SUMMARY
For many investors, a volatile mix of news and contradictory economic data has led to investment paralysis. We believe the doomsaying can be easily exaggerated.
- It is not easy being an investor these days. There are large investment balances sitting on the sidelines, even as bearish bets on equities have hit an all-time high. Facts and data are often ignored when large, disparate trends converge.
- Private employment in March showed the smallest monthly gain since recovery from the Covid shock. We think we will see the end of post-pandemic employment growth in late 2023 and early 2024. Ultimately, we expect two million job losses from late 2023 to 2024 – hardly a catastrophic result given the US Federal Reserve’s huge tightening campaign, but still a material departure from today’s economic outlook.
- The Fed appears more inclined to raise rates than to lower them, with markets expecting a final 25-basis-point rate hike as roughly a 65% chance early next month. This is despite the risk that additional Fed action could exacerbate fears of financial instability once again.
- The bond markets seem to understand that the Fed is likely to err. Recent broad rate decreases across markets presage a deceleration in the economy as well as lower inflation. The equity markets have looked at lower rates beneficially. They are significantly ignoring the effects of a recession on earnings, in our view.
- Over the past 12 months, we have focused our asset allocation strategy to seek to earn as much yield as possible from quality bonds and dividend-paying equities. The Fed-led surge in interest rates and post-2022 pricing in equity markets has offered potential opportunities to improve portfolio quality and generate better returns.
- History shows equity markets rise and fall about six months ahead of corporate profits and we expect equity gains commencing in 2024. With this in mind, the outperformance of defensive investments won’t provide a sharp rebound in the coming year.
- We continue to believe that markets will punish vulnerable borrowers and cyclical investments as the impact of the Fed’s tightening cycle fully comes to fruition. Once fully priced, these same “undesirable” sectors may likely be the overweights in portfolios tomorrow.
