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Charts for the Week

The Fed | Not expected to follow the crowd... yet

June 10, 2024

The central banks in Canada and Europe both lowered interest rates last week for the first time since the post-Covid global tightening of monetary policy began in 2022. Several central banks around the world have started to ease policy this year. The US is still expected to follow suit before the end of the year, but a stronger than expected jobs report on Friday pushed the consensus view back to anticipating just one 0.25 percentage point cut in November or December. 

Some still think that the Fed will lay sufficient groundwork at its meeting this week to prepare the market for an initial rate cut at the end of July. As has been the case for months, the jobs report had enough cautionary findings to potentially warrant loosening monetary policy if inflation behaves. 

Despite the strong increase in payrolls reported by the Establishment Survey, the Household Survey continued to paint a picture of a weakening labor market with the unemployment level trending higher and the number of individuals employed full-time trending lower. The unemployment rate increased to 4%, ending its streak of 27 straight months below that level. 

While policymakers may desire to follow the pack and lower rates, the Fed may be forced to keep rates higher than other countries to offset the large fiscal deficits being run by the federal government which are significantly larger than in other developed countries and a likely contributor to sticky inflation. 

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The Economy | Latest news, old news

June 3, 2024

The government’s latest official read on the state of the economy was a continuation of recent trends with steady growth and strong corporate profits belied by statistical discrepancies and cautionary imbalances. 

For the second consecutive quarter, the average of Gross Domestic Product (GDP) and Gross Domestic Income (GDI) indicated that the economy expanded by a solid 2.4% over the past year. GDP continues to measure noticeably larger than its twin, GDI; however, the statistical discrepancy is no longer growing and both measures of the economy are now trending in the same direction. 

Last week’s report also showed persistent strong corporate profitability with profits continuing to account for an elevated share of national income. Despite corporations’ success in taking more of the economic pie over the past decade, it remains risky to declare that profits have reached a permanent new plateau as a share of national income given rising interest rates and the fiscal imbalances facing the federal government that will likely require higher taxes. Those imbalances are highlighted by the fifth consecutive quarter of negative net domestic savings which threatens to reduce the long-run growth potential of the economy. 

One new item of note: nominal year-over-year GDP growth decelerated to 5.38% after the recent revision and is now basically equal to the Fed’s target overnight interest rate. Economic growth and the long-run level of interest rates are linked; thus, it is notable when the fed funds rate crosses paths with GDP growth. Excluding the pandemic, nominal GDP growth has typically fallen below the fed funds rate before or around the start of a recession. That has not happened yet and may not if the Fed starts to lower rates before the end of the year. 

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Source: YCharts,, BEA, AOWM Calculations

Commodities | A headwind to disinflation?

May 27, 2024

Investors once again trimmed their expectations for multiple rate cuts by the Fed this year (after having only recently once again grown more hopeful). The see-sawing outlook led stocks slightly lower last week – except for the AI darlings which continue to run hot. Given everyone’s general inability to predict inflation, it seems inevitable that inflation data in the coming months will lead to more waxing and waning of investors’ anxieties.

One headwind that may keep headline inflation from surprising on the positive side is rising commodity prices. After falling back quickly from their post-pandemic peak, broad commodity price indexes have been trending higher again with the potential to continue doing so.

The transition to renewable energy, the adoption of electric vehicles and increasing investments in AI will all put upward pressure on commodity prices for several years to come (even if in the long term they have the potential to be deflationary forces). And the current unstable geopolitical environment risks sending commodity prices skyrocketing at any time.

In the near term, however, the biggest driver of commodity prices will likely be the strength of the global economy, which is expected to remain strong. The IMF’s latest forecast has world GDP growing by 3.2% this year and next. Such economic strength would be very welcome but may also keep inflation and interest rates higher for longer around the globe. 

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Source: YCharts,, Bloomberg, Dow Jones, IMF, AOWM Calculations

US Stocks | Premium performance and valuation

May 20, 2024

The headline indexes for the US stock market hit fresh all-time highs last week after the latest CPI inflation report and Fed chatter offered renewed hope that everything is awesome. While many stock markets around the world have also been surging to new highs, US stocks continue to command a near record valuation premium. 

