There is no shortage of jargon and industry speak in the financial news. I do my very best to steer clear of it when I write to you, as I fully appreciate how confusing (and sometimes annoying!) it can be. However, one term snuck into my Pam to Paper post last week when I used the phrase “Goldilocks economic backdrop” and a client reached out to ask me to explain what I meant. Great question!
I think it’s safe to say we all know who Goldilocks is and the related fairy tale of the wandering girl who stumbles into the home of three bears. While there, she tastes the bowls of porridge trying to find one that is the perfect temperature. This “too hot, too cold, just right” parable has been told to countless children over the generations.
It turns out it also serves as the perfect analogy for many market-related dynamics in recent years. When referring to an economic data point or situation that is “just right,” the term Goldilocks is a perfect substitute!
To further illustrate this terminology, let’s equate today’s economy to the bowls of porridge:
Too hot – this “bowl” is where we were coming out of the pandemic and into 2021 and early 2022. Inflation soaring, stimulus dollars flowing, and job market soaring. The “too hot” conditions are what led to the Federal Reserve raising rates from 0% to over 5%. Based on today’s economic data, we are no longer “too hot”
Too cold – this “bowl” was what many feared entering 2023. A economy that fit this profile would be in a recession, with weakening earnings for businesses, and a weak job market for workers. This scenario did not come true in this year – quite the opposite with a recent GDP read over 5% in Q3
Just right – this “bowl” is the one I was referring to as most accurately describing today’s economic backdrop (also referred to as Goldilocks since it’s the one she chose). As was true in the story, this is the ideal case for the economy and markets. It’s not too hot (excessive inflation), it’s not too cold (recessionary and/or weak jobs). It’s just right – slowing inflation, strong corporate earnings, and solid job growth. Do we still have issues in the economy? Of course. Is there still potential for us to flip hot or cold? Absolutely. But for now does it seems we are in a Goldilocks situation? Yes – and year to date returns for equities support that assessment.
Hope this helps explain how a fairy tale character finds herself named in countless business news stories!
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