Instead of a repeat of the “Roaring 20s” from a century ago, this decade is now looking more like a no-recession 1990s boom economy, according to UBS Global Wealth.
For a brief patch in 2021, markets were awash with talk of another “Roaring 20s” playing out. But that bullishness faded as inflation climbed above 5% and the Federal Reserve pivoted away from talk of “transitory” inflation to warning of the risks of it becoming trenchant.
Then came the rate shocks of 2022, which left the S&P 500
SPX
with a 19.4% loss, its worst yearly losses since 2008. The roughly $25 trillion Treasury market also saw historic losses.
“Fast-forward two and half years, investors are instead trying to make sense of an economy that grew 4.9% in 3Q, despite the Federal Reserve hiking rates 525 basis points since March 2022, and Treasury yields reaching their highest level in 16 years,” a team led by Jason Draho, head of asset allocation, chief investment office Americas, of UBS Financial Services Inc., wrote in a new client note.
“Both outcomes are opposite of the consensus forecasts at the start of the year.”
While UBS still thinks a Roaring ’20 decade fits their bull case scenario, they argue that the 1990s might provide a better template for today, where a Fed hiking cycle (see chart) eventually ended, modest rate cuts were implemented and the economy saw a soft landing.
“For one thing, the current hiking cycle is reminiscent of 1994, when the Fed hikes rates 300 bps in a year to 6%. The economy then had a soft landing in 1995, allowing the Fed to modestly cut rates, both of which we expect in 2024,” Draho’s team wrote.
“Only then did the 1990s boom of faster growth, rising productivity, and disinflation take off.”
But what about today’s $33.4 trillion of U.S. debt, domestic social tensions and other major differences now than during the Clinton administration?
“Something is afoot in the US economy, and it’s not just cyclical noise,” the UBS team said.
U.S. stocks have been under pressure this fall from rising benchmark rates, with the 10-year Treasury yield
BX:TMUBMUSD10Y
near 4.63% on Monday, but down from a 16-year high of 5% in October.
The S&P 500 was on up 15% on the year through Monday, while the Dow Jones Industrial Average
DJIA
was 3.6% higher and the Nasdaq Composite Index
COMP
was up 31.7% since early January, according to FactSet.
Read: Wall Street hasn’t been this jumpy about a recession since the Volcker era
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