There are fundamental factors that have driven the US market so far ahead of the rest of the world over the past fifteen years – e.g., a higher number of technology companies, better economic growth, the appreciation of the US dollar, and, perhaps most importantly, superior earnings growth by US companies. 

While these factors partly justify the large outperformance by the US stock market since the end of 2010, the run-up in US stock prices may be partly the result of some irrational exuberance that has led to an excessive valuation premium. Looking forward, international stocks appear poised to at least keep pace, if not have their own day in the sun, as the premium for US stocks is stretched, and an ultimate compression in valuations seems inevitable. However, that has been a perfectly rational thing to think for the past decade, and US stock valuations have only gotten richer on an absolute and relative basis (which just makes having some international diversification both more rational and exceedingly more difficult to do psychologically). 

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Source: YCharts,, Goldman Sachs,, Barlclays,, MSCI, World Bank, AOWM Calculations

Mr. Market | Storing up excitement?

May 13, 2024

The S&P 500 is back within a hairsbreadth of its all-time high after a mild pullback in April. Earnings reports for the first quarter have generally come in as expected, and the commentary by management teams has not derailed projections for strong profit growth later this year. Interest rates have also retreated lower this month in response to weaker than expected economic data.

The Fed's latest Senior Loan Officer Survey on Bank Lending Practices underscored some potential softening in the economy even while forecasts for economic growth remain robust. The number of banks tightening lending standards had been quickly trending lower until this quarter which indicates at least some hesitancy in the banking sector about the accuracy of those rosy forecasts.

Market internals also caution that the calm may be an illusion. For example, the typically defensive utilities sector has been significantly outperforming in recent months and is the top performing sector so far this year, even while interest rates have moved higher which would usually be a headwind for utility stocks. Long-term rates are also testing the low end of the uptrend they have been on this year. A bounce back up towards 5% would likely not be well received by the stock market. 

All that said, inflation reports this week may be benign, letting rates continue to mellow. And utilities may just be a beaten-up sector that is rebounding as investors focus on what it will take to power the AI boom. Positive momentum remains a soothing breeze at the market’s back; however, with the amount of leverage in the system and the interconnectedness of the global financial markets, Mr. Market’s inner wildness lies ever in wait.  

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Source: YCharts,, AOWM Calculations

Monetary Policy | Slowly trying to thread the needle

May 6, 2024

Last Wednesday, the Fed acknowledged that there has been “a lack of further progress” in bringing inflation down in recent months. Then on Friday, the jobs report for April rekindled investors’ hopes that the economy may be slowing just enough to get disinflation and the accompanying rate cuts back on track. Investors set aside concerns that the economic data might be pointing towards stagflation and joined the Fed’s Chair, Jay Powell, who downplayed the idea that the economy might suffer through a period of low growth and high inflation.

Despite the recent stickiness of inflation, policymakers still announced a deceleration in the reduction of the Fed’s holdings of Treasury securities from $60 billion per month to $25 billion. While the Fed has reduced its balance sheet by $1.6 trillion, it remains $3.2 trillion larger than it was before the pandemic. Policymakers are hoping that slowing the pace of quantitative tightening will enable the Fed to continue reducing the size of its balance sheet without disrupting the financial markets. The move also conveniently enabled the US Treasury to avoid having to raise the size of its debt auctions as it seeks to finance an inconveniently large budget deficit without disrupting the financial markets. 

The Fed’s balance sheet is unlikely to return to what it was before the Great Financial Crisis anytime soon as the current consensus among central bankers is to run monetary policy with “ample” reserves which likely means the Fed will hold assets equal to about 15% of GDP in the best of times. But that goal, much like the Fed’s 2% inflation target, seems to be a long-term ambition that policymakers are in no rush to achieve. 

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Source: YCharts,, AOWM Calculations

GDP Growth | Still good despite Q1 miss

April 29, 2024

The economy grew slower than expected in the first quarter while inflation was higher than anticipated. The markets jittered momentarily with concerns of looming stagflation but ultimately were largely unfazed by the news last week. Investors did once again downgrade their expectations for Fed rate cuts in response to the inflation data, and Fed officials are likely to confirm those lowered expectations at their meeting this week. 

