Apr 14, 2024 - Economy

Wall Street traders keep underestimating America’s economic strength

Illustration of an upward trending stock line shaped like a flexing arm.

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.

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