2024-04-26: Aspettative

Within the span of six short months, in America we have come full circle: at the end of last year we were expecting between 4-6 interest rates cuts in 2024, now we are at only 1-2 cuts, with 20% of the market expecting an interest rate rise. The mood is rapidly impacting interest rate expectations in Europe and in the UK, even though their cyclical position is far less favorable.

As surprising as this evolution of expectations goes, it is not without justification: the data did not evolve as the market expected and as a consequence the monetary authorities did not behave as expected either. Forecasting the future is not easy.

When asked, ex-post, why did we not take advantage of the described changes in expectations I remind people exactly that: forecasting the future is not easy. To get short-term moves right you have to guess correctly about the future not once but twice, and in the right sequence: once on the way in and once on the way out. Unlike betting on coin flips in your spare time or with friends, that is very tough to do when your or someone else’s money is involved and, more importantly, it is reckless given what we know about the probabilities of success.

If you want to learn anything from situations like this one you should spend less time on finding and praising who got it right and who got it wrong (an exercise which we know it is pointless and prone to misinterpretations). At the same time, you should spend more time on thinking how to best allocate your portfolio in the long-term and on avoiding creative commercial proposals from advisors who act recklessly.

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Despite all of the above, markets had a good week. Equities ended positively and bonds lost marginally. Somewhat counterintuitively, emerging market equities did best even though a relatively tighter monetary policy environment is not necessarily favorable to a cyclical recovery.

[Image Sources: The Guardian, In the Rain by Franz Marc, 1912. Photograph: Staedtische Galerie im Lenbachhaus und Kunstbau, Muenchen/Lenbachhaus Munich]