Interesting times, indeed. While political shockwaves across the globe are changing the trajectory of nations and shifting the outlooks for international economies, investment markets in the US are narrowly fixated on one simple question: When will we see interest rate cuts?

If ever there was a period that demonstrated how the stock market interpreted the phenomenon of an economic cycle, it was the past two calendar years. Largely driven by interest rate policy from our Federal Reserve, both stocks and bonds have retraced and advanced, gaining little ground since the end of 2021. But while investment performance may have been largely muted, the economic and geopolitical environment underpinning financial markets has been tumultuous. In this commentary, we will explore the lasting impacts of the pandemic era, where we currently sit in the economic cycle, and the implications for portfolio positioning going forward.

In our last commentary, we suggested that a higher-for-longer interest rate environment, flattening global growth, and fears of an impending recession would put pressure on equities over the short-term. While we still hold that perspective, we were clearly a bit early in expressing that view and have been a bit surprised by the level of optimism and enthusiasm of late. The tug-of-war between fundamental investors respectful of traditional econometrics, and momentum strategies that embrace a psychology of exuberance and complacency with risk, has favored the latter.

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