Investors’ Outlook: Staying ahead, reaching beyond

Staying ahead, reaching beyond

We’re approaching the last stretch of the year, and markets are in early Christmas-rally mode, pricing in a pivot by the Fed following two important data points: Inflation is continuing its downward path after a brief spike, with all components heading in the right direction, and October payrolls showed that job growth has started to decelerate. Here, bad news is good news, because it means the economy is slowing down and the Fed is probably done hiking due to its dual mandate of pursuing both price stability and maximum employment.

Most of the hard work has been done to battle inflation. The last mile to get to 2 percent will be arduous—mission impossible in the short term. We understand the Fed’s hawkish tone, but we also remember that the Fed didn’t care that inflation was below that target for a decade, so we believe it doesn’t really care if it’s a bit above 2 percent either. The hawkish narrative needs to stay in place just to keep up appearances. It will be hard to get to 2 percent without a recession, though, so markets shouldn’t get carried away with the idea of a soft landing.

As the recession debate goes on, economist Paul Samuelson’s quip, “The stock market has predicted nine out of the last five recessions,” comes to mind. We stick to our recession view, as we believe that the longer interest rates stay high, the more likely something will break. And while we’re confronted with varying forecasts, it comes down to what one chooses to wear. We will be walking around with an umbrella handy.

We foresee a tricky environment, unlike what we’ve experienced in the past. We would expect to see risk-off sentiment as the typical reaction to going into a recession. But things are different this time around. The bulk of companies are healthy, with strong balance sheets and the lowest debt-servicing costs they’ve ever had at 20 percent of net profit; compare that to 80 percent before the global financial crisis. What’s concerning investors is government debt (which is why we see gold and crypto doing so well) and geopolitical fault lines, both of which are likely going to stay with us through the course of 2024.

We don’t think it’s the right time to make significant changes to our portfolio, though we did tap into our cash position to upgrade alternative funds for diversification purposes. In this Investors’ Outlook, you can pore over our outlook for 2024, read up on the US dollar, and find a Q&A with our experienced ESG analyst on the energy transition and what it means for investors.

This publication will return in early February. In the meantime, reflecting on the dynamics of the past year, we remain vigilant and proactive in navigating the ever-evolving economic landscape and are ready and excited to embrace the opportunities that the coming year holds.