This month Jason Weaver discusses a jobful recession, market bifurcation and bond duration.
One of the primary data points the Fed tracks is the labor market which has been strong throughout this hiking cycle, making taming inflation harder.
The common view is that we need a recession to bring down inflation, and that we cannot have a recession with a strong job market at the same time
In the early 2000s, the Fed kept interest rates low for a long time because the labor market showed no signs of improvement, prompting what economists now call the Jobless Recovery
In hindsight, it was a policy mistake on the Fed’s part because the low-interest environment fueled the real estate bubble
Market bifurcation is a term used to describe the phenomenon of two different asset classes
Can occur when investors become more or less risk-tolerant.
During periods of uncertainty, investors may become more risk-averse and shift towards value stocks. Conversely, during periods of expansion, investors may become more risk-tolerant and shift their investments towards growth stocks.
In 2023, growth has significantly outperformed value
Bond duration is a measure of how sensitive a bond’s price is to changes in interest rates
The higher the duration of a bond, the more sensitive it is to interest rate changes
Investors who are concerned about interest rate risk may want to invest in bonds with shorter durations.