This inflation cycle has played out much differently than past cycles.
The primary challenge in tackling stubborn inflation today is that the ultra-low rates of the past several years allowed companies to assume long-term debt very cheaply. The Fed’s Open Market Committee (FOMC) can only change the shortest-term interest rates, primarily impacting revolving and floating debt like credit cards and bank loans. The anticipated increase in corporate demand for financing at higher rates never materialized and delinquencies have been well-managed. So, the financial system has remained resilient and provided consumers with the confidence needed to continue spending.
Entering this cycle, consumers were also flush with spending power due to government stimulus, low fixed-rate mortgages, and lower-than-average debt service costs. So, Fed rate hikes haven’t impacted consumer behavior as much as in past cycles. Equally important, companies took advantage of robust demand by raising prices – further feeding inflation – and allowing them to protect or even increase profit margins while retaining their workforce. This self-reinforcing loop has allowed the economy to avoid recession and the stock market to recover faster than virtually every economic indicator – and our own fears – otherwise suggested.
Today we are in a momentum-led rally with the market assuming interest rate cuts later this year and a renaissance of capital spending on Artificial Intelligence over the next many years.
Momentum can carry a market a long way and we have enjoyed a period of market stability without suffering any meaningful pullback. This is rather surprising with 3 of the “Magnificent 7” having underperformed YTD, the Fed lowering projected rate cuts by half, and the past two months of inflation coming in higher than projected. The stock market has defied all but the rosiest of scenarios, with equity issuance (including IPO’s) at the highest level since 2021. This too shall change, but when it does it shouldn’t derail the bull market we are in. Volatility will return to test the conviction of investors. There will be some rougher sledding for us all at some point (it could be sooner rather than later).
Integras Partners strategies allow our clients’ stock exposure to be insulated by time. We don’t take meaningful market risk with money that our clients need soon. We don’t want them to change their spending decisions due to financial markets. Our objective has always been for our clients to enjoy life and leave the worrying to us.
Learn more about Integras Partners’ investment strategies.
Call us to review your investment approach at (404) 941-2800.
