On the Minds of Investors

Are bonds a good investment?

Compared to the past decade, bond yields across every major sector are above their ten-year median.

What does the rental market mean for inflation this year?

To have a clear view on where inflation may be heading, it is therefore worth understanding how the rental market is faring.

Can alternative investments deliver in 2023?

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.

Will the U.S. run out of funding after reaching the debt ceiling?

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.

What do you expect from 4Q earnings?

Operating leverage, which is the relationship between changes in revenue and changes in earnings, continues to be key for profitability.

What to do with fixed income in 2023?

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.

What are the investment implications of China’s reopening?

China’s resumption of normal manufacturing activity should continue to support supply chain normalization, maintaining global inflation on its cooling trend.

Will diversification make a comeback in 2023?

For long-term investors, buying the dips – in both stocks and bonds—could become attractive in 2023, and diversification could stage a comeback.

How will investors remember 2022?

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.

What is the consumer spending on?

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.

Why isn’t the market agreeing with the Federal Reserve?

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.

Is inflation finally slowing?

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.

Is the labor market as strong as investors fear?

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.

Have international equity markets already priced in the worst?

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.

Just how bad (or good) is economic growth?

The prevailing economic resiliency coincides with softening inflation, which gives the Federal Reserve an opportune window of slowing inflation but solid growth to tighten monetary policy to an appropriately restrictive stance and maintain that level for a period of time before growth starts to bite.

Are banks capitalized for another recession?

Numerous data suggests the US economy will enter a recession in the next 12 months; 46% of professional forecasters in the Philadelphia Fed Survey project a recession, the Conference Board recession probability model predicts a 96% likelihood of recession, and the U.S. Treasury yield curve is deeply inverted which has been a decent predictor of prior recessions.

Have global markets reached a turning point?

For many investors, the “pivot” promise from October’s CPI print elicited a sigh of relief. Given that stock prices are higher, bond yields are lower and the dollar has softened in the weeks after the inflation reading, it would appear that markets have reached a turning point.

How do the midterm elections impact the outlook for markets and the economy?

Markets often rally after elections, and the 2022 midterms were no exception with markets up 5.9% during election week. In the future, market prognosticators will point to this as another data point confirming the pattern of post-election rallies.

What is the outlook for long-term returns?

The start of this month saw the release of our 2023 Long-Term Capital Market Assumptions, where we forecast economic growth, inflation, and asset returns over a 10–15-year horizon. The current report stands in stark contrast to prior years, which were characterized by a relatively muted outlook for returns from both stocks and bonds.

What led inflation to slow in October?

There's still a question of whether the Fed will allow its policies to work their way through the economy, as there is still a risk that they knock the economy into a recession to combat an inflation problem that, based on this report, is receding on its own.

How can Millennials ride out the current market storm?

2022 has been a year of remarkable volatility across asset classes. Stocks, bonds and cryptocurrencies have been rocked by a confluence of challenges that could be described as a “perfect storm.”

Is a slower rate hike path on the horizon?

The committee’s tone remained hawkish and inflation-vigilant, but investors took initial relief at new statement language acknowledging the significant amount of tightening the Federal Reserve (Fed) has already delivered and the lags with which it will affect the economy and inflation.

How should I invest around the midterm elections?

The 2022 midterm elections are just days away and many investors are wondering how these elections may impact their portfolios. Although many investors fear the impact of politics on their portfolios, history shows election-related market volatility is typically short-lived and it is policy, not politics, that influences the economy and markets over time.

Is this a bear market rally?

Markets picked up steam recently, anticipating that the Federal Reserve (Fed) could follow a 75 bps rate hike in November with a smaller 50 bps rate increase in December. Markets have been rallying since mid-October, up 7% since the mid-month low. But is this just another bear market rally?

What are the investment implications of China’s Party Congress?

As usual, China has been going through its own economic, policy, and political cycle. While the rest of the global economy is slowing down and facing the possibility of recession ahead due to elevated inflation and rapid policy tightening, China’s economy began to slow down over a year ago and already went through a contraction in the second quarter.

When will earnings estimates begin to decline?

2022 has been a volatile year, and this volatility has been almost entirely driven by fluctuations in valuations; until recently, earnings estimates had been climbing or stable.

What to do with fixed income?

The hallmark of core bonds is their diversification benefits and lower volatility to risk assets, which make them an important ballast in portfolios. However, with bonds down double digits this year , investors are struggling with their fixed income allocations.

