When Right is Wrong

Are you like me sitting there scratching your head asking, “what happened?” Our views at the start of the year were that US inflation would prove to be more problematic than the consensus thought, and that US policy rates would rise further than the market expected. And indeed, it has proven to be the right call. Market expectations for where the US Fed policy rate would end the year have risen from 4.54% in January to 5.10% today. This week’s consumer price data release has shown that core inflation remains high and problematic.

Chart 1: Market expectations for year-end Fed policy rate rises 55bps year-to-date

Right on both counts, but wrong to assume that that would necessarily mean trouble for the broad US stock market. But then we are into which equity market index to look at?

The S&P500 has returned 14% year to date, the Nasdaq has returned 30% but the 'old economy' Dow Jones 30 has returned just 2.9%. In essence the markets perception of the economy has shifted and some parts of the market have been impacted. The Dow Jones index is one of the worst performign year-to-date. However, the AI/Chat GPT phenomena has overwhelmed all. As is often mentioned by equity strategists in recent weeks, a very few tech stocks have contributed most of the gain from the US market year-to-date.

Chart 2: Old economy Dow Jones 30 trails NASDAQ by 27%

It’s a reminder of the old adage, that you are buying a stock market not an economy.?