Neither Rate Scenario Is Good for the Economy
Walk me through equity valuations. Rates will either come down sharply this year because the banks are going to roll over (banks are likely back around September 30, 2023 unrealized loss levels of $684 billion for the banking industry with the 10-year at 4.3%), or, rates will come down slowly in 2H 2024 by perhaps 75-100 BPS for the year.
Neither scenario is good for the economy. The first scenario means the U.S. will have a full-blown recession. The second scenario means consumers and businesses will continue to grind slower (or go out of business in the latter case) as rates remain elevated. Equity valuations feel rich against this backdrop.
Then again, the Fed did grow its balance sheet from $4 trillion to $9 trillion over 16 months (January 2020 - April 2022). That type of liquidity has long legs and will distort valuations for multiple years.
Also, how long before the rating agencies begin to downgrade Investment Grade debt to High Yield? Much of what is IG rated was only originally rated so because rates were close to zero when said company issued debt. The rating agencies need to get around to re-rating debt.