Our studies of economic and stock market history are meant to provide perspective, not an investment roadmap. But occasionally a current trend will resemble the past so closely it’s eerie.
Take the current inflation cycle. If (as we believe) June’s CPI inflation rate of 9.1% represents the peak for this business cycle, then many of its characteristics have lined up almost perfectly with the “average” of past inflationary episodes.
We scrutinized the typical path of money growth during the four-year presidential election cycle, and found that it typically tends to bottom out in October of the midterm year! The cycle says a monetary pivot is imminent, and the average pattern traced out by M2 suggests an acceleration in the growth rate of about 2.5% leading up to the presidential election.
After last year’s spectacularly successful pivot following the December 2018 plunge, the thinking is that future rate hikes are the bull market’s only threat. Perhaps that will be the case; the belief is certainly well-supported by postwar U.S. economic history, but it also reveals a shocking lapse in short-term memory.
The Fed has long claimed itself to be “data dependent” while providing less and less information on those data points it considers most relevant. We can’t know what’s on that list, but we certainly know what isn’t: the ISM Manufacturing Composite, which (prior to the current cycle) provided an excellent gauge of the Fed’s policy bias.
More upside surprises are still likely and, despite the disappointing jobs report, the overall economic picture still supports a September taper. The improving economic picture is not just happening within the U.S., but in other major countries. We still believe the upside for the U.S. 10-year is limited.
The new debate over the QE “taper” erupted at the same time that a long-reliable Fed-tracking tool is telling us it’s time to ease.