Drive for Show, Putt for Dough

Global central bank hiking cycles have dominated financial market headlines for the last 18 months, keeping many investors on the sidelines, hiding out in cash as inflation and the resulting rate hikes were serious headwinds to returns. Now, over the last few months, as these hiking cycles have increasingly hinged on incoming economic data to determine the moment of pausing, ending, or even reversing (in the case of certain Emerging Markets), we have seen a dizzying rush of wagers that each CPI or Payrolls report will provide the singular answer to economic and financial direction for the next 18 months. From July 4th to Labor Day, the Nasdaq had five different 5% swings; similarly, 10-year U.S. Treasury yields moved up (or down) 0.25% on six different occasions, notably catalyzed by economic data releases (see Figure 1).

As the Ryder Cup took place last weekend in Rome, a number of golfing analogies come to mind. As it relates to these recent short-lived and volatile market swings, we are reminded of the amateur golfer who, after a prolonged period of sitting on the sidelines, swings aggressively at every shot, determined to shoot incredible scores and make up for lost time. Yet, the most aggressive approaches can often leave you in the bunker, or in a water hazard, scrambling to avoid losses (not that we have any experience with that). This is especially true when you are playing on an unfamiliar, or especially difficult, course – as we believe is the case in markets today.

Treasury yields have traded in a wide range in the 10 days around the last 3 NFP and CPI prints

Those market participants looking to extrapolate each inflation or jobs data point, hoping for the proverbial hole-in-one on economic answers and investment returns, are more likely to stray off course, missing the more durable trends that are unfolding in front of us. We believe analyzing the incoming data is as important as ever with the Federal Reserve (Fed) moving to a more balanced approach of data-dependency, but that requires context and patience, analyzing the economic figures holistically and with nuance.

For example, the Manufacturing ISM survey fell to the contractionary level of 48 coming in to 2023, leaving many prognosticators calling for imminent recession, particularly with consensus 2023 real GDP estimates at a paltry 0.3% back in January. Never mind tightness in the labor market, excess savings with solid wage growth, the hand-off from goods consumption to services, or the sentiment-based nature of surveys, all of which suggested these expectations of gloom were over-done. Sure enough, entering September, the consensus for 2023 real GDP had risen sharply to 2.0% (see Figure 2).

Real GDP estimates have swung sharply, from muted expectations in Q1 to robust today