The Great Rate Debate ⚖️

Did you know that throughout history, periods of rapid technological innovation have often led to significant shifts in economic power dynamics?

As we look to the advent of AI, we might very well be looking at something potentially more revolutionary than the printing press.

In this edition of our newsletter, we’ll be exploring the following takes on the global market:

• Higher For Longer Interest Rates, No Problem: First, we’ll explore how equity investors see a great opportunity on the horizon, despite the contrary narrative that famous strategists paint for us 👍

• Is The Economy Accelerating: Next, we’ll be asking ourselves if the economy’s slowing down or speeding ahead, pointing to three key factors that have been overlooked 📈

• The World Is Cheap Relative To The US, Is It Time To Diversify: Finally, with US equities traditionally trading at a premium compared to global equities, we’ll be questioning the necessity of diversifying investments outside the United States 🤔

Join us as we take a closer look at the global market, becoming wiser one day at a time.

Higher For Longer Interest Rates, No Problem 👍

Many equity market strategists argue that the stock market rally will soon confront the reality that the Fed is not yet ready to begin the process of cutting interest rates.

Once that reality sets in, equities will sink, and J.P. Morgan strategist Marko Kolanovic is among the most prominent to espouse this view.

But the markets are well aware—the Fed has made their view abundantly clear—the Fed Futures market is now pricing in only a 2.5% chance of a Fed cut in March, a 20% chance of a cut in May, and a 66% chance of a cut in June.

Equity investors are not blind to these probabilities 👀

If equity investors are so well aware, then why is it that equity markets have continued to surge?

The answer is two-fold.

First, the Fed isn’t cutting rates yet because the economy is growing much faster than expected and that has been translating into better-than-expected corporate earnings growth 💵

Second, the AI boom is real as evidenced by much faster than expected demand for chips, and this boom has no end in sight 🖥️

Is The Economy Accelerating? 📈

A narrative has emerged that argues the economy is accelerating due to rising real wages, a surging stock market, and rising investor confidence.

According to this line of thought, strong GDP growth will prevent inflation from declining, and therefore the Fed will only be able to cut rates slightly, if at all.

The problem with this argument is that the most important economic data does not support this notion.

First, the best GDP tracker, produced by the Atlanta Fed, shows the economy is slowing significantly this quarter compared to the last quarter 🐌

Second, excluding shelter costs feeds into the official inflation indexes with long lags, inflation is already within striking distance of the Fed’s target, and has been there for several months 🎯

Third, forward looking inflation models indicate that after a seasonal blip in January, the downtrend will resume in February 📉

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The World Is Cheap Relative To The US, Is It Time To Diversify? 🤔

With a few historical exceptions, US equities consistently trade at a premium to global equities.

Now is no different 💰

But the US is leading the world in GDP growth as well as in the technology revolution.

As in the past, there really is no need to diversify outside of the United States 🦅

Inner Circle Macro Update 🔍

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