In the post-Volcker era, the Federal Reserve (Fed) has typically exhibited a vigilant approach to fighting inflation. Whenever labor market tightness appeared and inflation was beginning to approach its target rate of 2% Core PCE, the Fed would often spring into action with rate hikes. This cycle, however, has been unique, with the Federal Reserve instead permitting inflation pressures to build-up rather than promptly stamping them out.
Now, having allowed inflation to garner a foothold well above its own target, the Fed is having to respond by aggressively tightening credit and financial conditions via sharp rate hikes and quantitative tightening. This backdrop has led equity markets down a path littered with periodic selloffs, punctuated by sharp relief rallies. While the trend is certainly downwards, investors need to be attentive to ‘bear-market rallies’, their short-lived character, and the risk of becoming enticed into an enduring bear market, one with many underappreciated risks.
