UBS Global Wealth Management's Jason Draho and his team have suggested that the current economic environment is more reflective of the 1990s boom period rather than the "Roaring 20s" many had anticipated. This perspective comes after a year where inflation concerns have prompted a change in Federal Reserve policies and market dynamics have shifted significantly.
In 2021, optimism fueled expectations of a "Roaring 20s" scenario, but as inflation rates soared above 5%, sentiment changed. The Federal Reserve moved away from its initial stance that inflation was "transitory", instead warning of its potential to persist. The subsequent rate shocks in 2022 led to a significant downturn in markets, with the S&P 500 experiencing its worst performance since the 2008 financial crisis, dropping by 19.4%, and the Treasury market suffering historic losses.
Despite these challenges and the Fed's aggressive rate hikes totaling 525 basis points since March 2022, the U.S. economy showed resilience with a strong third-quarter growth of 4.9%. This growth, along with high Treasury yields, defied the gloomy forecasts set at the beginning of the year.
UBS acknowledges that while a bullish Roaring '20s scenario remains possible, they argue that the economic conditions during former President Clinton's tenure might offer a more accurate comparison for today's economy. The rate hiking cycle currently underway mirrors that of 1994, which saw increases up to 300 basis points, reaching a rate of 6% within a year. This was followed by an economic soft landing in 1995 and modest rate cuts, a sequence UBS anticipates could be replicated in 2024.
Despite concerns over the $33.4 trillion U.S. debt and domestic social tensions, Wall Street has seen a lift from rising benchmark rates this fall. The 10-year Treasury yield was near 4.63% today, a decrease from the 16-year high of 5% seen in October, as reported by FactSet. Market indices have also shown remarkable resilience; as of today, the S&P 500 has climbed by 15% for the year, the Dow Jones Industrial Average has advanced by 3.6%, and the Nasdaq Composite Index has surged by 31.7% since January, despite lingering fears of recession.
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