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Dr. David Kelly, Chief Global Strategist
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For investors, large caps may be better insulated from higher rates than small caps, and falling net interest costs can assist decelerating input costs and wages in supporting stabilizing margins.
The big story for U.S. equity markets this year has been the remarkable performance of the largest seven technology stocks or the “magnificent 7.” These handful of stocks account for nearly 100% of S&P 500 YTD returns and are up over 72% this year.
Many investors are comfortable with the concept of fundamental analysis but are less confident in the technical aspects of market forecasting. As a result, they may wonder: does technical analysis matter?
Active stock selection remains of the utmost importance, as investors should look toward attractively priced companies with strong balance sheets and resilient profits.
For markets, disinflation could pose an earnings headwind for certain industries like autos, hotels and airlines while the Fed’s “higher for longer” mantra could instill continued volatility in bond markets.
While many of the traditional sources of diversification have been challenged by market conditions, alternative investments can enhance diversification.
Coming into 2023, the rallying cry from the asset management community was “Bonds are Back! ”. There were several reasonable assumptions behind this call.
While a reacceleration in growth and/or inflation could prompt another rate hike either in December or early next year, short-term bumps in a downward trending economy likely keep the Fed on hold well into 2024.
Historically, Chinese market recoveries can be fast and furious, highlighting the risk of being too underweight China when pessimism is already elevated.
At the start of the year, investors and economists were confident that 2023 would be a challenging year for the economy, markets and corporate profits. In the event, however, growth has been better than expected, equity markets are higher, and earnings have surprised to the upside.
The secondary market can often relieve liquidity issues for investors in private equity by offering the opportunity to sell existing investments to another buyer.
At first glance, the jump in energy equities may seem like a temporary phenomenon, but a variety of economic factors could support the sector’s performance over the longer-term.
Given the shifting characteristics in the bond market and uncertainty around the path of rates from here, investors should engage in an active approach with proven managers in their fixed income allocations.
The question for investors, however, is which measure of earnings has the highest correlation with stock market returns.
With two FOMC meetings before year end, investors and policymakers are closely monitoring the totality of incoming data to determine whether the committee will lift rates again or go on an extended pause.
Despite many looming threats to the economy, 3Q23 earnings season should hopefully represent a relative bright spot in the landscape.
As rates have moved higher risk assets have found themselves under pressure, with the S&P 500 down more than 7% from its July 31st high of 4,589. To an extent, this price action has been driven by a shift in investor psychology whereby “good news” is now “bad news.”
It is still a close call on whether the economy will enter a recession or not, but we do believe slow growth is the most likely outcome, while risks for a mild recession remain.
If automobile production decreases, prices for vehicles, particularly used ones, may increase once more, unwinding some of recent disinflation and putting renewed upward pressure on “super-core” CPI.
After well over a year of anxiously anticipating an economic recession, the U.S. economy continues to look sound. However, as we enter the “fall of worry” there are several risks on the horizon this autumn: impacts from the UAW strike, rising oil prices, the resumption of student loan payments, and the potential for a government shutdown.
As widely anticipated, the Federal Open Market Committee (FOMC) voted to leave the Federal funds rate unchanged at a target range of 5.25%-5.50% at its September meeting.
Last quarter, 40% of S&P 500 companies mentioned artificial intelligence (AI) in their earnings calls – more than double from a year earlier – and their collective investments in AI are exploding.
With the possibility of tighter financial conditions going forward, investors may be well served by looking for any signs that tighter conditions are beginning to weigh on activity.
Over the long run, duration will be an investor’s friend for both asset classes: not only will lower rates push bond prices higher, but a lower opportunity cost of owning equities and easy monetary policy should allow valuations and earnings expectations to move higher.
While what happens in China will continue to influence growth, sentiment, and performance in the broader EM universe, powerful structural and cyclical themes can lead to differentiated performance.
We expect a slower growth and cooling inflation environment will allow the Fed to gradually reduce rates next year, thus stabilizing real yields and potentially biasing them lower.
