![]() ![]() Will July’s positive market sentiment continue? Or will the inflation alarm bell ring again, leading to a return to bear market conditions? No one knows for sure, but William of Ockham might help us understand the probabilities. Under that scenario, bad news about the economy is good news for investors because it means central banks will have achieved their inflation goals ahead of schedule and will soon turn to supporting growth with easier monetary policy. Investors now seem to expect reductions in economic growth and excess demand much earlier than previous estimates, and that will force central banks to quickly pivot away from fighting inflation. Stock markets also rallied during most of the month. In July, market interest rates responded to central bank tightening by … wait for it … falling across the maturity spectrum. Those hikes have been very large by historical standards, and they’ve also started to unwind emergency stimulus programs implemented during the COVID-19 crisis. Federal Reserve has been particularly aggressive in its inflation fighting efforts with a series of 50- and 75-basis-point rate hikes. Combatting inflation is now the sole focus of central banks around the world, so they’ve rapidly hiked short-term interest rates and reduced the size of their balance sheets. Future improvements aren’t visible yet because no inflation data reported so far this year didn’t surprise to the high side. It goes without saying that the global economy has a problem with unacceptably high rates of inflation. With that principle in mind, let’s try to figure out what markets are telling us. To crudely summarize his seminal thesis that became known later as “Occam’s Razor,” phenomena are best explained by the simplest hypothesis possible. Fourteenth century philosopher William of Ockham provided a great service to today’s investors seeking to understand the current state of financial markets.
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