Is it possible?

Markets have been melting up since October on the narrative the Fed is done with interest rate hikes and would cut rates in 2H of 2023. This narrative was held on to tightly even though Powell and his crew repeatedly emphasized hikes would continue until inflation was close to their target of 2%.

So even as rate hikes have continued and the probability of cuts in 2023 have evaporated, markets continue to melt higher on narrow leadership (just 5 stocks driving the headline return) and optimism around the Fed.

One of my advisors asked, is it possible that we can have the recession and markets just keep going up?

Historically, that's not been the case but Covid action should make us ask this exact question. Investors now have become so conditioned to central bank intervention, we look past the economic damage a recession causes and immediately start pricing the next expansion.

Covid may not be a great example for many reasons. However, how quickly the economic impacts were dismissed by markets was truly unbelievable. I think it's why the lag effects of interest rate hikes are similarly being overlooked today.

Markets are "forward looking" and discounting mechanisms, at least that's what is claimed. So since this recession is so telegraphed, it should already be priced in. Markets are "efficient" right?

If the time for central bank intervention has decreased to days (e.g. SVB intervention) and investors can rationalize/discount/ignore large falls in sales/earnings (e.g. Covid), can we now assume that markets are no longer connected to the economy at all?

Further, even as liquidity is being reduced via QT and financial conditions tighten, this also does not seem to matter. Maybe we have finally reached the day where markets can never go down...

Pondering these questions is likely what many rational investors do in the midst of historical bubbles as the world, at that time, appears inconceivable and logic is nowhere to be found.

The fact that I'm even compelled to write about this should be a warning I guess, but the persistency of irrationality requires us to adjust. Just be careful how you do it.