With many parents (and investors!) taking the end of summer to be with their families and go to the beach one last time, kids are not the only ones who need a refresher before they head back to the classroom; in today’s blog, we try to help parents get ready to go “back to school.”
2023 has seen more office conversion activity – while sometimes this can be easier said than done, it does suggest that there is an evolving opportunity in the office space for investors who can deploy additional capital.
India’s smaller share in global manufacturing exports and its lower dependence on the China reopening story helps to explain its strength versus other export-oriented Asian economies’ struggles.
While the probability of a soft landing has risen given the generally strong incoming data, the concern is that most leading indicators continue to point to recession.
The rally in corporate credit may have caught some investors by surprise given the consensus that a recession would materialize this year, a historically bad environment for credit spreads.
Looking back at the past six U.S. stock market declines greater than 10%, international has not always sold off more. In some instances, it has performed in line or even better.
This combination of resilient growth, better than expected profits and enthusiasm around artificial intelligence has led to a strong rally in U.S. equities so far this year.
The likely cause for declining oil prices is increased U.S. production, which is expected to reach an all-time high in 2023.
While the Fed may need some more convincing over the next two meetings, it seems reasonable to expect this tightening cycle will end this year.
It would not be surprising to see a more notable re-rating in valuations later this year or in early 2024; this, in turn, will create opportunity for both primary and secondary market investors.
Beneath the surface are two market dynamics: the megacap tech stocks, which account for the lion’s share of positive market performance year-to-date, and everything else.
The combination of slower economic growth, higher interest rates and tightening credit conditions are likely to weigh on CapEx and could be the thing that tips the U.S. economy into a mild recession.
Fundamentals differ significantly at the sector level. For example, office remains the weakest sector, as vacancy rates remain elevated, and firms struggle to fully exit remote working.
Today’s announcement made it clear that the committee still needs more compelling evidence that inflation is under control and could very well tighten at least once more this summer.
While labor market conditions may have had some effect on pushing up services prices, we think its impact is overstated. Over the last 4 months, more than half of the year-over-year gain in core services ex-shelter inflation has come from transportation services alone.
Core infrastructure continues to represent a way to generate income without taking on more equity risk, while proactively hedging portfolios from the chance that inflation is harder to tame than many currently expect.
Although rates have risen across the curve in recent weeks due to debt ceiling uncertainty, more hawkish Fed expectations, and resilient economic data, the overall macro landscape is one of slowing growth and receding inflation.
In real estate, industrial asset valuations have barely flinched given low vacancy rates and rising rents, whereas the office space has seen (and is expected to see) further pain as we determine what the future of work will look like.
Given the rapid tightening from the Federal Reserve, property values are likely to be marked down in the quarters ahead impacting loan values on bank balance sheets.
This combination of lower rates, higher equity valuations, and declining earnings – with a potential recession on the horizon – leaves us cautious on the equity market at current levels.
A pause from the Fed is certainly welcome from a broader macro perspective, but the challenges facing local and regional banks in particular, are still prevalent.
For Americans planning for retirement, the obvious implication is to save and invest more. Beyond this, it has become increasingly necessary to have some assets outside of traditional 401(k)s and IRAs.
The U.S. reached its debt limit of USD 31.4 trillion on January 19th and has since been relying on funds in the Treasury General Account (TGA) and so-called “extraordinary measures” to fund its obligations.
The statement language has shifted from “ongoing increases will be appropriate” to a data-dependent approach “in determining the extent to which additional policy firming may be appropriate”, hinting the committee is ready to pause rate increases.
After an initial rally of 60% from late October to late January, Chinese equities have corrected 15% and are now down marginally for the year.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
The first estimate of 1Q23 real GDP showed the economy grew at a 1.1% annualized rate, below the consensus expectation for 1.9% growth.
Moreover, many banks stepped away from riskier lending in the aftermath of 2008, creating an opportunity for private credit firms and other direct lenders to increase their market share.
Those waiting for a pick-up in unemployment to signal a looming recession or that the Fed can finally declare victory may be too late.
