What to Evaluate Over the Next Few Months for Clues in Growth and Risk Capital Market Direction
In our view, the market is currently hyper focused on the impact of rate hikes, peak rates, and the timing of when we will start to normalize inflation in the US economy. A standard view is that it takes approximately one year for interest rate movements to show up as an impact in the overall economy. And now one year post the rate hike cycle beginning, we are clearly beginning to see the slowdown in overall inflation that we expected to see from the Fed's rate hike initiatives in q1, 2022.
For markets to determine when we will cleanse the inflation cycle and begin to move into an expansionary phase, the impact of rate hikes have yet to become concretely identifiable in the data. We believe this remains important as the Fed's narrative has been consistent in saying the path forward is data dependent. The ability for the market to digest whether the Fed went too far or not far enough we believe will bear out in GDP growth data.
For risk and growth assets, such as small cap equities, we expect the market will start to look approximately 9 months ahead once the trends in data begin to emerge. As such, we have included below a link from the US Bureau of Economic Analysis to the significant economic data points calendar and highlight the second estimate of q4 and 2022 US GDP estimates expected this week (the third estimate to come March 30th and the first q1 estimate April 27th).
So looking forward to the next few months, as data comes along we do expect choppy markets in small cap and growth equities. We also expect the economic picture to become more clear though q2 providing better clarity to understand the higher probability direction of markets for the balance of 2023 for this higher risk/higher reward sector.