What’s New

Following a torrid rally to end the year, major US indices continued to melt higher in January with the Nasdaq, Dow Jones Industrial Average, and S&P 500 all making gains.

The incremental strength in equity markets was set against a backdrop of a resilient, growing US economy. To that end, the first report from the Commerce Department unveiled fourth quarter GDP which showed that the US economy grew at a robust – albeit decelerating – pace of 3.3% year-over-year. For context, economists were predicting 2%. Under the surface, the US consumer remained strong, with personal consumption growing 2.8%. This highlights that spending growth accelerated through the end of the year. US labor markets remain supportive of the consumer for now, and continue to do well, though we continue to see potential signs of weakness under the surface.

The relative strength of the economy likely contributed to the move we observed in sovereign yields, with bond prices moving lower on the month as yields on the 10-year Treasury finished the month slightly higher than where it started the year at 3.97%. Markets also repriced the odds of the Federal Reserve cutting interest rates, with the bond market now pricing the first cut in May versus March to start the month and taking out a full cut for the year (now pricing five cuts instead of six).

On that note, January ended with the Federal Reserve’s first policy meeting of the year where Fed Chair Jerome Powell indicated that until there is more confidence that inflation is on track towards the 2% target, the Fed won’t lower rates. As of now, a March rate cut seems unlikely. Rates are currently between 5.25% and 5.5%, making it the highest level in more than two decades. The battle of inflation goes on.

Moving into the new year, we continue to remain concerned about the balance between risk and reward in equity markets. We find it unlikely that we end up in such a goldilocks scenario whereby the Fed can aggressively cut rates against a backdrop of a strong economy and weak inflation. As such, we continue to be cautious in our positioning while selectively seeking out investment opportunities.

Overall, in many ways, this environment of rising yields and equity markets griding higher was like much of what we saw last year. As was the case then, performance under the surface was divergent. A select few industries, including insurance, software and services, telecommunication services, and semiconductors led the way, while most other industries delivered negative returns.

Our Perspective

This neatly captures the situation facing investors. While markets may continue to grind higher in the face of several risks we see, returns are likely to be harder to come by.

Afterall, we continue to see downside risks to the economy and valuations look unattractive. In such an environment, it is as important as ever to rely on our time-tested investment strategies and pricing discipline to take advantage of opportunities we see, while simultaneously seeking to mitigate risk in our portfolios.

2024 Outlook: Growing (with the) Pains

After a surprising and eventful 2023, eyes remain on the Fed and its ability to achieve a soft landing in the year ahead, equity market valuations and earnings growth potential, and fixed income’s potential to remain competitive to stocks – all amidst a slowing global economy and rising geopolitical tensions.

Given this environment, we believe that risk management takes priority. By promoting safety today when risks are elevated, we can preserve capital to deploy into more attractive opportunities when conditions are more supportive. Those risk-taking conditions will eventually emerge again, and you can be sure we will be there to capitalize when the moment is right.

This year promises to be no less eventful than 2023. Odds are good that there will be more noise than ever for investors to sort through amidst a presidential election at home and, unfortunately, rising geopolitical risks abroad. Our team of investment professionals is focused on seeking out the signal amongst this noise, on the lookout for not only risks, but opportunities as well.

Our View

Economic Cycle		The economy is in a late cycle. The Fed has hiked aggressively and while the economy has remained resilient to date, the manufacturing industry is showing serious pain, and we anticipate that the lagged effect of monetary policy will start to be felt in other parts of the economy in the coming quarters.
Stock Market		Sentiment around the stock market now appears stretched and valuations are not compelling. To date, market returns have been driven by multiple expansions. Stock selection will be increasingly important.
Bond Market		Interest rates are at a 22-year high, as the economy has remained resilient, and the market is weighing the dynamics of still-elevated core inflation and the potential for interest rates to remain higher for longer. Corporate spreads remain well contained, particularly considering the risks we see to the economy.
Important Issues on the Radar		Inflation: While significantly lower than the 2022-high, factors including a resilient demand environment and wage increases threaten to keep core inflation elevated. Should this be the case, the Fed may remain tighter for longer.
		China’s Economy: China has pivoted on the two key economic issues that acted as severe headwinds to growth over the last two years; however, economic growth appears to be stagnating and it will be critical to monitor the policy response in the coming months.

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Source: Wall Street Journal.

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