More than fifty years ago, Niel Armstrong demonstrated that soft landings are hard. As the Apollo 11 lunar module navigated toward the Sea of Tranquility, NASA’s designated landing spot on the moon’s surface, the astronaut noted that his horizontal speed was too great, indicating he would be more than four miles off course by the time he would touch down.

The US economy held up better than expected in 2023 despite aggressive interest rate hikes, turmoil in the banking sector and geopolitical stress. Several factors contributed to this resilience. Restrictive monetary policy raised borrowing costs without triggering severe tightening in broader financial conditions, corporate profit margins remained healthy, consumer spending held up well, easing supply chain bottlenecks contributed to declining inflation, and the labor market continued its post pandemic recovery.

The surprising resilience of the US economy in the face of sharp interest rates hikes over the past 18 months has sparked enthusiasm in markets for a soft landing. Economic growth has been surprisingly strong this year and inflation pressures appear to be easing, giving the impression that the Fed may have engineered a pathway out of high inflation that won’t trigger a full-blown recession.

The US economy showed remarkable resilience in the first half of the year in the face of rising interest rates, sticky inflation, a regional banking crisis, an ominous yield curve and persistent geopolitical tension in Europe and with China.

The odds of a soft landing for the US economy narrowed significantly in Q1 as economic data continued to come in too hot and markets began to fear an environment of higher rates for longer. 

We are writing to give you a brief update on the events in the banking sector over the past week and the implications on Rain portfolios. By now you are likely aware of the events surrounding Silicon Valley Bank (SVB) which was seized by the FDIC on Friday, and Silvergate Capital Corp, which announced it was voluntarily liquidating its banking entity. Both firms were hit by downturns in their respective industries, technology, and cryptocurrency startups.

The economy and financial markets remained rangebound in the fourth quarter, after a year of historic shocks including surging inflation, the outbreak of war in Europe and sharply tighter monetary policy.

The economy decelerated and financial conditions tightened during the third quarter, making for a challenging time for financial markets. While inflation numbers appear to have peaked during the period, the outlook for prices remains uncertain, driven by the continued war in Ukraine, draconian Chinese COVID policy, and a tight US labor market.

While the war in Europe dominated markets in Q1, the only war that mattered to markets in Q2 was the battle that was heating up between the Fed and inflation. During the quarter, surging prices forced the Fed to pivot to dramatically more aggressive tightening. This in turn drove mortgage rates up, sent the dollar soaring and led to significant stock market losses.

Just as the prolonged economic disruption of COVID-19 seemed to be disappearing in the rearview mirror, the world got a lot more complicated again in the first quarter of the year.

Despite uneven growth and the start-stop nature of the COVID economy in 2021, the US (and most developed economies) registered the strongest economic growth in nearly four decades.

Toward the end of the third quarter of 2021, it became clear the economic rebound in the US would be more uneven than expected. A resurgent virus and signs of waning vaccine effectiveness held back the nascent recovery in the travel and leisure industries, supply-chain bottlenecks persisted and began to hamper production, a regulatory crackdown in China sent shudders through foreign markets, and back-to-back hurricanes in the eastern US further complicated the recovery.

The US economy surged through the second quarter on the back of massive fiscal stimulus and public health data indicating that the worst of the pandemic is behind us.

After a difficult 2020 and a sluggish start to 2021, we are finally able to envision a return to economic normalcy.  As the year progresses, both a fiscal surge and the ongoing vaccine rollout will likely dominate the economic outlook. Fiscal support in the form of the $1.9 trillion American Rescue Plan is expected to provide $1.2 trillion (or roughly 5% of GDP) of additional spending to the economy over the course of just six short months and much of this is targeted toward lower-income households that are more likely to spend it.

The US will spend the better part of 2021 and beyond recovering from the pandemic that has left deep scars on the economy and labor markets. The good news in this story is that the vaccine came sooner and is more effective than expected. Furthermore, single-party alignment in Congress increases the chances of continued fiscal stimulus for the economy.

The recovery that took hold in May and June, bolstered by the $2.2 trillion CARES act and aggressive action by the Federal Reserve, began slowing over the summer and more dramatically into the Fall. 

