Wall Street traders keep underestimating America’s economic strength
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Illustration: Annelise Capossela/Axios
Here's an investment strategy that has consistently outperformed during the 2020s: Bet that the US economy is going to run hotter than either the stock market or the bond market expects.
Why it matters: That strategy is the exact opposite of the way traders made money in the 2010s, which was to bet that the recovery from the 2008-09 global financial crisis would be slower and feebler than the market was hoping.
By the numbers: In the 14 quarters since the brief 2020 recession ended, U.S. GDP has soared by $8 trillion, or 40%.
- By contrast, in the 14 quarters after the 2009 recession ended, GDP rose by a relatively measly $2 trillion, or 14%.
How it works: Economic weakness causes the Fed to keep interest rates at near-zero levels, in an attempt to spur growth.
- The Fed Funds rate was kept at zero for seven full years, from the the beginning of 2009 to the end of 2015.
- For most of those seven years, the bond market expected rates to rise within a year or so; they just never did, because the economy consistently disappointed.
- In that environment, a trader like Gary Stevenson could make a fortune off his prediction for continued economic weakness — by betting on continued low interest rates.
Where it stands: Since the recovery from the pandemic shock started in 2020, the Gary Stevenson trade has been a consistent loser — while the opposite bet, that economic strength would surprise to the upside, has been a clear winner.
- Corporate profits have surged, propelling the stock market to new record highs. The S&P 500 now stands at more than 5,100, a gain of more than 50% from where it was before the pandemic hit in 2020.
Between the lines: In the U.S., the most visible sign of the economy running hot has been inflation.
- High inflation caused the Fed to raise rates by a stunning 5.25 percentage points over a span of 18 months, in an attempt to slow down economic growth and bring surging prices under control.
- Economists expected such aggressive rate hikes would cause a recession — but they didn't.
- Fed officials expected in both December and March that they would cut rates three times this year. But given continued above-target inflation figures, that now seems unlikely.
The bottom line: Don't hold your breath waiting for a rate cut. The economy seems to be doing just fine without one.
