Economics and Strategy

A Flo Rida Market Structure

— David Zervos, Chief Market Strategist

For our quarterly market strategy commentary we decided to channel a little Flo Rida by presenting the eight “lows” which best describe the current U.S. macroeconomic and financial market landscape:

  1. Low inflation
  2. Low unemployment
  3. Low rates
  4. Low curve
  5. Low vol
  6. Low issuance
  7. Low spreads
  8. Low volumes

That pretty much sums it all up, or as Flo would say: “low, low, low, low, low, low, low, low!” Additionally, in the near term, there are not really any potential catalysts for a change. Fed policy is unlikely to surprise in any way until the June summit on framework alteration. Presidential politics shouldn’t start to affect markets materially until at least around the time of the first Democratic debate in the summer. Similarly, material changes in our low-inflation/low-unemployment economic landscape look highly unlikely. Grinding all these lows even lower over the next few months seems like the most probable path.

As the year progresses, however, Fed policy, Presidential politics, and the global economic data all have the potential to pop at least a few of these market characteristics off their lows. A commitment to Temporary Price Level Targeting (TPLT) by the Fed could cause inflation expectations to perk up, the curve to steepen, and rate volatility to increase. A strong showing in the debates by some of the further-left-leaning Democratic Party candidates could rattle equities, increase volatility, and even increase inflation expectations. In addition, some of the cracks we are already seeing in the global economic data may begin to widen as the long and variable lags from 250 basis points of Fed rate hikes and $600+ billion of cumulative Quantitative Tightening begin to kick in. These factors in turn could cause some shakiness around the lows in unemployment and credit spreads.

In any case, all of these lows will not simultaneously disappear, and in fact there is a decent chance they’ll all remain with us for the rest of the year. But if I were to consider which ones are the most vulnerable to a flip, I would go with vol, curve, and spreads. And it would be increases in political risks and/or global economic duress that cause the change. Now if this were to happen, I suppose I would need a new song to channel. I’ll work on coming up with some good choices over the next few months as we all begin to weigh the odds of an adjustment in the current “low” market structure. Sadly though, with all the politics surrounding the Fed, I doubt I will be able to go back to what I was channeling in the summer of 2014: “Turn down for what.” That theme song probably only comes back after the 2020 election.