At the beginning of 2023, financial market commentators assumed that a deep recession would occur this year and the major stock indexes would be in the red. Fast-forward to the final FOMC meeting of the year, and stocks are firmly in the green.

Of course, the so-called experts who told you to sell your stocks in January won’t admit they were wrong. They’ll just pretend they didn’t call for doom and gloom, and they’ll continue to apply a wealth-destroying strategy of “sell at low prices, buy back at higher prices.”

If you truly believe in the Warren Buffett principle of “Be fearful when others are greedy,” then this is the time to be fearful. The time to be greedy was in January, when the short side of the stock trade was overcrowded.

At this point, both the Federal Reserve and Treasury Secretary Janet Yellen are fully predicting a “soft landing” for the U.S. economy. In its remarks for December’s FOMC meeting, the committee predicted that there would be no recession in 2024 and that the inflation rate would cool down to 2.4% next year.

Meanwhile, Yellen sees inflation coming down to the Fed’s 2% target by the end of 2024. Consider the source, though. This is someone who never saw evidence of a recession in the U.S. economy, even as consumer prices skyrocketed for essentials like food, rent, and vehicles.

Courtesy: CNBC

As large-cap stock investors breathe a sigh of relief, they may be drawing the wrong conclusion. Interest rates are still quite elevated, as you can see in the chart shown above. Even after several cuts next year (assuming that actually is what happens), rates will still have been high for a long time.

Historically, there’s been a lag effect between high interest rates and economic recessions. When borrowing costs are high, businesses have a tougher time getting loans and they have to pay more interest on their existing loans.

Plus, consumers have to pay higher rates on their credit card balances as well as on their home and auto loans. Overall, this precipitates a slowdown in the economy – but it doesn’t typically happen immediately after a series of interest-rate raises.

Instead, the recession will generally happen after the Federal Reserve starts lowering interest rates. There’s a lag between the series of rate hikes and the economic impact, but large-cap stock traders evidently think “this time is different.”

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    Those are the famous last words of unsuccessful investors: “This time is different.” Sure, the FOMC indicated in its dot plot that there will be three interest-rate cuts in 2024. However, the dot plot isn’t written in stone and it’s subject to change with every FOMC meeting.

    Moreover, it appears that the market has already priced in the assumption of multiple interest-rate reductions next year. The 2-year Treasury bond yield just dropped to 4.49%, heading toward its lowest closing level since June.

    Courtesy: CNBC

    At the same time, stock traders went on a buying spree under the assumption that the dot plot is a reliable gauge of what will happen in the future. Yet, consider how different the assumptions were in January, versus the actual pace of rate hikes in 2023’s second half.

    There’s a lesson to be learned from all of this. Just because 2022 was turbulent, didn’t mean 2023 would be turbulent. And just because 2023 was calm, doesn’t mean 2024 will be calm.

    To put it another way, wise investors need to resist the recency bias that most financial traders fall victim to. The future won’t necessarily be like the recent past, and while being fearful when others are greedy isn’t easy, it’s generally the right frame of mind.

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