Investment Insights

We’ve Come a Long Way Baby

  • Mar 21, 2023
  • Craig Farley

It is a little over a year since the Fed (rather belatedly) introduced its first interest rate hike of this cycle.

At the time, consensus expectations were for the Fed Funds rate today to be under 2%. We are sitting at a target range of 4.50%-4.75%.

The 450 basis points of cumulative rate hikes so far eclipses the speed and magnitude of any cycle since 1980, and, prior to that, 1973.

Relative to all prior hiking cycles of the previous 70 years, this cycle has delivered:

  • The weakest US growth
  • One of the largest declines in US housing and manufacturing activity
  • The worst S&P performance, and
  • One of the most inverted yield curves

The chart below courtesy of Jim Reid and the Deutsche Bank team illustrates how effective Fed hiking cycles are in breaking things:


To quote: ‘we’re now increasingly annotating for this cycle. If the US economy moves into recession in H2 2023 as we expect there will likely be more annotations ahead’.

Prior episodes have traditionally been accompanied by soothing market rhetoric early in their development. ‘X is contained’, ‘Y is an isolated event’, ‘Z represents idiosyncratic risk’ are typical phrases ascribed to a mini crisis that ultimately manifests into something systemic.

This cycle feels eerily similar.

Whilst we do not dismiss the possibility of a muddle-through scenario out of hand, history suggests we may be in for a (continued) turbulent ride this year.

We side with the view that more annotations are likely forthcoming. Our modus operandi remains the pursuit of robust portfolio defence across our range of strategies.

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.