While the quarterly data for the Fed’s preferred PCE inflation metric provides policymakers with little room to loosen monetary policy, the GDP report also offered no real reason for the Fed to cut rates. Despite missing expectations for the first quarter, GDP has still posted solid growth over the past year. 

If there are signs of concern in the GDP data, it is the degree to which the growth has been driven by increased government spending and low personal savings. A stronger rebound in private investment in tandem with continued growth in personal consumption fueled more by income growth than savings would be a firmer foundation for a continued expansion. 

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Source: YCharts,, AOWM Calculations, 

Yield Curve | Bear steepening again

April 22, 2024

The interest rate on 3-month Treasury bills has now been above the 10-year Treasury yield for eighteen consecutive months. It is the longest inversion of the yield curve since the late 1920s. Historically an inverted yield curve was an indication that the crowd believed a recession was on the horizon; however, it is unclear what the unusually deep and long current inversion is indicating. 

Recently, long-term interest rates have been rising, reducing the negative spread to short-term rates. This is the second bear steepening (so called because it is caused by a decline in long-term bond prices) in the past ten months. The first one ran from July to October last year during which the stock market also sold off about 10%. This time around the stock market had continued to rally higher along with rising long-term rates until recently. 

In general, the recent increase in long-term rates appears to be driven primarily by the apparent strength of the economy as real, inflation-adjusted interest rates have gone up twice as much as inflation expectations. But investors may be starting to worry that the longer the Fed feels able and compelled to keep short-term rates higher, the greater the chance that tighter monetary policy will start to negatively impact the economy. 

How high long-term rates go from here will depend on the future path of inflation and monetary policy. If inflation remains sticky or surges higher again, long-term rates may be on a new upward trend -- assuming the federal government allows that to happen. In theory the Fed is independent to conduct monetary policy as it deems best to keep inflation in check, but growing fiscal imbalances may test that independence in the coming years and put a cap on how high long-term rates are allowed to go, no matter what inflation does.  

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Source: YCharts,, AOWM Calculations, 

Inflation | Disrupting the narrative

April 15, 2024

At the start of the year, the consensus view was that inflation would continue to moderate which would allow the Fed to cut interest rates aggressively, ensuring the economy would remain resilient and the stock market would generate solid returns. Over the first few months of the year, confidence in that outlook for inflation and interest rates has deteriorated, but investor sentiment toward stocks has remained strong – at least until last week. 

The recent reports on the Consumer Price Index and Producer Price Index reflected stubborn inflationary pressures. While what exactly is driving the increase in the price indexes shifts month to month leading to an enduring hope that once certain price pressures abate so will inflation, the persistence of high inflation in itself risks perpetuating future high inflation. At the very least, it will make it more difficult for the Fed to cut rates significantly this year. 

The inflation reports coupled with concerns about higher rates and geopolitical events that could send energy prices higher created the first mild hiccup in the stock market in months. Investors have been very optimistic on the outlook for equities, but it was unrealistic for the smooth ride since late October to continue indefinitely. Market pullbacks are more normal than months without any.  

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Source: YCharts,, AOWM Calculations,

Labor Market | Less (or more?) than meets the eye

April 8, 2024

The headlines from the latest jobs report were once again positive: payrolls increased 303,000 in March, and the unemployment rate ticked down slightly to 3.8%. While the labor market appears to be stabilizing at a healthy level, there remains an odd level of economic anxiety given all the good news for the economy and the markets. Behind the headlines, the details in the jobs report provide some clues as to why that might be as the data is not uniformly positive. 

In particular, the Bureau of Labor Statistics’ Household Survey of individuals continues to paint a less robust picture of the labor market than the Establishment Survey of employers. While payrolls continue to show steady annual growth of 1.9%, the number of individuals employed as estimated by the Household Survey has lagged, up just 0.4%. And the increase in the employment level is all in part-time jobs as the number of individuals with full-time jobs has declined by 1% over the past year, which has been historically indicative of a recession. 

One theory for the discrepancies in the economic data is the surge in unauthorized migrants over the past three years, which the Congressional Budget Office estimates to be upwards of 5 million people. The Household Survey has shown a large increase in the foreign-born employment level; however, that is just getting back to the pre-pandemic trend and is roughly in-line with the approximately million individuals who gain lawful permanent resident status each year. The payroll data may be doing a better job of identifying the total increase in foreign-born workers.

