MFS: Markets are Distracted

MFS: Markets are Distracted

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By Rob Almeida, Global Investment Strategist, MFS

In brief

  • Economics and finance fail as sciences because they prompt people to confuse cause and effect.
  • Whether we’re near or at peak rates is not as relevant for markets as many think. It’s a distraction.
  • Headlines are often distractions. I’m not suggesting they aren’t important or valuable data points, but they’re small parts of a much larger mosaic.


Finance isn’t a science

Finance and economics are considered soft sciences. They’re soft because unlike physical sciences, they lack immutable laws. Water freezes at zero degrees centigrade and boils at 100. That’s a law of physics and it’s absolute.

Economies and financial markets are comprised of people making decisions. Sometimes those decisions are rational, often times not. The absence of rules and laws often leads to narrative fallacy and attribution error as people rely on observations and patterns to ascribe cause and effect, sometimes confusing correlation with coincidence. The consequence of this is often, and unfortunately, financial loss. Then people look for someone or something to blame.


The Devil’s tricks

A tremendous amount of effort and ink has been spent on determining the timing of peak central bank policy rates. The current consensus is we’re near the peak.

While whether policy is or isn’t near peak seems relevant, it’s not. It’s a distraction. 

The market is akin to a demonic beast that works hard to trick investors into making mistakes. It distracts investors from what really matters. And it’s been successful for centuries in this regard, separating people from their savings.  

If the US Federal Reserve hikes another 25 or 50 basis points or cuts 50 or 75 basis points later this year as the short-term Treasury market implies, the damage to the economy and company fundamentals has been done. The jump in capital costs over the last year was the fastest in four decades. Given the bulk of the US economy is fixed rate, now we wait to learn the effects.    

One measure is bankruptcy filings. There have been 74 filings so far in 2023 from companies with liabilities greater than $50 million. When annualized, as I did in the chart below, its surpassed the COVID lockdown year of 2020 when US gross domestic product collapsed by nearly one-fifth.

Bankruptcies on pace to exceed COVID-era spike

Most companies incur debt for a variety of reasons, including for tax purposes, to compound profits and to diversify capital sources. The key is how much. The just-passed era of artificially suppressed capital costs induced companies to assume historic debt loads. Today, those costs are dramatically higher than before and will be…


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