Governments are aligning behind the goal of achieving net zero emissions by 2050, but dramatic changes to the global economy will be required to get us there. Learn more about the policies and innovations that could pave the way to a carbon-neutral world.
These financial institutions would incorporate FedNow into their existing transfer infrastructure, so consumers, businesses and non-bank payment providers would use the system indirectly, rather than treat it as a third-party application.
Accelerating efforts to achieve a green and secure energy supply are having an impact on the economy and markets.
The key point, though, is that much of the “stickiness” that has been ascribed to core services may largely reflect the lingering hangover of supply chain issues, where Fed policy has little impact.
As the Fed ponders its next step, investors should be mindful that the window of opportunity that has emerged in fixed income may slam shut quickly.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
A forced and rapid energy transition is under way. Discover what impact this will have on commodity markets and clean energy investment opportunities.
However, with a potential recession on the horizon and vulnerabilities in the financial system, investors ought to be selective, gearing towards the highest quality areas of the bond market.
In the statement, the Federal Reserve (Fed) acknowledged the potential implications of banking turmoil on the economic outlook but highlighted that at this point, it’s uncertain how big that impact will be.
However, we seem to be at the beginning of a turnaround given the change in the international growth and interest rate backdrop, together with a potential shift in market leadership.
Putting aside the obvious implications of the above – namely uncertainty and, in turn, volatility – it would be wise to also consider what this means for the March Federal Open Market Committee (FOMC) meeting.
This highly anticipated print was overshadowed by the fallout from regional bank failures, which could also impact how the Federal Reserve (Fed) approaches its March rate decision.
With the U.S. housing market struggling under the weight of higher mortgage rates, higher home prices, and limited supply, more and more questions have been coming in around the outlook for commercial properties.
While uncertainty remains about the cyclical path of U.S. policy and growth, the picture has gotten much clearer (and more positive) in China since late 2022.
The recent surge in inflation has been driven by both demand and supply factors as fiscal stimulus and low rates supported a boost in demand, while lockdowns put significant pressure on supply chains.
In general, these concerns remind us that the government’s monthly jobs report should be seen as just one piece of the broader labor market mosaic.
By the second half of the year, growth is likely to slow as the cumulative effects of higher rates are felt and inflation moderates as food and shelter consumer price index (CPI) soften.
Ultimately, the conversation around cash and traditional long-term assets should not be framed as “either/or”, but rather as “both, for different reasons.”
Several pro-growth changes occurred late last year that investors should not ignore: support to the real estate sector, conclusion of the regulatory review of the internet sector, dialing down of geopolitical tensions – and crucially, a changing of the “Zero COVID policy".
Markets had largely expected the uptick, but the underlying components showed a more mixed inflation picture compared to the broad-based declines seen in prior months.
Although financial conditions are tighter now than in early 2022, they have retreated significantly in recent months.
The next decade is likely to be characterized by more “normal” inflation. As a result, not all recent central bank rate hikes will be unwound - the era of free money is over.
The statement language and press conference were somewhat dovish.
Importantly, however, significant valuation dispersion suggests that as investors gain more clarity about the health of the U.S. economy and trajectory of inflation and rates, small caps could lead the charge as we embark on the next bull run.
2022 was a year to forget in the capital markets. Stock/bond correlations turned positive and left traditional investors with nowhere to hide as volatility spiked and prices plunged.
Compared to the past decade, bond yields across every major sector are above their ten-year median.
To have a clear view on where inflation may be heading, it is therefore worth understanding how the rental market is faring.
Looking ahead to 2023 we see slower growth, a gradual deceleration in inflation, and monetary policy that remains tight; as always, this will create risks, as well as opportunities, across the spectrum of alternative investments.
For investors, we anticipate a slowdown in economic growth and inflation should bring bond yields lower, but debt ceiling risks, although certainly not our base case, could derail the bond market recovery and foment significant volatility if realized.
Operating leverage, which is the relationship between changes in revenue and changes in earnings, continues to be key for profitability.
Current data suggest three realities: inflation is cooling; job growth remains firm, but is likely to moderate, as will wage growth; and services and manufacturing data point to broader economic slowing.
