Weekly Market Update

On the inflation front, our data sources point to a 2% inflation rate later in 2024. US goods prices are near deflation levels as falling import prices for finished goods and materials are benefiting US industry.

In real estate, rear view mirror housing data and backwards calculation methodology for the US Shelter CPI suggest further downward surprises for these core inflation measures over the year ahead.

Investors worried that the US Federal Reserve will not lower rates should be mindful that it is unlikely the US can sustain its galloping January employment growth (+353,000, but -2.6 million prior to seasonal adjustment).

Similarly, for the “recessionaires,” there is also no reason to expect a sudden aggregate employment contraction that would cause the Fed to ease rapidly. Some cyclical shares are already priced (or even over-priced) for a stronger-than-expected macro environment.

Others face ongoing property-related risks in the US and China. We cannot count on a big bond rally bailing out the market’s most rate-sensitive sectors.

The eventual broadening in markets will be led by corporate earnings but will benefit more slowly from falling rates and a yield-curve normalization.

When we look at sector performance since late last year, we can see that investors have already begun to price in elements of a cyclical recovery. But like most of the post-pandemic period, this is not a typical cyclical rebound.

While sectors tied to manufacturing and housing have surged, other traditionally high beta segments remain in the doldrums.

There has historically been a close relationship between manufacturing sentiment and outperformance of Industrials versus defensive sectors like Consumer Staples. Performance over the past 12 months suggests, however, that Industrials are already priced for a fuller cyclical recovery.

Homebuilders, another highly cyclical group of stocks, have surged since mid-2022 despite a doubling in mortgage rates. Structural demand for housing, coupled with a shortage of supply and easing of cost pressures, have led to a de-coupling of the typical relationship between home builders and interest rates.

Again, we see a cyclical recovery already priced into shares.

Last year, the healthcare sector underperformed the broader market by 24%1 (+2% VS +26% for the S&P 500), impacted by a perfect storm of US drug pricing reform, COVID hangovers and disruption from the excitement related to GLP-1 weight loss drugs.

As we highlighted in our recent CIO Bulletin, we now view health care innovation to be on “sale.” The healthcare sector is highly diverse. Within the sector you will find defensive value in large cap pharma and highly speculative growth in small cap biotech.

Straddling these two extremes are medical devices and life sciences tools companies, who focus on the equipment and tools needed to operate a hospital or undergo a drug trial.