U.S. Real GDP -0.5%–+0.5%
Core PCE Inflation (4Q/4Q) 3.50%–3.75%
Federal Funds Rate 4.75%–5.00%
S&P 500 4,000
10-Year Treasury (%) 3.25%–3.75%
Market Pulse Publications* 25
Investment-Grade Spreads (bps) 100–150 bps
High-Yield Spreads (bps) 450–500 bps
image of a sunset at the end of an highway

What are some of the signposts that will indicate we are on the path to finding balance?

  • China is on path to economic reopening
  • Alignment of market expectations and Fed forecasts
  • Trough in consumer confidence
  • Shelter costs stabilizing and reflecting in inflation indexes
  • Wage growth slowing to the Fed’s preferred level
  • Labor market moving closer to equilibrium
  • Company earnings holding up, and forward guidance is improving
  • Diplomatic progress in numerous geopolitical hotspots

The Bull and Bear Have Fat Tails

Given that most forecasts, especially point forecasts, are almost always wrong to some degree, we apply a discipline of developing three scenarios:  our “base case,” as discussed above, a more positive “bull case,” and a more negative “bear case.”  We do this to better understand what might happen and answer the question, “What if we are wrong?

We also try to gauge the likelihood of these upside and downside scenarios.  In risk analysis, upside and/or downside risk are said to have “fat tails” when the chances of them happening is increased.  And we believe that is the case this year.  We’ve assigned a 60% probability to our base case, a 25% probability to the bear case, and a 15% probability to the bull.  These are fat tails.

Let’s run through how our scenarios differ across three key considerations looking forward: inflation, Fed policy, and earnings.