China’s resumption of normal manufacturing activity should continue to support supply chain normalization, maintaining global inflation on its cooling trend.
For long-term investors, buying the dips – in both stocks and bonds—could become attractive in 2023, and diversification could stage a comeback.
2022 was a roller coaster for investors with Russia’s invasion of Ukraine challenging global energy supply, central banks pivoting aggressively to combat high inflation, fading, yet still widespread effects of a global pandemic impacting consumers, businesses, and supply chains, and elevated political uncertainty shifting the landscape of economies globally. In summary, 2022 was a volatile year.
The past few weeks have seen much ink spilled on 2023 outlooks, with strategists and analysts suggesting an increased likelihood of recession next year as the consumer begins to show signs of stress at a time when the Federal Reserve (Fed) has signaled there is more room for rates to rise.
As widely anticipated, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate target range by 0.50% to 4.25%-4.50% at its December meeting.
November’s CPI report showed a second month of softening inflation despite still-elevated price growth. Headline CPI increased 0.1% month-over-month (m/m) and 7.1% year-over-year (y/y), while core CPI (ex-food and energy) increased 0.2% m/m and 6.0% y/y, all below consensus expectations.
Today’s investing landscape is dominated by a sentiment that may seem odd at first glance: namely, that good news is bad news. More specifically, good news for the economy is bad news for the stock market.
International equities are down -13.6% year-to-date (in U.S. dollars), with multiple contraction and weaker currencies dragging on returns, as investors price in higher rates and more uncertainty about fundamentals.
The US economy is showing signs that the post pandemic surge is beginning to moderate, but we do not think a recession is imminent. Nonetheless, stocks are near correction territory, consumer sentiment has soured to levels last seen in 2011, geopolitical tensions are elevated, and prices are higher everywhere; all of which challenge this view.
A re-rating of valuations has led to negative equity returns year-to-date, but importantly, earnings estimates have continued to trend higher. In an environment of rising rates, earnings will be the key driver of returns.
As we emerge from this pandemic with inflation now rising at its fastest pace since the 1980s, the biggest question for investors is whether some of this inflation will prove “sticky”.
The remainder of 2021 should see an acceleration in economic activity, rising inflation, and higher interest rates. In general, this dynamic should support the outperformance of value relative to growth, with attractive relative valuations acting as an additional tailwind for value outperformance.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
Even with this Fed action, there will likely be calls for fiscal action to support to businesses suffering from the response to virus fears, says David Kelly.
For investors, large caps may be better insulated from higher rates than small caps, and falling net interest costs can assist decelerating input costs and wages in supporting stabilizing margins.
The big story for U.S. equity markets this year has been the remarkable performance of the largest seven technology stocks or the “magnificent 7.” These handful of stocks account for nearly 100% of S&P 500 YTD returns and are up over 72% this year.
Many investors are comfortable with the concept of fundamental analysis but are less confident in the technical aspects of market forecasting. As a result, they may wonder: does technical analysis matter?
Active stock selection remains of the utmost importance, as investors should look toward attractively priced companies with strong balance sheets and resilient profits.
For markets, disinflation could pose an earnings headwind for certain industries like autos, hotels and airlines while the Fed’s “higher for longer” mantra could instill continued volatility in bond markets.
While many of the traditional sources of diversification have been challenged by market conditions, alternative investments can enhance diversification.
Coming into 2023, the rallying cry from the asset management community was “Bonds are Back! ”. There were several reasonable assumptions behind this call.
While a reacceleration in growth and/or inflation could prompt another rate hike either in December or early next year, short-term bumps in a downward trending economy likely keep the Fed on hold well into 2024.
Historically, Chinese market recoveries can be fast and furious, highlighting the risk of being too underweight China when pessimism is already elevated.
The secondary market can often relieve liquidity issues for investors in private equity by offering the opportunity to sell existing investments to another buyer.
At first glance, the jump in energy equities may seem like a temporary phenomenon, but a variety of economic factors could support the sector’s performance over the longer-term.
