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  • Writer's pictureRobert Baharian

The Monetary Lag

I'd like to think I'm a contrarian. I guess most investors do. Does that not make me contrarian? I have no idea. I'm human I guess. I'd like to think I'm different to everyone else, but so too does everyone else. I think we're all so much more similar than we think. Anyway, I don't want to get too philosophical here, let's get into markets.


Stocks have been trending lower this week, and bonds, well, up, down, sideways, and back to where they begun the week. Markets are in a real conundrum at the moment. With inflation proving to be a lot stickier than expected, there is no clear sign right now as to how this is all going to play out. But then again, it's always unclear when it comes to financial markets.


DB had a couple of great charts this week on the behaviour of stocks and bonds during rate hike cycles. DB go on to say that at this stage of a normal hiking cycle we show that markets and economies are usually fairly benign. However year 2 onwards is where the pain starts to be felt. As today’s chart shows, in all Fed hiking cycles in the last 70 years, the S&P 500 usually doesn’t miss a beat until around 9 months from the first hike. Interestingly at around 24 months the market is on average no higher than it was at 9 months indicating that this is the window where problems start to arise.


The S&P is still weak in this cycle versus history so the recent positive momentum in markets and the global economy could be more of a reflection of recovering from 2022's extreme rates market and Gas/war shock rather than the confirmation of a soft landing. It might only put us back closer to where we might normally be at this stage of the cycle.

In relation to bonds, DB go on to say that the “average” Fed hiking cycle sees yields peak at around 13 months after the first hike. Although the peak so far in this cycle was back in October, we are currently only c.30bps below this peak 11 and a bit months after the Fed started hiking, and 10yr yields are the highest in 3.5 months.

The real test will be when the lag of monetary policy fully kicks in as it should do over the next few quarters. By March the ECB will have likely hiked +350bps in 8 months, the Fed +475bps in 12 months, and the RBA +325bps in 9 months.


I personally feel as though the worst of it is behind us, and of course, the market could prove me wrong very quickly. The reason I believe this is because of the positioning of corporates and the consumer coming out of the pandemic. Corporates and the consumer have never been better placed to weather the storm -cashed up, lower LVRs, higher incomes, more jobs, and the list goes on. And so maybe, just maybe, we end up somewhere in between a no landing and soft landing. Until then, the debate continues.

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