Fading The Soft Landing Narrative

A ‘‘very strong’’ labor market report coupled with the first preliminary signs of inflation slowing down have brought back 2021-like euphoria in risk assets: junk credit spreads are tightening fast, meme stocks are going through the roof and even Turkey (!) is now priced as a much safer investment despite front-end real interest rates as low as -60%.

In the investment world, when markets are behaving as if the economy is delivering decent growth and inflation is predictably low we call that ‘‘Goldilocks’’ - as in the story of Goldilocks and The Three Bears, markets are not hot or cold but just right.

There is one problem: the Goldilocks or Soft Landing market interpretation seems very misplaced at this stage.

In this article, we will:

Discuss the latest CPI and labor market reports, and show how they do not necessarily imply high odds of a Soft Landing;

Look at the behavior of different asset classes and discuss implications for long-term and tactical portfolio allocations.

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