in key indices, such as the Dow Jones Industrial Average and the S&P 500, has investors on high alert. They are closely monitoring any signs of economic weakness that could signal an impending downturn.
While it is important to note that no two economic situations are exactly alike, the eerie resemblance to the Volcker era has instilled unease among investors. The uncertainty surrounding the path of the economy and the potential impact on financial markets has led to increased caution and hesitation.
In conclusion, Wall Street is currently experiencing a level of nervousness about a possible recession that rivals the anxiety felt during the Volcker era. Investors are closely watching economic indicators and monetary policy decisions for any signals of an economic downturn. Only time will tell whether these concerns will materialize or ease, but for now, the financial markets remain on edge.
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