Goldilocks and the Three Bear Cases
Much has been written about the potential ‘goldilocks’ scenario that many market participants are hoping for. Analogous to a ‘soft-landing’, this framework involves the combination of:
- Inflation falling back to Central Bank target
- Economic growth slowing, but still coming in at positive levels or very marginally negative
- Minimal impact on the wider economy
- Unemployment levels rising to alleviate labour market tightness, yet not running away from us
The reason why this is often referred to as a goldilocks scenario, is that A) it is the perfect tonic to the problems that are confronting the global economy in the present, the most potent being persistent inflation, and B) it is very hard to achieve with a tool as rudimentary as monetary policy. However, recent market data does suggest that the medicine (in the form of higher base rates) is working, and we could indeed be well on our way to achieving said ‘soft-landing’.
Across the globe we have begun to see evidence that inflation is falling, though not as fast as one would have hoped. Supply chain pressures are easing and the rate of cash reserves have been declining due to factors including the current cost of living.
Consumer Price Index (CPI) Inflation – Selected Major Economies
The reason why this is often referred to as a goldilocks scenario, is that A) it is the perfect tonic to the problems that are confronting the global economy in the present, the most potent being persistent inflation, and B) it is very hard to achieve with a tool as rudimentary as monetary policy. However, recent market data does suggest that the medicine (in the form of higher base rates) is working, and we could indeed be well on our way to achieving said ‘soft-landing’.
Across the globe we have begun to see evidence that inflation is falling, though not as fast as one would have hoped. Supply chain pressures are easing and the rate of cash reserves have been declining due to factors including the current cost of living.
Consumer Price Index (CPI) Inflation – Selected Major Economies
Further, global unemployment rates have risen slightly, but continue to remain well below long term averages. Additionally, recent jobs reports emanating from the U.S. highlight that job openings are also starting to come down to pre-pandemic levels, with participation rates rising, which would further suggest the Federal Reserve (Fed) is succeeding in its task so far.
Unemployment Rate
Source: OECD
Finally, whilst global PMIs have come off, recent GDP data has been encouraging and suggests that growth levels are still positive – albeit marginally, showing the robustness of the global economy in the face of higher rates and a ‘weak’ China.
Goss domestic product (quarter-on-quarter change)
Source: OECD
All this suggests to us that the goldilocks scenario of a soft-landing is potentially not as fairy-tale as some market commentators have proclaimed. Further, whilst of course there are other factors at play, such as fairly low earnings expectations going into the year, markets seem to have taken the aforementioned data in their stride and in general have climbed throughout 2023.
However, there are risks that could yet prove to derail the goldilocks train. These being:
- Interest rates rises have gone too far, and it is simply taking time for the much coveted ‘long and variable’ lags to come into effect, with negative consequences for the economy and market alike.
- Rate rises have not gone far enough, and inflation instead remains high and sticky, causing policy makers to have to go back to the drawing board.
- Exogenous factors, such as a re-ratcheting up of the conflict in Ukraine or production cuts affecting oil prices, impacting global output and market performance alike.
Finally, recently published data showing falling Purchasing Managers’ Index (PMI’s – an index highlighting the direction of economic trends in manufacturing and service sectors) in the US would suggest that there appears to be a dislocation between business confidence / output and market performance. One, or perhaps even both, will be wrong. This reinvigorates LGT’s multi asset approach which continues to structure models in a diversified fashion, and our dynamism allows us to act with conviction when required.