Blog: The Fractal Market Hypothesis and Optimism

Stock and bond markets both surged last week as investors came to believe that the "soft landing" was here. That is, inflation pressures have been relieved and the economy will now resume growth. It then follows that the Fed is not only done raising rates, but will begin cutting them early in 2024. Optimism seemed to come from three sources:

• Fed commentary supporting an indefinite pause because higher long-term bond yields have tightened financial conditions,
• Softness in the employment numbers, and
• US Treasury's slightly small bond auctions.

While it would certainly be welcome news if these three things signaled a turning point in the US and global economy, the optimism seems to ignore other troubling events:

• War continues in Ukraine,
• The Israeli/Hamas conflict escalates and may spread,
• Inflation ticked up in the US last month after the Summer slump,
• Europe and China are sliding into recession,
• The US government funding deadline is 10 days away, and
• The US bond rally may have eased financial conditions again.

Actually, this is a short list of potential problems. So why did the rallies occur? The Fractal Market Hypothesis (FMH) may show us a reason.