A large influx to the labor force that is not completely captured in all the government statistics could potentially reconcile the conflicting data and explain how the economy has enjoyed significant disinflation while the headline economic numbers have remained so strong. But such a swift influx comes with its own fair share of challenges as well.  

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Source: YCharts,, BLS, Department of Homeland Security, Congressional Budget Office, Congressional Research Services,, AOWM Calculations,

The Market | Betting on the positive data

April 1, 2024

The S&P 500 Index has rallied strongly off its late October low and is up nearly 28% over the past five months. Such a swift, strong rally has only occurred a handful of times in recent decades and has pushed valuations back into rarified air that will likely suppress future long-run returns even if valuations are equally glorious in the long run.

Investors and business leaders had braced themselves for the effects of tighter monetary policy in 2022; however, the lagged effects have yet to materialize in any significant way, and the growing consensus is they never will. The government continues to publish conflicting economic data that suggests things are not booming and potential cracks exist that should temper enthusiasm at least a little.

Even if the economy avoids a recession, slow growth with stubborn inflation and normal interest rates would disappoint hopes built on only the positive data.  

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Central Bankers | Take a tiny step

March 25, 2024

The federal government avoided a partial shutdown as Congress passed a $1.2 trillion spending bill at the deadline last week. The bill will likely keep discretionary spending largely unchanged from the previous fiscal year. Unfortunately, discretionary spending accounts for less than 30% of the total federal budget. Thus, even with expectations for a solid increase in tax revenue this year, ballooning interest payments on the federal debt and growing mandatory spending will likely keep the federal deficit around 6% of GDP at a time when the unemployment rate remains below 4%. 

The fiscal stimulus from large federal deficits has countered the Fed’s attempts to slow the economy over the past two years. Nevertheless, policymakers at the Fed remain poised to begin reducing interest rates. Their latest projections still show a majority of policymakers expecting their target overnight interest rate to be 0.75 percentage points lower by the end of the year. 

While the Fed remains publicly committed to bringing inflation back to 2% (and investors show no indication of believing they won’t), the action of cutting interest rates in the current economic environment would be a clear indication that the 2% target is more rhetoric than actual policy. Although, if policymakers cut rates too much, they may lose their inflation fighting credentials. In the end, both inflation and rates may stay higher for longer. Policymakers’ forecasts perhaps offered small hint at that as the median long-run expectation for the fed funds rate ticked up ever so slightly by 0.1 percentage points. 

Across the Pacific in Japan, policymakers there are growing hopeful that they have finally succeeded in awakening the inflation dragon after decades of increasingly extreme monetary easing. Accordingly, the Bank of Japan took its first small step towards tightening policy, raising its target interest rate for the first time since 2006 by 0.1 percentage points. Like in the US, policymakers in Japan would probably not be terribly upset if inflation continued to exceed their 2% target in a stable, moderate way that helped to unwind the stimulus of recent years in an orderly fashion.    

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Rates Higher for Longer | Stocks shrug

March 18, 2024

Part of what helped to juice the stock market at the end of last year was the growing belief that the Fed would significantly reduce short-term interest rates this year in response to falling inflation. A few months into the new year, while many inflation metrics continue to trend steadily lower, headline CPI inflation has proven to be more stubborn than hoped. Investors have accordingly recalibrated their expectations for rate cuts down to just 0.75 percentage points by the end of the year after anticipating a reduction of 2 percentage points a couple of months ago. 

The waxing and waning outlook for interest rates has done little to slow the stock market as the consensus view remains that even if inflation takes longer to contain, the Fed will still be able to do so without causing a recession. 

Policymakers will chime in with their latest projections for the economy, inflation and interest rates at the Fed’s policy meeting this week. No change in the target fed funds rate is expected, but those projections and the perceived tone of Jerome Powell’s remarks could easily shift investors’ mood. In recent years, several market inflection points have occurred around Fed meeting dates – a fact which in itself may be indicative of a fragility in the overall system.  

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The Consumer | Undeterred

March 11, 2024

Personal consumption expenditures make up over two-thirds of the US economy. While a recession can occur even when consumer spending keeps growing, it would be hard to avoid one if there is a hiccup in consumption.  Much of the concern about the economy over the past year centered around the ability of individuals to keep spending like they did during the pandemic in the face of higher inflation, higher interest rates, diminished savings, and restarted student loan payments. Thus far the American consumer has been undeterred. 

