Risk assets surged to end 2023 as the Federal Reserve blessed market hopes for rate cuts. That momentum could persist for some time as inflation cools.
We think 2023 stressed the value of adapting to a new volatile macro regime and leveraging investment insight and structural forces to find opportunities.
The prevailing narrative about the U.S. economy is that it’s ‘resilient’: despite rapid rate hikes, economic growth has held up and may even be accelerating.
U.S. corporate earnings have stagnated for a year, but Q2 beat a low bar. Expectations of improving margins look rosy. We stay selective in equities.
Central banks are set to hike policy rates this week. Markets expect rate cuts to soon follow due to cooling inflation, whereas we see central banks holding tight.
Higher expected corporate earnings mask broad pressure under the surface. We see more earnings pain ahead and look for opportunities at the sector level.
We see different and abundant opportunities in the new macro regime. We go granular within asset classes, regions, and sectors – and harness mega forces.
Sticky inflation looks to compel developed markets (DM) central banks to crank policy rates higher – and keep policy tight for longer. The Federal Reserve paused last week but pointed to more hikes on the way.
We see the market’s focus returning to higher-for-longer rates and sticky inflation after a U.S. debt ceiling deal. We prefer an up-in-quality portfolio.
Inflation has proven sticky, even as growth weakens. Markets are realizing that policy rates are set to stay higher for longer. We like quality in stocks and bonds.
We think the U.S. debt limit showdown will spark renewed volatility in markets. That risk reinforces why we stay invested and cautious by going up in quality.
The ECB and the Fed both need to quickly normalize policy from the emergency settings adopted when the pandemic first hit.
The Fed last week signaled a large and rapid increase in its policy rate over the next two years and struck a surprisingly hawkish tone, indicating it’s ready to go beyond normalizing to try to tame inflation.
Strategic rivalry between the U.S. and China is creating a bipolar world.
Markets are pricing in a liftoff from near-zero policy rates as early as next year, even though the Fed through its new framework has committed to stay behind the curve on inflation. We caution against extrapolating too much from strong near-term activity data amid a powerful restart. We see a high bar for the Fed to change its policy stance and believe this may be underappreciated by markets.
A powerful economic restart is underway in the U.S. – with Europe and emerging markets (EMs) set to follow.
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