The second quarter saw broad financial markets rebound strongly, erasing nearly all losses experienced during the March meltdown. Markets were buoyant on the back of unprecedented fiscal and monetary support from policy makers around the world as well as early signs that COVID infection rates appear to be levelling off and may be past peak in some countries.

The economy has been receiving palliative care since it was forced to take a back seat to the medical crisis that is still unfolding around the world. A flattening infection curve in many places and talk of “reopening” the economy have lifted markets from March lows, in a bounce almost as violent as the initial selloff itself. But it is far too early to assess the economic damage caused by efforts to contain the spread of Coronavirus.

The Federal Reserve charged to the rescue in a big way in 2019. In the face of increasing trade tensions and recessionary forces bearing down on the economy, US central bankers reversed course and reduced short-term rates three times starting in late July and in October, took steps to increase liquidity in short-term lending markets. By December, investors began embracing the idea that the worst of the US-China trade war was behind us.

Equity and bond markets can’t agree on one basic question this year: is the economy headed toward recession or not? US equities, which were up more than 20% through the end of Q3, seem to be brushing off signals that the economy may be slowing while bonds, up more than 8% (corporate bonds more than twice that) through the same period – far better than their stellar performance during the 2008 credit crisis – seem to be pricing in a sharp recession.

The current economic expansion entered its 11th year in July (the longest in recorded history) and there are currently enough early warning indicators of recession to justify a quick look at what that means for markets and your portfolio. What is a recession and why do they happen?

After the brutal flogging the market took late last year, few expected such a strong start to 2019, with world equity returns registering one of the best first halves in more than 20 years. Also notable, however, was the backdrop of deteriorating economic growth and softening earnings data during the period.

As we discussed in our last letter, the sudden plunge in equity markets in Q4 seemed to be at odds with the solid economic fundamentals in the US at the time. Since then, the soft patch in data we witnessed in January and February – data that seemed to confirm the recessionista’s worst fears - has turned out to be a passing phenomenon, largely attributable to severe winter weather and the prolonged government shutdown. The soft data have been replaced by robust economic numbers in retail sales, employment, industrial production, and wage growth, while inflation remains tame.

When the market plunges, investors immediately begin searching for a new narrative to replace the old one. In Q4, the narrative of solid economic growth and earnings, low inflation, a robust job market and improving wages quickly gave way to one of too much Fed tightening, slowing global growth, escalating trade frictions with China, a strong dollar, stretched valuations and an impending recession. All off this in the course of less than one week. This sudden change in storyline belies the fact that large, open economies – unlike financial markets - simply don’t roll over that quickly.

•Volatility in early October is more likely the result of high valuations and tightening financial conditions, not necessarily a flattening yield curve •Trade tensions with China are compounding valuation anxiety

The spat between the US and Turkey is currently roiling various markets, with the greatest impact being felt by other emerging market economies. While there are fundamental reasons to be

If you’re wondering what is driving markets right now you’re not alone. 2018 has been characterized by a lot of noise and the pace of today’s news cycle makes it seemingly impossible for markets to fully digest current events before new ones crowd out yesterday’s news.

Strong wage growth in January ignited inflation concerns and sent equity markets tumbling   Talk of tariffs and trade barriers in March further dented already fragile investor sentiment   The

2017 was a good year for markets, almost too good in fact.  For the first time in history, the S&P 500 Index had no negative months during the calendar year.

Equity-market volatility hit an all-time low in Q3 Low volatility and strong equity markets were likely the result of improved economic fundamentals during the period On the other hand, policy

Trump’s agenda of regulatory rollback, infrastructure spending and tax cuts is all but stuck in Washington’s ideologically fractured environment. Strong earnings made up for stalled policy and a lack of

The so-called “Trump Trade” began to lose steam toward the end of Q1 as it became clear that single-party control in Washington wouldn’t necessarily translate into quick results Events abroad

Markets had a hard reset in Q4 with the election of Donald Trump on November 8th. Initially global equity markets plunged, but within hours began to recover and rallied strongly throughout the quarter, mostly on speculation that the new president would usher in tax cuts, deregulation and a sweeping fiscal spending program.

