On Tuesday March 14, 2023, Cuna Mutual Group hosted a Special market update: Bank crisis webinar discussing the current state of the market related to the banking crisis. Since Tuesday, the stream of headlines covering possible financial contagion has been fast and furious.
Here we go again. Central banks around the world, especially the U.S. Federal Reserve (Fed), declare inflation rates are too high and commit to bringing them down via interest rates hikes. Markets react negatively as the cost of capital rises. Time passes and investors become convinced hikes are about to end and the Fed will soon pivot to rate cuts.
Perhaps a good way to set reasonable expectations for financial markets is to evaluate them in past and future phases.
Fourteenth-century philosopher William of Ockham provided a great service to today’s investors seeking to understand the current state of financial markets. To crudely summarize his seminal thesis that became known later as “Occam’s Razor,” phenomena are best explained by the simplest hypothesis possible. With that principle in mind, let’s try to figure out what markets are telling us.
After a long slumber, inflation is awake and creating havoc for consumers and financial markets. The drama of the moment is amplified by the starting line from which inflation began its race higher. Since the early 1980s, the global economy mostly experienced a period of disinflation and steadily falling interest rates. Conditions were so benign that economists dubbed the period the “Great Moderation.” It was a nearly perfect setup for financial markets that seemed to gallop inexorably higher.