A strong labor market, growing incomes, increasing asset values, and fixed ultra-low mortgage rates have all helped to keep consumer spending growing at a steady pace. Like all economic data these days, the outlook is not without a few potential storm clouds on the horizon. Short-term consumer debt is increasing quickly, the delinquency rate on credit card loans is rising, the savings rate is unsustainably low, asset valuations are elevated, inflation is not fully contained, and unemployment is increasing. 

For now, the positives are outweighing the negatives and may have sufficient momentum to continue doing so, but the negatives highlight the potential fragility of the currently humming flywheel.  

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Corporate Profits | Unfazed by the Fed thus far

March 4, 2024

The Fed’s preferred PCE inflation metric continued to tick lower in January. Thus, even while policymakers hold their target fed fund rate steady, monetary policy is continuing to tighten as falling inflation pushes the real, inflation-adjusted fed funds rate higher. Using Core PCE as the measure of inflation, the real fed funds rate has now swung eight percentage points over the past two years from negative 5.5% to positive 2.5%.   

So far that big change in interest rates has not served as much of a headwind for corporate profitability. Indeed, many companies have gotten a boost from the additional interest income on their cash holdings. In the fourth quarter of last year, profits for companies in the S&P 500 came in largely as anticipated, and expectations for earnings growth this year remain robust at more than 12%. While companies with higher debt levels have seen interest expenses start to rise, the increase has been relatively modest. 

A return to a more historically normal interest rate environment will be a long-term drag on profit margins, which have benefited from falling rates for decades. In the short term, however, the bigger risk to corporate profits from tighter monetary policy is not higher interest expense, but a slower economy that could make it difficult to achieve lofty growth expectations. 

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Source: YCharts,, AOWM Calculations

Bubbles | Turning future returns into past returns

February 26, 2024

Stock markets across the globe are hitting new all-time highs. Even Japan’s stock market reached a new record high after more than 34 years of languishing below its 1989 bubble peak. Japan is an example of how the herd can push stock prices to such heights that decades of future returns are squeezed into a short period of time.   

Investor enthusiasm last week was fed by “the most important stock in the world”, Nvidia, reporting another quarter of astounding growth. Nvidia appears to hold the key to unlocking the door to the magical AI future, and it is taking full advantage of the moment. While Nvidia is likely to continue to be a highly successful company, it will be challenging for its stock to offer investors good long-term returns at its current valuation. (Although, over the short term, bubbles can inflate longer and higher than imaginable.) 

The current AI mania echoes the excitement surrounding the internet at the turn of the century. At that time, Cisco was the indispensable stock that for a few months in 2000 surpassed Microsoft as the most valuable company in the world. While Nvidia is a different juggernaut in many ways, Cisco still offers a cautionary tale for any stock that flies too close to the sun as it remains nearly 40% below the high it reached 24 years ago. 

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Source: YCharts,, AOWM Calculations

The Fed | Facing a tougher road ahead

February 19, 2024

CPI inflation was slightly higher than expected in January. While the Consumer Price Index is not the Fed’s preferred inflation metric, the inflation report still led investors to lower their expectations for rate cuts this year to be largely inline with the 0.75% reduction in the overnight fed funds rate that policymakers have forecasted. Inflation continues to head in the right direction, but the pace of progress has slowed. 

Just as the initial decline in inflation has been relatively painless, so has the Fed’s efforts to normalize its balance sheet from the extreme measures taken during the pandemic. Other than the quickly extinguished fire of a few large bank failures last March, the Fed has successfully shrunk its balance sheet without disrupting the financial system. However, the road there might be about to get tougher as well. 

Since the bank failures last year, total bank deposits are up, and bank reserves at the Fed have increased even while the Fed’s total assets have declined by more than $700 billion. The increase in bank reserves (which are a liability on the Fed’s balance sheet) is thanks to the rapid decline in the amount of money that the Fed borrows primarily from money market funds. But that bucket is almost empty as money market funds swap back into holding US Treasury bills with slightly higher yields, so further quantitative tightening will likely entail a resumption in the decline of bank reserves (just as the Fed is trying to wrap up its emergency lending program initiated in response to last March’s turmoil).  

