What if we do get the economy to “soft-land”?

With recession fears gripping markets as the Federal Reserve scales back its easy-money stance to combat high inflation, investors had few places to hide from the financial carnage in 2022.

But what if Fed Chair Jerome Powell pulls off a “soft” landing, like the rare Fed tightening cycle of 1994-1995, that didn’t plunge the economy into the abyss?

Economists at Mizuho Securities examined which assets have performed best this cycle. You found stocks and commodities CL00,

yielded the highest returns of around 12% and 11%, respectively, when rates were at their peak (see chart, gray line), followed by investment-grade corporate bonds, LQD,
as the The Fed doubled its interest rate to about 6% or 600 basis points.

What worked in the “model” of the Fed’s 1994-1995 tightening cycle.

Mizuho Securities

“The Fed began raising interest rates from 300 basis points in February 1994 to 600 basis points in February 1995,” Alex Pelle and Steven Ricchiuto of Mizuho Securities said in a statement Thursday. “There was no recession and this is being presented as a model tightening cycle by various hawkish policymakers.”

the dollar DXY,
ended the cycle down more than 15% against a basket of competing currencies, while the S&P 500 index SPX,
and several other asset classes found a bottom “mid-cycle tightening.” Remarkably, home prices remained roughly unchanged.

See: After 2 stormy years with house prices soaring, don’t hope for a major correction. Why COVID-era real estate values ​​are here to stay.

“Of course, there are major economic and valuation differences between now and 1994,” the team wrote, adding that a “soft landing” is not their baseline economic case for the current tightening cycle.

This year has seen sharp losses for stocks, even outside of the high-flying tech companies that previously propelled stock indices to pandemic records. Highly rated corporate bonds haven’t had it that tough either since the collapse of Lehman Brothers.

There’s also the impact of a fading mania in newer financial sectors, including cryptocurrencies BTCUSD,
and “blank check” or special purpose acquisition companies (SPACs). That has resulted in shocking losses for some investors even before the Fed has hiked interest rates significantly or started shrinking its nearly $9 trillion balance sheet this cycle.

Read: “Not the decoupling we wanted,” says crypto investor as Bitcoin plummets and stocks surge. Can digital assets make a comeback in 2022? What if we do get the economy to “soft-land”?

Brian Lowry

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