The best parallel to current conditions is one traders haven't lived through, former Bridgewater executive says

By Steve Goldstein

The best historical parallel for current economic conditions might be a period that few if any current traders have lived through.

Bob Elliott, the co-founder of ETF provider Unlimited Funds and former Bridgewater Associates executive, says the 1950s and 1960s might provide the strongest analogue.

"I think the most relevant cycles that come to my mind are back in the 50s and 60s," he said on the Macro Hive podcast. "The Depression was familiar to them. They were very reticent to take on new borrowing in order to finance their spending and so most of the expansions that occurred in the 50s and the 60s, they were predominantly income-driven expansion," he said.

The past 15 years, households also have been reluctant to lever up because of the global financial crisis in 2008.

That's good in that the current expansion is more sustainable, he said. It also means that the Fed's interest rate hiking cycle had less of an impact on the economy.

"It's not that interest rates have had no effect, it's just that they haven't had that much effect," he said.

That also means that interest rates are not very restrictive at the moment. "Very restrictive monetary policy means stocks are going down, credit spreads are going up, the economy slowing rapidly," Elliott said. "What on Earth do you look at to say this is very restrictive monetary policy."

The S&P 500 index SPX has gained 15% this year, while the yield on the 2-year Treasury BX:TMUBMUSD02Y has eased 53 basis points.

The SPDR Bloomberg High Yield Bond ETF JNK has gained 2% in 2024.

He says if a recession emerges in the next 12 to 18 months, it wil be a "disappointment-driven recession." Asset prices embed a combination of strong earnings growth and aggressive interest rate cuts. Disappointment on either front could lead to asset prices declining, he says.

He said both bond market and stock market investors are trying to front-run the macroeconomic linkages. "And the result is they're just paying sky-high prices for these assets before the types of adjustments that have to happen in order to get the outcomes that are being expected," he said.

-Steve Goldstein

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09-06-24 0841ET

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