While normalizing bank reserves should not in theory cause problems, the Fed has placed itself in uncharted territory with unknown hazards. Once money market funds stop lending the Fed money, policymakers may start to step more gingerly on the long path back to a normalized balance sheet and slow the pace of quantitative tightening.

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Source: YCharts,, AOWM Calculations

Recession | Now unexpected

February 12, 2024

Last week, the S&P 500 notched another up week (the 14th in the past 15) and cruised past the symbolic 5000 level to a new all-time high. The rally remains highly concentrated in the mega cap stocks, but it is still indicative of a growing sense of insouciance – a feeling that is echoed in the debt markets. 

Credit spreads in the corporate debt market are at a historically low level and falling. If investors were fearing any economic weakness, credit spreads would at least be ticking slightly higher. And while banks remain cautious in their lending, the number of banks continuing to tighten lending standards is dwindling – which is typical when the economy is coming out of a downturn, not headed into one. 

The lack of a recession last year surprised many. If a recession were to materialize this year, it might surprise even more.  

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Source: YCharts,, AOWM Calculations

Strong jobs report | Have we reached nirvana?

February 5, 2024

For the second week in a row, the government reported unexpectedly strong economic data. In January, employers were estimated to have added 353,000 new jobs, the estimated payroll gains in December were revised higher to 333,000 and the unemployment rate remained at a low 3.7%. 

With inflation seeming to also be in full retreat, the economy appears to have reached nirvana (low inflation, low unemployment, solid growth, high government deficits, low personal savings, historically normal interest rates, record stock prices, record house prices, no pain). However, the headlines belie the government statisticians’ struggles to gauge the true state of the economy on the other side of the pandemic wildness. The same report that showed payrolls growing at a steady rate also showed the total number of hours worked barely changed from the previous year. And the accompanying household survey of individuals continues to show much slower job gains than the survey of employers and an increasing number of people who wish they were employed.  

The numerous discrepancies in the economic data are indicative of potential rumblings underneath the surface that at least caution against claiming enlightenment too soon.   

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Source: YCharts,, AOWM Calculations

GDP | Too good for rapid rate cuts?

January 29, 2024

Last year, the economy was supposed to weaken and potentially tip into a recession. Instead, economic growth accelerated (at least based on current GDP estimates). Real GDP adjusted for inflation increased by 2.6% in 2023 as consumer spending remained resilient in the face of waning pandemic savings, higher interest rates, and the restart of student loan repayments. Economic growth last year was also greatly supported by the federal government which ran an abnormally large budget deficit equal to nearly 8% of GDP. 

Even with the economy seemingly running hot, the Fed’s preferred PCE inflation metric continued to trend downward, and annualized 6-month PCE inflation is now tracking right at the Fed’s 2% target. Accordingly, investors’ expectations for more Fed rate cuts this year have swung back up despite the strong GDP report, and the overnight fed funds rate is once again anticipated to be below 4% by the end of the year based on fed fund futures. 

It would seem unwise for the Fed to start lowering rates with economic growth accelerating. However, when Fed policymakers meet in May, annual PCE inflation could be tracking near 2% if current trends persist, providing them with sufficient rationale to start lowering the fed funds rate at that time. How quickly they reduce short-term rates will likely depend on the true strength of the economy. Certainly not all the data is as rosy as the estimates of GDP growth suggest. Even evident in the GDP numbers are the low personal savings rate and high government deficits which raise questions about the sustainability of the recent strong expansion. If the economy does continue to motor along, investors’ expectations for rate cuts are unlikely to be met, but that would not be an altogether bad thing. 

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Source: YCharts,, AOWM Calculations

Stocks | All-time high with "cash on the sidelines"

January 22, 2024

Last Friday, the S&P 500 Index hit a new all-time high for the first time in more than two years; however, most stocks remain well below their highs reached in 2021. The new year has brought a resurgence of the mega cap trade as the largest stocks have pushed higher while the rest have pulled back slightly. 

One thing that some point to as potential fuel for a broader rally this year is the cash investors have stashed away in money market funds. As the Fed lowers interest rates and the odds of a recession recede further, the hope is investors will reallocate their money market fund holdings into stocks. 

