Setting Course Episode 4 | Bob Elliott, CEO & CIO, Unlimited

The US economy unlikely to experience a sharp recession in the next 6-9 months

The current dynamics in the real economy do not align with the probability of an all-out sharp recession in the US economy. The macro outlook suggests a continued income-driven economic expansion with potential inflation due to supply shocks. The Federal Reserve's monetary policy has not significantly affected the slow-moving macroeconomy, resulting in growth above potential, low unemployment, and inflation slightly above the central bank's comfort level.

The impact of different policy responses on the economy and markets

Macroeconomic outlook and investment strategies should consider the comprehensive understanding of the magnitudes of various policy responses, such as fiscal policy, quantitative easing, and regulatory policy. Quantifying the linkages of these policies and considering the comprehensive picture is crucial for accurate assessment. Confirmation bias and reliance on single data points can lead to incomplete assessments. A comprehensive approach in analyzing multiple data points and indicators provides a more holistic understanding.

The potential risks associated with inflation and central bank response

One of the significant risks is if inflation remains durably above central bank targets, posing challenges for central banks aiming for lower inflation rates. Various regions, such as the UK, Europe, Canada, and Australia, are experiencing stabilizing inflation rates at levels exceeding central bank mandates. The risk lies in disinflationary pressures potentially flipping into inflationary pressures, including rising gas prices and moderating goods prices. Central banks may respond by maintaining current policies, not easing as priced in by markets, to tighten financial conditions and possibly moderate inflation pressures.

Assessment of stock market movements and tech stocks

Tech stocks, characterized by extreme valuations, face the challenge of realizing the expected earnings growth. Historical evidence suggests that stocks with such high valuations often fail to meet earnings growth expectations over the long term. Short-term sentiment and flows can extend rallies, but the long-term odds are against high PE stocks delivering significantly positive returns. Instead, comparing stock market performance to bond market rallies provides more insights, as bonds have rallied more than stocks despite extensive financial stimulation.

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Setting Course Episode 4 | Bob Elliott, CEO & CIO, Unlimited

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Quick takeaways

Deep dives

The US economy unlikely to experience a sharp recession in the next 6-9 months

The impact of different policy responses on the economy and markets

The potential risks associated with inflation and central bank response

Assessment of stock market movements and tech stocks

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