What should investors expect for 3Q22 earnings?

The third quarter earnings season is set to kick-off with the large U.S. banks releasing results. Our current estimate for 3Q22 S&P 500 operating earnings per share (EPS) is $53.82, representing year-over-year (y/y) growth of 3.5% and quarter-over-quarter (q/q) growth of 14.8%.

Does inflation impact younger and older investors differently?

In the aftermath of the COVID pandemic, global economies are reeling in the face of decades-high inflation, brought about first by unprecedented levels of fiscal stimulus and more recently by supply-chain snarls, which in turn are largely attributable to China’s continued COVID-zero policy and the ongoing war in Ukraine.

After robust job gains, is the labor market coming into balance?

The September Jobs report showed the economy continues to make progress in easing labor market tightness. The recent pace of job growth remains solid but has moderated, and wage growth continues to run at a more modest pace of 0.3% month-over-month.

Are falling job openings a sign of cooling labor markets?

For investors, while it may seem reasonable to assume a fall in job openings would precede an uptick in the unemployment rate, the still huge gap between labor demand and supply suggests that job openings can come down further without meaningfully pushing up the unemployment rate.

What just happened to Gilts and Sterling?

In recent weeks, a series of fiscal and monetary developments led volatility to spike in the United Kingdom’s government bond and currency markets. By our lights, the combination of these events amplified uncertainty about the UK’s institutional architecture and the Bank of England’s commitment to sustainable monetary and fiscal policy.

When can the Fed stop hiking interest rates?

During the September Federal Open Market Committee (FOMC) press conference, Chair Powell noted that the Committee would like to see positive real rates across the entire yield curve as one indication that they have reached an appropriate policy stance.

Are markets more in line with Fed rate expectations?

The Federal Open Market Committee (FOMC) voted unanimously to raise the Federal funds rate target range by 0.75% to 3.00%-3.25%. The tone of the committee remains hawkish given policymakers are “highly attentive” to taming inflation that runs well above its 2% target.

How does a softening housing market complicate the Federal Reserve’s quantitative tightening plan?

The housing market has had a difficult year. Mortgage rates have skyrocketed from 3.1% to over 6.0% and home prices are up 18% year-over-year. As a result, housing affordability has been crushed leading to a sizeable decline in single-family housing construction and mortgage origination activity.

What is the risk of a market correction?

We still believe headline inflation has peaked on a year-over-year basis, but more clarity on the trajectory of inflation will be key in order for interest rate volatility – and therefore capital market volatility broadly – to decline. The Fed looks set to continue raising interest rates in a fairly aggressive way through the end of 2022, and potentially into 2023 if inflation proves stickier than expected.

When will the U.S. dollar peak?

At first glance, a “strong U.S. dollar” may seem like a positive. There are advantages: overseas trips are cheaper for U.S. tourists and foreign goods are cheaper to import for U.S. companies and consumers (helping bring down elevated inflation). However, important disadvantages exist: U.S. exports are more expensive for foreigners and foreign earnings of U.S. companies are dragged lower.

What should I know about President Biden’s Student Loan Relief Plan?

President Biden’s announcement on a set of changes to student loan repayment has generated several questions from clients. The most common boil down to: How will student debt relief impact consumers? Will the deficit impact lead to a further rise in inflationary pressures? And, is it likely to be passed?

How healthy is the consumer?

Coming into 2022, investors expected that a healthy consumer – supported by significant fiscal stimulus during the pandemic – would power the economy at an above-trend pace. While this was indeed the case at the start of the year, a series of idiosyncratic factors pushed aggregate growth into negative territory.

Is it a bad idea to invest in EM equities during a Fed rate hike cycle?

In the short-term, rate hikes may pressure EM equities, but not as much as investors may think due to: lower vulnerability to capital outflows, high interest rate differentials limiting outflows, and a greater dependence on China’s cycle versus the Fed.

What will a buyback tax mean for dividends?

The tax on buybacks will be particularly relevant for equity investors given the role share repurchases played in enhancing profit growth during the post-GFC cycle. The big question is whether or not this buyback tax will lead companies to reduce share repurchases and increase dividend payments going forward.

How will the Inflation Reduction Act impact the economy?

This week, the Inflation Reduction Act (IRA), a legislative package that includes climate spending, prescription drug pricing reform, and tax reform, was signed into law. The IRA represents a meaningful commitment to climate goals and should reduce the deficit over the next decade but is unlikely to reduce inflation and will weigh on 2023 profits.