Given the shifting characteristics in the bond market and uncertainty around the path of rates from here, investors should engage in an active approach with proven managers in their fixed income allocations.
The question for investors, however, is which measure of earnings has the highest correlation with stock market returns.
With two FOMC meetings before year end, investors and policymakers are closely monitoring the totality of incoming data to determine whether the committee will lift rates again or go on an extended pause.
Despite many looming threats to the economy, 3Q23 earnings season should hopefully represent a relative bright spot in the landscape.
As rates have moved higher risk assets have found themselves under pressure, with the S&P 500 down more than 7% from its July 31st high of 4,589. To an extent, this price action has been driven by a shift in investor psychology whereby “good news” is now “bad news.”
It is still a close call on whether the economy will enter a recession or not, but we do believe slow growth is the most likely outcome, while risks for a mild recession remain.
If automobile production decreases, prices for vehicles, particularly used ones, may increase once more, unwinding some of recent disinflation and putting renewed upward pressure on “super-core” CPI.
After well over a year of anxiously anticipating an economic recession, the U.S. economy continues to look sound. However, as we enter the “fall of worry” there are several risks on the horizon this autumn: impacts from the UAW strike, rising oil prices, the resumption of student loan payments, and the potential for a government shutdown.
As widely anticipated, the Federal Open Market Committee (FOMC) voted to leave the Federal funds rate unchanged at a target range of 5.25%-5.50% at its September meeting.
With the possibility of tighter financial conditions going forward, investors may be well served by looking for any signs that tighter conditions are beginning to weigh on activity.
Over the long run, duration will be an investor’s friend for both asset classes: not only will lower rates push bond prices higher, but a lower opportunity cost of owning equities and easy monetary policy should allow valuations and earnings expectations to move higher.
While what happens in China will continue to influence growth, sentiment, and performance in the broader EM universe, powerful structural and cyclical themes can lead to differentiated performance.
We expect a slower growth and cooling inflation environment will allow the Fed to gradually reduce rates next year, thus stabilizing real yields and potentially biasing them lower.
With many parents (and investors!) taking the end of summer to be with their families and go to the beach one last time, kids are not the only ones who need a refresher before they head back to the classroom; in today’s blog, we try to help parents get ready to go “back to school.”
2023 has seen more office conversion activity – while sometimes this can be easier said than done, it does suggest that there is an evolving opportunity in the office space for investors who can deploy additional capital.
India’s smaller share in global manufacturing exports and its lower dependence on the China reopening story helps to explain its strength versus other export-oriented Asian economies’ struggles.
While the probability of a soft landing has risen given the generally strong incoming data, the concern is that most leading indicators continue to point to recession.
The rally in corporate credit may have caught some investors by surprise given the consensus that a recession would materialize this year, a historically bad environment for credit spreads.
Looking back at the past six U.S. stock market declines greater than 10%, international has not always sold off more. In some instances, it has performed in line or even better.
The likely cause for declining oil prices is increased U.S. production, which is expected to reach an all-time high in 2023.
While the Fed may need some more convincing over the next two meetings, it seems reasonable to expect this tightening cycle will end this year.
It would not be surprising to see a more notable re-rating in valuations later this year or in early 2024; this, in turn, will create opportunity for both primary and secondary market investors.
Beneath the surface are two market dynamics: the megacap tech stocks, which account for the lion’s share of positive market performance year-to-date, and everything else.
The combination of slower economic growth, higher interest rates and tightening credit conditions are likely to weigh on CapEx and could be the thing that tips the U.S. economy into a mild recession.
Fundamentals differ significantly at the sector level. For example, office remains the weakest sector, as vacancy rates remain elevated, and firms struggle to fully exit remote working.
Today’s announcement made it clear that the committee still needs more compelling evidence that inflation is under control and could very well tighten at least once more this summer.
While labor market conditions may have had some effect on pushing up services prices, we think its impact is overstated. Over the last 4 months, more than half of the year-over-year gain in core services ex-shelter inflation has come from transportation services alone.
