Market Setting Up for Lower for Longer

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and special guest Zach Abraham discussed Market Setting Up for Lower for Longer. Here’s an excerpt from the episode:

Zach: It’s just wild the way that you watch these things unfold. I just think that’s why I think that this lower for longer thing is coming, because I feel like you couldn’t have set up the market or market participants worse, because you have literally told them, if we take a 23% GDP shock in a single quarter, don’t worry. We got you. And so, I just think you have that Pavlovian response.

You guys know as well as I do, the only way you’ve been wrong over the last 15 years, if you didn’t buy the dip in tech. For 15 years, it’s like a fifth of most people’s lives. That’s why we were prepping clients back in 2021 just saying, “Look, I think this is the right time to make a pivot towards fundamentals and really be disciplined about it. But don’t expect it to look good every quarter, because you’re going to see these reflexive and Pavlovian rips.” That’s how it’s played out. [chuckles] I still can’t believe the NASDAQ is up as much as it is this year, but at the same time, I guess, I’d say it wasn’t surprising given the backdrop.

Tobias: It’s been extraordinary to watch rates rise the way that they have. As you say, to wind it forward 12 months and see the market where it is, I certainly didn’t expect that to happen. But then if you look at every other crash, they do seem to have this very long– The 2000-2002, 2007-2009, they are years long events and they have an early sell-off that spooks everybody and then it rallies back to almost the all-time high. It never quite gets there. Then it’s that back half where all of the action seems to happen.

I think we saw that rally back to almost the all-time high whenever that was recently, but it also didn’t quite get there. And now we’re into that part of the cycle where the Fed has been raising for now– I think they started in May last year. Do you guys know exactly when that started? It’s been a while. Anyway, so, the yield curve inverted in late October last year. Here we are. It’s almost October. The yield curve is now halfway back from where– At its full inversion, it was -1.89. We’re at like -0.96, I think yesterday, or -0.93 yesterday. So, halfway. Say, call it halfway. It’s taken a long time to get there. And so, when you see that the actual crash, like, the real carnage tends to happen after the inversion goes back into normalization.

So, we’re getting pretty close to that event, and maybe that’s what now we’re seeing a little bit of the jitters, a little bit of the shakes. I think the Fed keeps it raised until something break. Why would they not? They’ll be looking at exactly the same data that you and I are looking at, we’re all looking at and saying, “Well, we’ve put rates to 5% and market hasn’t cracked. Stock market hasn’t cracked, it’s fine. Real estate market hasn’t cracked. It’s fine.” There’s just zero incentive to lower rates at this point. There’s plenty of punishment, because inflation is still pretty high. So, I guess, they wait until something cracks. And the moment that it cracks, they start cutting. But we know there’s a long lag, and it takes another two years for that to play through. That’s [crosstalk] rough roadmap.

Zach: I couldn’t agree with everything you said. I think that the lag time is going to take longer this time, because credit– You’re coming out of a period of time where obviously you had historically low rates really across the board. And then on top of that, [chuckles] in an environment that’s unlike any we’ve ever seen with fiscal stimulus. If you– [crosstalk]

Tobias: Massive fiscal stimulus.

Zach: Oh, yeah. So, anybody that wanted to get something financed or refinanced has, you know what I mean, for the most part. One of the things that I keep going back to– Again, I think one of the biggest issues this market is dealing with is one of perception. Meaning, when you look at stimulus– The other thing, people are like, “Well, wages are up a lot.” This is the worst real wage growth over the last two and a half to three years that you’ve had in history, right? So, yeah, they’re up, but up compared to what? I feel like people are missing that– [crosstalk]

Tobias: Purchasing powers down even though wages are up.

Zach: Right, which that matters to the consumer. The thing that I just cannot wrap my head around and we’ve gone round and round about this. Again, you say the word recession, everybody’s like, “Well, you’re a permabear. You get–” Guys, historically recessions happen every six and a half years. It’s not like Independence Day and a recession settles over the top of the White House and just nukes it.

[laughter]

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