Will global central banks’ fight against inflation lead to a global recession?

The broad takeaway is that economic conditions are softening globally, and aggressive central bank tightening is contributing to it. The global economy could avoid a recession if a stronger recovery emanates from China in the second half of 2022, and a soft landing is achieved in regions like the U.S. and Europe, however, that outcome looks increasingly challenging.

How should I think about investing in alternatives?

There are three roles that alternative investments can play in a diversified portfolio – they can provide income, diversification, or enhance returns. Importantly, these are not mutually exclusive; some alternatives – like core real assets – can provide a combination of both income and diversification.

Has the Fed shifted more or less hawkish?

For investors, further tightening is ahead; however, a data-dependent committee suggests an increase in the federal funds rate to above 3.5% in this cycle is now less likely.

Is the 60/40 dead?

Since emerging from the Financial Crisis, a 60/40 portfolio of U.S. stocks and bonds has earned a whopping 11.5% average annual return. However, 2022 has been a particularly challenging year for the 60/40, which declined 16.1% in the first half of the year.

Is there a role for private real estate in my portfolio?

What has not come into question is whether investors will need alternative sources of income and diversification. As such, it seems increasingly likely that private real estate will be part of the broader investment conversation in the years to come.

Are we already in a recession?

Looking ahead, we recognize that recession risk has risen. That said, it seems premature to make a call that we are already in recession today.

Does investing in European equities still make sense?

The tragic war in Ukraine has led to an indiscriminate sell-off in European equities. While headlines weigh on sentiment, the 1Q earnings season was strong for Europe.

What are the investment opportunities in sustainable construction?

Many of the innovations and technologies needed for a carbon neutral economy are not yet available, but there are still many existing solutions that can be implemented today to reduce emissions, particularly in how we manage energy efficiency in buildings and appliances.

Will the Fed tip the economy into recession?

For investors, the Fed has laid out a hawkish path for rate increases with the intent to front load rate hikes. With such aggressive tightening this year, recession risks have risen further in 2023.

What should I know about quantitative tightening?

Even as QT commences, long-term rates are likely to trade range bound between 3.00%-3.5% and be little impacted by balance sheet reduction at first. That said, as bank reserves decline to levels that may restrict bank activity, markets will likely signal the Fed may need to change course.

Are you worried about an earnings recession?

While rising interest rates and a more hawkish Federal Reserve (Fed) help to explain what has gone on with valuations, it was not as clear why earnings estimates continued to move higher. Interestingly, however, companies have begun guiding earnings expectations lower in recent weeks, as it appears too difficult to continue ignoring rising costs and economic growth that is decelerating back toward trend.

Should I time the bottom in today’s market?

Long-term investors are facing a number of challenges today. Multi-decade-high inflation is eroding purchasing power and portfolio values, and recent volatility across capital markets has made the investment landscape look perilous.

Are bonds attractive?

The spike in yields through the first five months of this year has led to some very ugly returns in fixed income.

Are we in or headed towards a recession?

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.

What are the investment opportunities in renewable energy?

Progress on mitigating climate change hinges on cleaner energy as 73% of global greenhouse gas emissions come from energy usage in industry, buildings, and transport.

How do investors navigate market volatility?

The war in Ukraine is causing surging commodity prices, COVID lockdowns in China are exacerbating strained supply chains, and 40-year-high inflation has prompted the Fed to aggressively tighten monetary policy. Together these dynamics are also creating uncertainty about future growth.

When will China’s economy and markets find their footing?

The Year of the Tiger was expected to be a year of stabilization for China’s economy and of recovery for its equity market, following last year’s tough Year of the Ox. However, instead of positive surprises, investors have continued to grapple with uncertainties, both new and old.

Tax planning? Or a plan for taxes?

At the end of the day, active tax management is a way to take advantage of volatility. Volatility is a hallmark of the capital markets, but it also tends to derail investors and undermine their ability to reach their long-term retirement goals.

How aggressive will the Federal Reserve (Fed) tighten monetary policy?

At its May meeting, the Federal Open Market Committee (FOMC) voted to raise the Federal funds target rate range by 0.50% to 0.75%-1.00% and signaled similar 50 basis point rate increases would be on the table for the next couple of meetings.

Does China’s “COVID zero” approach threaten global supply chains?

Since the onset of the pandemic, global supply chains have been stressed, weighing on economic growth and lifting consumer core goods inflation. Supply chain issues had seemed to peak in December, with some encouraging improvement in the first two months of 2022.

