April 22, 2024 | 3 MIN READ

Weekly Market Update

Being Ready for the Unexpected

What happened last week?

Last week, the S&P 500 and Nasdaq shed -3.05% and -5.52%, respectively, while the Dow was flat.

The S&P 500 dipped 5% below its 52-week high for the first time this year with the Technology, Consumer Discretionary and Real Estate sectors declining the most, as investors became nervous about the path of inflation and what that could mean for monetary policy.

3 Things to Know

Don’t React but Ensure Portfolios Are Prepared

In the hours after Iran launched missiles and drones at Israel on April 13, pundits were quickly jumping to conclusions.

Some saw the moment as the tipping point for a far more destructive and wide regional conflict. Others were quick to dismiss it as a meaningless display of force. Collectively, traders acted on their hunches, guessing.

This was all repeated in the immediate aftermath of Israel’s retaliation on Friday. For most investors, reacting to such news is too late to be effective. Experience tells us it would more likely harm portfolios than help. Portfolios should be prepared for a less-than-ideal world as embodied in our Wealth Outlook 2024 theme “Economic Security.”

Security threats to supply, such as the conflict in the Middle East, are also a key risk to short-run price stability. We consider supply fundamentals critical to maintaining what has been a global pattern of decelerating inflation following the pandemic surge.

Commodity prices are getting much attention of late, but let’s recall that global crude oil quotes were $89 before the massive shift in global supply following the Russian invasion of Ukraine and oil prices are near that level even now after the shocking new events in the Middle East.

Economic security requires redundant energy supplies, defense deterrents, cyber-security defense and increased tech supply chain investments. These are all robust long-term growth investments in equities markets, despite their usual volatility.

Global supply shocks are very rare, but they still suggest we should invest with a range of possible positive and negative economic outcomes in mind rather than build portfolios that only seek the highest absolute return, regardless of risk.

As we’ve described in recent months, we would expect to hold a larger allocation to global equities than our present net 2% over the course of an economic expansion. This is particularly true if global interest rates are “tamed.”

But present risks, firm equity markets and rising rates leave us holding to a more conservative asset allocation for now.

The “Fed Question” Is Back

Will the Federal Reserve be able to tame inflation without collapsing the economy?

We continue to see a favorable rebalancing of global demand and supply amid exogenous risks. However, the path to realizing a happy mix of solid growth and weak inflation was priced-in unusually smoothly in markets during the past half year.

For example, up until the past two weeks, US equities had not posted a single decline of 2% or more since October 2023.

Let’s remember what followed the Fed’s tightening of 2022/2023 – disinflation, solid growth and stronger returns for both equities and bonds. Many issues, from geopolitical risks to a possible “Fed error,” might make the “echo” of 2022 less profoundly positive once it is past.

But “healthy doubt” and normal volatility should not derail investors from exposure to economic development and technological progress – the drivers of equity returns.

US equities have been the strongest-returning major asset class for the past century and have posted positive returns in 74% of all years since WWII. Yet this includes an average inter-year decline of 12%.

Nearly 40% of monthly returns for the S&P 500 have been negative. In short, higher return, higher risk assets usually don’t enjoy such a smooth ride without interruption. Over the past decade, the Fed’s forecast for its policy rate has been off the mark looking ahead 12 months by an average of 0.94 percentage points.

Their forecasts have been off as much as 3.7 percentage points for the year ahead. We noted this after markets have swung from an assumption of two rate cuts to seven and back already this year.

We would suggest great caution in assuming markets now suddenly have the right forecast for US monetary policy.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorraine Schmitt - North America Investment Strategy

See our weekly CIO Strategy Bulletin for more details