What if the plane we’re trying to land is only a connecting flight?
Wade Witbooi
The past year in financial markets has caused many investors to scratch their heads. Equity markets continued to climb a wall of worry in the face of a widely expected recession in the US.
In 2023, we quickly re-learned that the economy and the stock market are not tethered at the hip but operate independently.
In 2024, market participants again overestimated interest rate cuts at the start of the year. However, various global central banks, including the Bank of England (BoE) and European Central Bank (ECB), have finally cut interest rates after many months of holding steady. Now all eyes are on the US Federal Reserve (Fed) and its Chair, Jerome Powell, for a move which will influence policy for many other central banks, including the South African Reserve Bank (SARB). According to Bank of America Global Research, 2024 has aptly been named ‘The Year of the Landing’.
What does the ‘landing’ talk really mean?
1) Soft landing
According to an article on US financial news website The Street.com, a soft landing’ may be regarded as a way to tame inflationary pressures while avoiding a recession. The Street’s analogy paints the picture: ‘Imagine that the pilot is the US Fed and the aeroplane is the US economy. Interest rates are the landing gear — they must be steered correctly to ensure safety, all the while battling headwinds such as volatility, negative investor sentiment, and even capitulation’. Alan Greenspan (the 13th Chairman of the US Fed) achieved the elusive ‘soft’ landing in 1995.
2) Hard landing
Investopedia defines a hard landing as a marked economic slowdown or sharp downturn following a period of rapid growth. Economies that experience a hard landing often slip into a recessionary period. US Fed Chair Paul Volcker dealt with inflation in the 1970s by raising interest rates, but at the expense of back-to-back recessions in 1980-1981 and 1982.
3) No landing
The chief economist at Ned Davis Research told CNBC, ‘No landing means above-trend growth, and also above-trend inflation’. He was describing an economy that is ‘overheating’. The senior economist for the American Institute for Economic Research, referring to the US, said: ‘For example: if economic growth were to continue at or above trend, but inflation failed to return to the 2-2.25% annualised rate range, it could be viewed as a no-landing environment’.
What landing are we heading for?
Predicting economic direction has been historically almost impossible, but global fund managers seem to be leaning toward a soft landing. In the latest Bank of America Survey, 76% of fund managers indicated they expected a soft landing. However, a McKinsey Global Survey on economic conditions paints a different picture. Respondents were more likely to predict a near-term recession at the end of the second quarter than in the previous quarter.
Source: Bank of America Global Research, 2024
Given such contrasting views, it's crucial that you do not direct your investments dogmatically in line with your economic forecast.
How do the S&P 500 and JSE perform when the US Fed starts cutting rates?
On 23 August 2024, the CME Fed Watch Tool was pricing in a 67.5% and 32.5% chance of a 25 and 50 basis point rate cut respectively at the US Fed’s September meeting. With markets already anticipating cuts, we took a closer look at the historical patterns of rate reductions in the US.
Since 1928, the US Fed has initiated 22 rate-cutting cycles, and in 16 of them, the US economy was either already in a recession when the cuts began or entered one within 12 months, according to a long-term analysis conducted by Schroders.
In simple terms, in previous cutting cycles, there was a 72.27% association with a recession, so you cannot automatically assume that cutting cycles results in recessions. More importantly, history also shows that recessions are not always to be feared – although there are notable exceptions.
To gain further insight, we analysed previous rate-cutting cycles since 1970 to see how returns have varied in different scenarios.
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