How do geopolitics highlight the need for more sustainable innovation?

Although climate change is a key consideration in sustainable investing, sustainable investing is more broadly about finding companies that are durable in the long run and identifying risks that traditional company analysis may not capture.

What’s going on with the housing market?

U.S. home prices have experienced incredible appreciation over the last decade, with particular strength in the years since the COVID-19 pandemic outbreak.

What are the investment opportunities in recycling and re-use?

The first thing most of us learned as children about protecting the environment was reduce, reuse, recycle. Those enduring principles are particularly relevant for companies looking to reduce their environmental footprint and their costs.

What should investors expect for 1Q22 earnings?

With financials kicking off the first quarter earnings season this week, our current estimate for 1Q22 S&P 500 operating earnings per share (EPS) is $51.01 ($42.80 ex-financials), representing year-over-year growth of 7.6%.

Why is there so much demand for labor?

The March employment report showed that the U.S. economy continues to recover in the aftermath of the COVID pandemic, with the labor force exhibiting signs of multi-generational tightness.

Has the sell-off created an opportunity in growth stocks?

2022 has seen a volatile start, with many of the growth names that performed well in the initial stages of the pandemic – as well as over the prior cycle – under pressure.

Should investors hedge the currency when investing in international equities?

Over the last 15 years, international equities have underperformed U.S. equities by a cumulative 270%. Currency played a role in this underperformance, subtracting 25%, as foreign currencies steadily weakened against the U.S. dollar.

Just how hot is the labor market?

One of the most critical levers to reduce carbon emissions globally is transportation. Transportation accounts for 16% of global greenhouse gas emissions, with nearly three-quarters coming from passenger travel and road freight.

What are the opportunities in sustainable transportation?

One of the most critical levers to reduce carbon emissions globally is transportation. Transportation accounts for 16% of global greenhouse gas emissions, with nearly three-quarters coming from passenger travel and road freight.

Is market timing worth it during periods of intense volatility?

2022 will likely remain volatile for equity markets, as central banks normalize alongside persistently hot-inflation and geopolitical issues result in prolonged uncertainty.

What’s been driving the equity market rebound?

Last week marked the best week for U.S. equities since November 2020, with the S&P 500 erasing almost half of its year-to-date losses. The S&P 500 is now only down 6.4% versus its max drawdown of 13% in 2022.

How might markets perform as the Federal Reserve hikes interest rates?

For the first time since December 2018, the Federal Open Market Committee (FOMC) voted to raise the Federal funds target rate range by a ¼ percent to 0.25%-0.50% at its March meeting and made clear further increases would be appropriate to tame inflation.

Does the case for investing in EM equities still hold?

Emerging market (EM) equities are underperforming for a second year, down -16.4% year-to-date after last year’s -2.2%.

What are the impacts of rising energy prices?

Before Russia’s invasion of Ukraine and its impact on commodity markets, we thought inflation might finally see its peak in February.

How should investors position for a yield curve inversion?

An inverted yield curve driven by short rates rising more than long-term yields has preceded every US recession since 1960 and is therefore a closely watched metric among investors regarding the outlook for the economy and markets.

Has the outlook for monetary and fiscal policy changed?

While geopolitical tensions have reached a boiling point overseas, American investors have recently faced a set of potentially market-moving events at home: President Biden’s first State of the Union address and Federal Reserve Chair Powell’s testimony in front of Congress on monetary policy.

How should I think about geopolitics and volatility?

Despite the horrible human and social impact, the conflict in Eastern Europe is currently noise for the market. Time will tell how things evolve, but the key risk is that higher commodity prices – and energy prices in particular – fail to be transitory.

Should I worry about Russia/Ukraine tensions impacting markets?

Geopolitical tensions involving Russia and Ukraine have been a source of market volatility, especially since February 11th when President Biden warned there was a “very distinct possibility” of a coming Russian invasion of Ukraine.

Will the Federal Reserve hike rates by 50 basis points in March?

Since the start of the year, markets have meaningfully repriced expectations for rate hikes from the Federal Reserve (the Fed) this year; projections have risen from 2-3 25 basis point (0.25%) increases to 6-7 currently.

Where are the opportunities in sustainable food and water?

The coexistence of food waste and world hunger reflects a classic market failure. About 17% of food goes to waste globally, and yet an estimated 690 million people (8.9% of the world population) are undernourished.

How would international equities perform during a U.S. boom-bust recession?

