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Soft Landing Chatter

CAMS Weekly View from the Corner – Week ending 6/3/2022

June 6, 2022

Within an edition approximately a month ago we briefly mentioned the proverbial “soft landing” phrase which is quite subjective but nonetheless is often referenced when the Federal Reserve begins to raise interest rates.

The phrase suggests a scenario whereby the Fed will be able to create a painless slowdown in economic activity all-the-while not causing any notable disruptions in the general employment market. In this soft landing scenario the price inflation backdrop will smoothly glide lower to a point where price inflation is once again a non-topic for analysts and the citizenry.

With this general economic storyline markets will then handle this gradual lowering of economic activity coupled with notable price inflation reduction in a much lower volatility fashion.

In fact it suggests a scenario where markets have seen their worst and are seeing better months if not years ahead and with this will “climb the wall of worry” eliciting another phrase that also is often referenced in such times when uncertainty is in our collective midst while the soft landing is unfolding.

If the above overall scenario sounds too good to be true in the sense that it is just perfect there is also a follow-on and often referenced phrase that sums up all of the above which is known as the “goldilocks” market backdrop. That is, it is just perfect – “not too hot and not too cold” which is usually the follow-on sentence offered upon using the goldilocks phrase by you-name-it pundit/analyst/talking head.

Is the above possible? Yes it is as everything is possible right. But is it plausible? That dear reader is a very tall order.

Regardless, can collective market psychology believe it may be unfolding and hence trade accordingly for weeks or even months? Absolutely! (Hold this thought.)

Being price inflation is the number one topic on the citizenry’s minds (per polls as well as anecdotally in our lived experience) we will focus on this aspect of the soft landing scenario.

The above chart is the well recognized Consumer Price Index (CPI) which is a gauge of price inflation for the United States. We have pushed the above chart back over forty years to capture a price inflation experience that can similarly match our current backdrop.

The faint blue vertical bars within the chart identify recessions along the timeline of the chart. Our red arrow starting in 1980 identifies the notable descent of price inflation back then as the inflation issue was battled.

As the price inflation line drops over ensuing years we see two faint vertical bars encompassed within our red down arrow. This means two recessions were experienced as that historic price inflation backdrop was brought to more reasonable levels.

As we look to the far right we can place our current inflation backdrop into historical context.

Notably, we have yet to see evidence that we have even peaked in our current day inflation experience.  With this it may be a bit early to even use the soft landing phrase being we haven’t even started to notably descend yet, but nonetheless, it has started to get tossed around.

The above chart is the same chart as our first but with the Fed’s benchmark interest rate (red line) included. Historically the Fed’s benchmark rate is above the level of price inflation. Per the above this changed as we entered the 21st century.

The point of the above, in keeping with the “price inflation coming down nicely without any economic pain (soft landing) view,” we can see that back in the early 80’s the Fed’s interest rate (Fed Funds Rate) had been trending with or was above the price inflation level. Current day, per our circle and upward arrow, we can see the Fed is miles behind the price inflation race.

Visually comparing the two eras relative to these two measures is frankly stunning! With this there is a potential need for a tremendous amount of interest rate increases from the Fed in order to get price inflation tamed again – if the economy can even handle such rate increases.

The question is will the over-indebted society/economy be able to handle sustained interest rate increases without seeing notable economic damage? If not, there goes the soft landing, goldilocks and the “climbing the wall of worry” scenarios that all inherently offer everything will be fine from here without economic or market challenges.

Collective Market Psychology

Previously we suggested that market participant collective psychology can buy into the soft landing scenario and hence trade accordingly for weeks and even months.

The above presentation is meant as a very brief foray into the low odds of such a landing as we look further out on the timeline while simultaneously drawing on historical context. This does not mean we cannot see a period of time where markets are calmer and even chop higher such as they have been attempting in the previous week-plus.

This ultimately presents a tremendous challenge for all market participants if the soft landing does not unfold but rather is held as a short term collective belief that results in pushing markets higher for X-weeks/months only to then turn hard south again.

History offers in droves this is how true bear markets (long running downward markets) unfold and is a primary reason why so many get financially hurt as they believe everything is fine again only to then see – weeks/months later – that everything is not fine and lower lows are put in again and again.

For our part we are hyper-vigilant on all of the above scenarios and are investing assets under our guidance judiciously while employing an extremely nimble psychology. Said differently, we are open to anything and convinced of nothing.

With this we invest assets cautiously and prudently particularly while in this historic time of price inflation coupled with the Fed being miles behind the price inflation curve. Stay Flexible – Be Nimble are operative words for this environment particularly as we begin to hear the soft landing scenario chirped about.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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