Core infrastructure continues to represent a way to generate income without taking on more equity risk, while proactively hedging portfolios from the chance that inflation is harder to tame than many currently expect.
Although rates have risen across the curve in recent weeks due to debt ceiling uncertainty, more hawkish Fed expectations, and resilient economic data, the overall macro landscape is one of slowing growth and receding inflation.
In real estate, industrial asset valuations have barely flinched given low vacancy rates and rising rents, whereas the office space has seen (and is expected to see) further pain as we determine what the future of work will look like.
Given the rapid tightening from the Federal Reserve, property values are likely to be marked down in the quarters ahead impacting loan values on bank balance sheets.
This combination of lower rates, higher equity valuations, and declining earnings – with a potential recession on the horizon – leaves us cautious on the equity market at current levels.
A pause from the Fed is certainly welcome from a broader macro perspective, but the challenges facing local and regional banks in particular, are still prevalent.
For Americans planning for retirement, the obvious implication is to save and invest more. Beyond this, it has become increasingly necessary to have some assets outside of traditional 401(k)s and IRAs.
The U.S. reached its debt limit of USD 31.4 trillion on January 19th and has since been relying on funds in the Treasury General Account (TGA) and so-called “extraordinary measures” to fund its obligations.
The statement language has shifted from “ongoing increases will be appropriate” to a data-dependent approach “in determining the extent to which additional policy firming may be appropriate”, hinting the committee is ready to pause rate increases.
After an initial rally of 60% from late October to late January, Chinese equities have corrected 15% and are now down marginally for the year.
The first estimate of 1Q23 real GDP showed the economy grew at a 1.1% annualized rate, below the consensus expectation for 1.9% growth.
Moreover, many banks stepped away from riskier lending in the aftermath of 2008, creating an opportunity for private credit firms and other direct lenders to increase their market share.
Those waiting for a pick-up in unemployment to signal a looming recession or that the Fed can finally declare victory may be too late.
Governments are aligning behind the goal of achieving net zero emissions by 2050, but dramatic changes to the global economy will be required to get us there. Learn more about the policies and innovations that could pave the way to a carbon-neutral world.
These financial institutions would incorporate FedNow into their existing transfer infrastructure, so consumers, businesses and non-bank payment providers would use the system indirectly, rather than treat it as a third-party application.
Accelerating efforts to achieve a green and secure energy supply are having an impact on the economy and markets.
The key point, though, is that much of the “stickiness” that has been ascribed to core services may largely reflect the lingering hangover of supply chain issues, where Fed policy has little impact.
As the Fed ponders its next step, investors should be mindful that the window of opportunity that has emerged in fixed income may slam shut quickly.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
A forced and rapid energy transition is under way. Discover what impact this will have on commodity markets and clean energy investment opportunities.
However, with a potential recession on the horizon and vulnerabilities in the financial system, investors ought to be selective, gearing towards the highest quality areas of the bond market.
In the statement, the Federal Reserve (Fed) acknowledged the potential implications of banking turmoil on the economic outlook but highlighted that at this point, it’s uncertain how big that impact will be.
However, we seem to be at the beginning of a turnaround given the change in the international growth and interest rate backdrop, together with a potential shift in market leadership.
Putting aside the obvious implications of the above – namely uncertainty and, in turn, volatility – it would be wise to also consider what this means for the March Federal Open Market Committee (FOMC) meeting.
This highly anticipated print was overshadowed by the fallout from regional bank failures, which could also impact how the Federal Reserve (Fed) approaches its March rate decision.
With the U.S. housing market struggling under the weight of higher mortgage rates, higher home prices, and limited supply, more and more questions have been coming in around the outlook for commercial properties.
While uncertainty remains about the cyclical path of U.S. policy and growth, the picture has gotten much clearer (and more positive) in China since late 2022.
The recent surge in inflation has been driven by both demand and supply factors as fiscal stimulus and low rates supported a boost in demand, while lockdowns put significant pressure on supply chains.
In general, these concerns remind us that the government’s monthly jobs report should be seen as just one piece of the broader labor market mosaic.