In both a U.S. led boom-bust recession and global synchronous growth, international equities could outperform, suggesting a key role for the asset class in portfolio construction.

Do investors really chase performance?

Time and time again, investors get caught up in the good times and buy an asset when its price is inflated, only to turn around and sell it once optimism has receded and the price has fallen.

Why do advisors need to re-think retirement income?

Retirement income can be a challenge for many advisors, and advice given to clients has often relied on rules of thumb based on assumptions of how households spend post-retirement.

What does the Social Cost of Carbon mean for investors?

Regulatory action on carbon emissions is likely to intensify over the coming years, and companies that are actively addressing these risks could have a competitive advantage in the future.

What to expect in China from the Year of the Tiger?

2021 was a year of steady reform introduction by Chinese authorities, focused on the long-term goals of improving the quality of growth and on addressing non-economic priorities like inequality, leverage, and decarbonization.

What kind of equities should I own if inflation is rising?

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.

When will U.S. debt become unsustainable?

With U.S. federal debt at 100.1% of GDP, the highest since World War II and rising, investors wonder what the breaking point could be.

What does the latest oil price collapse mean for investors?

It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.

Monetary medicine of limited effectiveness

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.

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LATEST COMMENTARY

Are bonds a good investment?

What does the rental market mean for inflation this year?

Can alternative investments deliver in 2023?

Will the U.S. run out of funding after reaching the debt ceiling?

What do you expect from 4Q earnings?

What to do with fixed income in 2023?

What are the investment implications of China’s reopening?

Will diversification make a comeback in 2023?

How will investors remember 2022?

What is the consumer spending on?

Why isn’t the market agreeing with the Federal Reserve?

Is inflation finally slowing?

Is the labor market as strong as investors fear?

Have international equity markets already priced in the worst?

Just how bad (or good) is economic growth?

Are banks capitalized for another recession?

Have global markets reached a turning point?

How do the midterm elections impact the outlook for markets and the economy?

What is the outlook for long-term returns?

What led inflation to slow in October?

How can Millennials ride out the current market storm?

Is a slower rate hike path on the horizon?

How should I invest around the midterm elections?

Is this a bear market rally?

What are the investment implications of China’s Party Congress?

When will earnings estimates begin to decline?

What to do with fixed income?

What should investors expect for 3Q22 earnings?

Does inflation impact younger and older investors differently?

After robust job gains, is the labor market coming into balance?

Are falling job openings a sign of cooling labor markets?

What just happened to Gilts and Sterling?

When can the Fed stop hiking interest rates?

Are markets more in line with Fed rate expectations?

How does a softening housing market complicate the Federal Reserve’s quantitative tightening plan?

What is the risk of a market correction?

When will the U.S. dollar peak?

What should I know about President Biden’s Student Loan Relief Plan?

How healthy is the consumer?

Is it a bad idea to invest in EM equities during a Fed rate hike cycle?

What will a buyback tax mean for dividends?

How will the Inflation Reduction Act impact the economy?

Will global central banks’ fight against inflation lead to a global recession?

How should I think about investing in alternatives?

Has the Fed shifted more or less hawkish?

Is the 60/40 dead?

Is there a role for private real estate in my portfolio?

Are we already in a recession?

Does investing in European equities still make sense?

What are the investment opportunities in sustainable construction?

Will the Fed tip the economy into recession?

What should I know about quantitative tightening?

Are you worried about an earnings recession?

Should I time the bottom in today’s market?

Are bonds attractive?

Are we in or headed towards a recession?

What are the investment opportunities in renewable energy?

How do investors navigate market volatility?

When will China’s economy and markets find their footing?

Tax planning? Or a plan for taxes?

How aggressive will the Federal Reserve (Fed) tighten monetary policy?

Does China’s “COVID zero” approach threaten global supply chains?

How do geopolitics highlight the need for more sustainable innovation?

What’s going on with the housing market?

What are the investment opportunities in recycling and re-use?

What should investors expect for 1Q22 earnings?

Why is there so much demand for labor?

Has the sell-off created an opportunity in growth stocks?

Should investors hedge the currency when investing in international equities?

Just how hot is the labor market?

What are the opportunities in sustainable transportation?

Is market timing worth it during periods of intense volatility?

What’s been driving the equity market rebound?

How might markets perform as the Federal Reserve hikes interest rates?

Does the case for investing in EM equities still hold?

What are the impacts of rising energy prices?

How should investors position for a yield curve inversion?

Has the outlook for monetary and fiscal policy changed?