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We’re a society that’s prone to hyperbole. No sooner had I grown accustomed to the panic over “hyperinflation” than I was told of the forming “economic hurricanes.” Now it’s stagflation? Hyperinflation and economic hurricanes at the same time? Make it stop!
Instead of immediately exaggerating the situation, let’s instead define what most people probably mean right now by “stagflation.” The U.S. economy will moderate, as the Federal Reserve (Fed) has wanted, while the inflation rate remains modestly above the Fed’s “comfort zone” (delaying rate cuts by a few months). I’d argue, with apologies to Saturday Night Live’s Linda Richman, that today’s stagflation is proving to be neither stag nor flation. Discuss.
The situation I just described is a far cry from the 1980s, a time when the U.S. unemployment and inflation rates peaked at 10.8% and 14.7%, respectively.1 Currently, the unemployment rate is 3.9%, and the inflation rate is 3.4%, adding up to a current misery index that is below the historical average, not setting record highs.2 Also, in the late 1970s and early 1980s, the monetary policy authorities had seemingly lost all credibility. Inflation expectations over the next five to 10 years climbed, at one point, to nearly 10%.3 Now, the bond market’s expectation for inflation over the next 3-, 5-, and 10-year periods is below 2.4%.4
I, for one, will be holding off on getting my acid-washed jeans and boat shoes out of the closet.
…the U.S. equity market has historically performed well when the Fed has been on hold for an extended period following the last interest rate hike. In fact, the longer they have been on hold, the better it generally seems to have been for markets (with 2000 being a notable exception).5 For all the questions asking whether they will or won’t and when and by how much, the S&P 500 Index has risen 17.7% since the last rate hike over 200 days ago on July 26, 2023.6 Strong nominal growth and no rate cuts are likely preferable to weak growth and multiple rate cuts.
Stop worrying about election years. The U.S. stock market has generated an average gain of 7% in election years.7 Yes, that’s a far cry from the average 17% return in year three of an election cycle.8 The more modest year-four return, however, is skewed lower by the market’s performance during the 2000 Tech Wreck and the 2008 Global Financial Crisis, both of which had nothing to do with the election. There are plenty of election years in which the market generated double-digit gains, including 1964, 1972, 1976, 1980, 1988, 1996, 2012, and 2020.
That’s not all. The market isn’t necessarily more volatile in election years, either. The median volatility in year four of an election cycle is essentially the same as it is in years one and three.9
Instead, it has been year two of election cycles that have historically resulted in greater volatility. Maybe it has something to do with the sheer coincidence of the Fed raising interest rates in 1994, 2006, 2018, and 2022.10
A family member recently called me asking me to opine on a mid-year outlook that they have read calling for a near-term 10% decline in the market. Didn’t this mean that he should “sell in May and go away”? To say that the question was like nails on a chalkboard would be an understatement (as well as dating myself).
1. There have been 10% corrections in the S&P 500 Index in 14 of the past 25 years.11
2. Selling in May and going away has not been good advice for long-term investors. I’ve run the numbers.12
3. Mild recessions have typically been associated with 20%-25% declines. The U.S. equity market has typically recovered within a year or two.13 A 10% decline, on the other hand, would perhaps correspond to a decelerating but still resilient economy. In other words, perhaps the “soft landing” that many are anticipating.
Brian Levitt is Global Market Strategist at Invesco and cohost of Invesco’s “Market Conversations” podcast.
Notes
1. Sources: US Bureau of Economic Analysis, 12/82, and U.S. Bureau of Labor Statistics, 3/80.
2. Sources: U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics, 3/31/24.
3. Source: University of Michigan, 4/30/24. Survey question: What about the outlook for prices over the next 5 to 10 years? Do you think prices will be higher, about the same, or lower, 5 to 10 years from now? By what percent per year do you expect prices to go up, on average, during the next 5 to 10 years? The median response peaked at 9.7% on 3/31/80.
4. Source: Bloomberg L.P., 5/15/24. Based on the 3-year, 5-year, and 10-year inflation breakeven. The breakeven inflation rate is calculated by subtracting the yield of an inflation-protected bond from the yield of a nominal bond during the same period.
5. Sources: Bloomberg L.P. and US Federal Reserve, 5/14/24. The dates of the hold periods are: 2/24/89 to 6/2/89, 7/6/95 to 12/18/95, 5/16/00 to 1/2/01, 6/29/06 to 9/17/07, 12/19/18 to 7/30/19, and 7/26/23 to Current (5/14/24).
6. Source: Bloomberg L.P., as of 5/15/24.
7. Source: Bloomberg L.P., 12/31/23. Based on the annual returns of the S&P 500 Index from 1957 to 2023.
8. Source: Bloomberg L.P., 12/31/23. Based on the annual returns of the S&P 500 Index from 1957 to 2023.
9. Source: Bloomberg L.P., 12/31/23. Based on the CBOE Volatility Index® (VIX®) from 1989 to 2023. The median volatility in years 1, 3, and 4 on election cycles was 17. The median volatility in year 2 of election cycles was 22. The VIX is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.
10. Source: U.S. Federal Reserve, 4/30/24.
11. Source: Bloomberg L.P., 12/31/23. Based on the S&P 500 Index. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
12. Source: Bloomberg L.P., based on the growth of $1,000 in the Dow Jones Industrial Average Index comparing a buy and hold vs. selling every May, investing in US Treasury bills, and buying again in November.
13. Source: Bloomberg L.P., 8/31/23. Based on recession dates defined by the National Bureau of Economic Research: Aug. 1957-Apr. 1958, Apr. 1960-Feb. 1961, Dec. 1969-Nov. 1970, Nov. 1973-Mar. 1975, Jan. 1980-Jul. 1980, Jul. 1981-Nov. 1982, Jul. 1990-Mar. 1991, Mar. 2001-Nov. 2001, Dec. 2007-Jun. 2009 and Feb. 2020-Apr. 2020. Indexes cannot be purchased directly by investors. Past performance does not guarantee future results.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of May 23, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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