Investment Strategy: Betting on a Hotter US Economy

The investment strategy of betting on the US economy to outperform expectations has been a winning one in the 2020s, with economic strength consistently surprising to the upside. This strategy, which is the opposite of the approach that worked in the 2010s, has led to significant gains for those who have bet on the economy running hotter than anticipated.

In the 14 quarters since the brief 2020 recession ended, US GDP has soared by $8 trillion, a 40% increase. This is in stark contrast to the 14 quarters following the 2009 recession, where GDP rose by a relatively modest $2 trillion, or 14%.

The key to this strategy lies in the fact that economic weakness leads the Federal Reserve to keep interest rates low in an effort to stimulate growth. Traders who bet on continued economic weakness, like Gary Stevenson, profited in the past by predicting low interest rates. However, since the recovery from the pandemic shock in 2020, this trade has been a consistent loser, while betting on economic strength has been a clear winner.

The stock market has reached new record highs, with the S&P 500 standing at over 5,100, a gain of more than 50% from pre-pandemic levels. Inflation has been a visible sign of the economy running hot, leading the Fed to raise rates in an attempt to control surging prices. Despite expectations of rate cuts, the Fed now seems unlikely to make any moves given continued above-target inflation figures.

Overall, the economy appears to be thriving without the need for a rate cut. Traders who have bet on economic strength have reaped the rewards, highlighting the importance of staying ahead of market expectations in today’s rapidly changing economic landscape.