In the wake of “Brexit,” central banks reasserted themselves over markets in a big way in Q3, sending bond yields to historic lows. The recent wave of populism in the developed world is targeting institutions that have been supportive of capital markets for the better part of 70 years. To the extent these political movements prevail, they would likely carry negative economic consequences.

Events in Q1 took the Fed off message and “Brexit” further complicated its story Given the limited set of policy tools, the Fed seems to want to play it safe and is reluctant to raise rates until it has strong evidence of inflationary pressures

The smooth December lift-off in rates was derailed in January by a rolling set of concerns that culminated in markets pricing in (at least for now) a more gradual pace of interest rate tightening than previously expected.

The Central Bank divergence story – the idea that instability in capital markets would be driven by diverging monetary policy among the world’s largest economies - is alive and well but evolving, with more pain in store for interest-rate sensitive investments

As of this writing, the S&P 500 has gone 1,302 days without a correction of 10% or greater, the second longest run since World War II. As far as the untrained eye can see, risk appears to have disappeared from markets.

Larry Cao, of the CFA Institute, writes that risk factor diversification - like that used at Rain Capital - is one of the most important advances in portfolio construction techniques in recent decades and is increasingly used by sophisticated institutional investors.

The inflation conundrum dogging the US economy right now has a lot of observers scratching their heads. The economy clocked 5% real GDP growth in Q3:2014 and an estimated 2.6% in Q4. Unemployment at 5.6% is at levels that have historically begun to generate wage inflation, but there is little to speak of. Explanations range from labor market slack to deflationary pressures from abroad, but economists at the Fed are pointing markets to a simpler answer: zero interest rate policy.

Regulators are (correctly in our opinion) focusing a great deal of attention on the very different legal and ethical standards that brokers and Registered Investment Advisors (RIAs) are held to. The SEC’s concern stems from the fact that investors generally aren’t aware of the meaningful differences and their legal implications. Barry Ritholtz does a nice job summarizing these differences in a recent Washington Post column.

The market isn’t hearing the Fed’s increasingly hawkish message, according to researchers at the Federal Reserve Bank of San Francisco. The take away? The authors reiterate Chairwoman Yellen’s words from earlier this year “. . .investors may underappreciate the potential for losses and volatility going forward.”

A flurry of communication has come out of the Fed in recent days – from hawks and doves alike - all focused on the need to change forward guidance on interest rates.

Federal Reserve officials have very nearly written our letter for us this quarter. Earlier this year we worried economic data were increasingly at odds with the Fed’s policy stance, a conflict that would eventually result in a sharp change in tone from the central bank.

A new interest rate cycle is upon us. The Fed has said – and the market is largely in agreement - that within a year short-term interest rates are likely to rise. We have already spent considerable effort purging interest rate risk from portfolios.

Fed Chairwoman Janet Yellen joked in her speech today at the Economic Club of New York, “if the economy obediently followed our forecasts, the job of central bankers would be a lot easier and their speeches would be a lot shorter.”

One perplexed Fed watcher recently observed that “Fed policy. . .is maddeningly disconnected from their [sic] forecasts.” After all, how can the Fed legitimately be concerned about unemployment and low inflation while simultaneously winding down bond purchases?

We have expressed concern for some time that markets have been too sanguine about the eventual ‘lift off’ from zero rates, ignoring a recurring Fed narrative that has attempted to guide toward an earlier exit should economic progress (as narrowly defined by the unemployment rate and inflation) justify it.

Unemployment and inflation generally work against each other. The Fed was counting on that relationship holding up when it established a dual threshold based on those indicators in late 2012. The idea was that as the two converged (or diverged), markets would better understand the future direction of monetary policy and adjust accordingly.

At Rain we talk a lot about what we call ‘information days,’ brief periods of time that are extremely rich with information. We find that evaluating narrow time periods of isolated stress (or euphoria) can be just as informative about manager positioning and underlying risks as longer-term statistics, if not more.