One problem with the cash-on-the-sidelines theory is that in practice the cash is always on the sidelines. If someone buys a stock, someone else is selling it, and the cash the buyer had now resides with the seller (on the sidelines).  

To the extent there has historically been a drawdown in money market assets, it has not occurred until there has been a significant decline in stocks and the Fed is near the end of aggressively cutting interest rates. Even then individuals’ total holdings of cash and fixed income securities have remained steady or continued to trend higher.

While there is no practical reason for a high level of money market assets to support the stock market, like any market theory if enough investors come to believe that it is a bullish signal, then it can become a self-fulfilling belief (at least for a while). But if the market rally does continue and broaden, it will more likely be because of improved fundamentals and will likely also be accompanied by higher money market assets, not lower. 

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Source: YCharts,, AOWM Calculations

Inflation | Progress slows but expectations do not

January 15, 2024

The headline Consumer Price Index (CPI) reported an uptick in annual inflation to 3.4% in December. Ever since hitting 3.0% last June, improvements in CPI inflation have stalled. Annualized 6-month inflation is now higher than it was a year ago for the first time since inflation peaked in the summer of 2022. Nevertheless, investors expect inflation to steadily decelerate towards 2% this year.

Despite CPI inflation failing to make progress in recent months, the Producer Price Index (PPI) continues to show reduced wholesale price pressures, and the Core Personal Consumption Expenditure (PCE) price index, the Fed’s preferred inflation metric, appears to be on a promising trajectory back to 2%. As a result, investors are now anticipating the Fed to cut its target overnight fed funds rate seven times this year to around 3.6%. As fears of the Fed keeping interest rates higher for longer have receded, the yield curve has once again become more inverted with the short-term Treasury rates now about 1.5 percentage points above the 10-year Treasury yield.

Investors have been waiting for the Fed to pivot for a long time. The yield curve has been inverted for 15 consecutive months and is poised to exceed the modern-day record of 17 months reached in the late 70s and early 80s when the Fed was battling double digit inflation. Fed policymakers will provide an indication at their next meeting at the end of January as to whether investors have once again become too hopeful for lower rates. 

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Labor Market | Signaling strength and weakness

January 9, 2024

The labor market is a good indicator of where the economy is but not necessarily where it is going. In that regard, the economy is still in good shape. The unemployment rate remained at a historically low 3.7% in December and employers added 216,000 jobs based on initial estimates. Claims for unemployment insurance are also offering hopeful signs that the labor market is slowing without stalling. 

However, there are also less-hopeful signs in the data. The number of individuals unemployed increased 10% last year. Job openings continue to decline, and individuals are less confident about leaving their jobs. Payroll growth is decelerating, and the data continues to be revised lower each month. And the canary-in-the-coal-mine that is temporary workers continues to decline. 

While the good news should not be discounted, the odds of a more significant slowdown remain higher than normal if for no other reason than a $28 trillion economy is challenging to precisely manage despite policymakers' best intentions. 

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Source: YCharts, BLS, Federal Reserve, AOWM Calculations

23/24 | The year that was and the year to come

January 2, 2024

Last year exceeded even the optimists’ expectations. Inflation retreated largely as anticipated while the economy remained surprisingly strong and unemployment stayed low. The growing hope that inflation will be tamed without a recession fueled a strong year for stocks, especially mega cap growth stocks, with the S&P 500 up 24.2% (26.3% with dividends). Most stocks significantly lagged the headline index yet had a good year nonetheless with the equal-weight S&P 500 up 11.7% (13.7% with dividends).  

One of the few things that didn’t exceed expectations was corporate earnings which weren’t as good as analysts had projected at the beginning of the year; however, they rarely are and were still far better than they could have been if the economy had slipped into a recession as many were predicting. 

In general, the outlook for the year to come is similar to what it was a year ago – moderating inflation, slowing yet positive economic growth, and decent (if not spectacular) market returns. The odds of a recession have declined but likely remain higher than the stock market would suggest. Investor sentiment has swiftly swung carefreely positive as the set up for stocks in 2024 appears promising. Such an overwhelming consensus can be its own cause for caution. 

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Source: YCharts, S&P, Federal Reserve, AOWM Calculations


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