By the second half of the year, growth is likely to slow as the cumulative effects of higher rates are felt and inflation moderates as food and shelter consumer price index (CPI) soften.
Ultimately, the conversation around cash and traditional long-term assets should not be framed as “either/or”, but rather as “both, for different reasons.”
Several pro-growth changes occurred late last year that investors should not ignore: support to the real estate sector, conclusion of the regulatory review of the internet sector, dialing down of geopolitical tensions – and crucially, a changing of the “Zero COVID policy".
Markets had largely expected the uptick, but the underlying components showed a more mixed inflation picture compared to the broad-based declines seen in prior months.
Although financial conditions are tighter now than in early 2022, they have retreated significantly in recent months.
The next decade is likely to be characterized by more “normal” inflation. As a result, not all recent central bank rate hikes will be unwound - the era of free money is over.
The statement language and press conference were somewhat dovish.
Importantly, however, significant valuation dispersion suggests that as investors gain more clarity about the health of the U.S. economy and trajectory of inflation and rates, small caps could lead the charge as we embark on the next bull run.
Compared to the past decade, bond yields across every major sector are above their ten-year median.
To have a clear view on where inflation may be heading, it is therefore worth understanding how the rental market is faring.
Looking ahead to 2023 we see slower growth, a gradual deceleration in inflation, and monetary policy that remains tight; as always, this will create risks, as well as opportunities, across the spectrum of alternative investments.
For investors, we anticipate a slowdown in economic growth and inflation should bring bond yields lower, but debt ceiling risks, although certainly not our base case, could derail the bond market recovery and foment significant volatility if realized.
Operating leverage, which is the relationship between changes in revenue and changes in earnings, continues to be key for profitability.
Current data suggest three realities: inflation is cooling; job growth remains firm, but is likely to moderate, as will wage growth; and services and manufacturing data point to broader economic slowing.
China’s resumption of normal manufacturing activity should continue to support supply chain normalization, maintaining global inflation on its cooling trend.
For long-term investors, buying the dips – in both stocks and bonds—could become attractive in 2023, and diversification could stage a comeback.
2022 was a roller coaster for investors with Russia’s invasion of Ukraine challenging global energy supply, central banks pivoting aggressively to combat high inflation, fading, yet still widespread effects of a global pandemic impacting consumers, businesses, and supply chains, and elevated political uncertainty shifting the landscape of economies globally. In summary, 2022 was a volatile year.
The past few weeks have seen much ink spilled on 2023 outlooks, with strategists and analysts suggesting an increased likelihood of recession next year as the consumer begins to show signs of stress at a time when the Federal Reserve (Fed) has signaled there is more room for rates to rise.
As widely anticipated, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate target range by 0.50% to 4.25%-4.50% at its December meeting.
November’s CPI report showed a second month of softening inflation despite still-elevated price growth. Headline CPI increased 0.1% month-over-month (m/m) and 7.1% year-over-year (y/y), while core CPI (ex-food and energy) increased 0.2% m/m and 6.0% y/y, all below consensus expectations.
Today’s investing landscape is dominated by a sentiment that may seem odd at first glance: namely, that good news is bad news. More specifically, good news for the economy is bad news for the stock market.
International equities are down -13.6% year-to-date (in U.S. dollars), with multiple contraction and weaker currencies dragging on returns, as investors price in higher rates and more uncertainty about fundamentals.
The US economy is showing signs that the post pandemic surge is beginning to moderate, but we do not think a recession is imminent. Nonetheless, stocks are near correction territory, consumer sentiment has soured to levels last seen in 2011, geopolitical tensions are elevated, and prices are higher everywhere; all of which challenge this view.
The remainder of 2021 should see an acceleration in economic activity, rising inflation, and higher interest rates. In general, this dynamic should support the outperformance of value relative to growth, with attractive relative valuations acting as an additional tailwind for value outperformance.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
Even with this Fed action, there will likely be calls for fiscal action to support to businesses suffering from the response to virus fears, says David Kelly.
See the potential impact that various recovery scenarios may have on client portfolios.
