Markets Are Propelled by What Hasn’t Happened

Whether you are examining the evolution of the US economy or the impact of monetary policy, one of the noteworthy developments this year is not what has happened but rather what has not. We were reminded of this over the last two weeks by macroeconomic data and by quarterly bank earnings. It is a phenomenon that, crucially for markets, has meant that interest-rate risk has not translated into any material credit risk — a relief that traders and investors are happy to run with despite residual uncertainty.

Consider some examples that reflect this general theme of what has not occurred:

  • Despite 10 consecutive interest-rate increases, which constitute the most concentrated Federal Reserve rate cycle in decades, the labor market has not experienced any significant weakening. Monthly job creation, unemployment rates, and wage growth have remained impressively robust.
  • Contrary to repeated forecasts from many economists and Wall Street analysts, the US economy has not fallen into a recession.
  • While the March bank disruptions produced the two largest failures in US history, the impact has not spread throughout the financial system, whether to other regional banks or highly leveraged non-bank financial institutions (NBFIs).
  • Traders and investors have not been significantly caught off guard by the wild volatility in the government bond market.