Exuberant Expectations

An excerpt from our Fourth Quarter 2023 Investment Brief:

Our proclivity to rationalize and simplify often results in the adoption of single factor solutions to complex problems that are, in the words of HL Mencken, “neat, plausible, and wrong.” This time may be different. The single most dominant determinant of the direction of markets in 2023 and so far in the new year has been widely fluctuating expectations for the direction of monetary policy. Market sentiment has swung from concern that tight Fed policies would reduce price pressures at the cost of a recession to jubilation that the Fed will tame inflation without derailing growth or destabilizing markets. The fourth quarter of 2023 marked a watershed in market expectations for the future path of monetary policy, as a much steeper decline in the Fed funds rate was priced into futures contracts on the Fed funds rate.