Fed Tightening Looks Done
What happened last week?
- The S&P 500 rose 5.85%
- The Dow Jones gained 5.07%
- The Nasdaq advanced 6.61%
The 10-year Treasury yield dropped a whopping 30 basis points to 4.52%. Markets celebrated that it looks as though the Fed’s tightening campaign has run its course.
This week investors will digest 3Q earnings reports from 55 of the S&P 500’s constituents. The results from the 408 companies that have already reported show that a three-quarters long profits recession has ended.
Markets recoveries don’t begin from a perfect economy. Our view has been that we’re operating in an environment where some economic sectors, such as manufacturing, have rolled into recession, are now stabilizing, and are likely to roll out before other sectors enter their own downturns.
While there is no way to be certain that this is THE turning point for financial markets, we believe fixed income offers compelling opportunities at this time and that equity conditions are looking increasingly sound for 2024–25.
3 Things to Know
Evolving Macro Environment Suggests Equity Broadening
The rolling recessions suffered in 2023 across many industries will not be repeated in 2024.
In fact, they will likely “roll out” in the year to come. That is just one reason we believe investors should consider adding to equity allocations.
Excluding the “Magnificent 7” US tech shares, the MSCI World Equity Market Total Return index is down 12% since end 2021.
At its recent low, the S&P 500 price lost 14% over the same period. Compared to the roughly 50% losses of the 2008/2009 Global Financial Crisis period and the unwinding of the great tech bubble from 2000–2002, the drop in equities since 2021 has not been catastrophic — but it has slowly eroded investor confidence.
More recently, from July 31 to October 27, US equities dropped 10%. But there has also been a far broader correction in world equities than the S&P 500 and Nasdaq 100 might suggest. Just 15% of stock markets globally are trading above their 200-day moving average.
For nearly three years, the GIC has maintained an overweight in cyber-security software firms given their critical role in protecting governments and firms from the dangers of cyber-crime and the misuse of AI. Equity performance has been strong, but earnings have delivered more than share prices, making valuations more attractive these days.
US Fixed Income Offers Compelling Returns
The gains for the bond market accelerated after Fed Chairman Powell appeared to set a fairly high bar for further interest rate hikes. He said that if there was a reversal of the easing in labor market conditions or if it appeared that the slowdown in inflation were stalling, it would call for additional policy tightening.
We believe fixed income offers compelling returns at this time with four-year duration US Investment grade corporate bonds yield near 6.25%.
We have a high level of confidence that core inflation measures will slow in the coming year. Lagging components of the CPI are only beginning to moderate.
If labor demand does slow markedly as we expect, the Fed will not want restrictive monetary policy to drive the economy into a full stall. This is why Fed forecasts and market estimates both embed rate cuts before 2024 ends.
Therefore, Citi believes current yields on high quality bonds provide a compelling potential opportunity to lock-in durable portfolio income for many years.
The Citi View: Don’t Time the Market
Historical data analysis has gotten much faster, but this does not explain why there are many striking values available to investors.
While we see undeniable valuation discrepancies and potential growth opportunities, others claim to be able to predict the “perfect moments” to enter and exit investments.
The history of equity market timing continues to show a bleak record.
Growth is normal. Since World War II, the US economy has expanded in 87% of all months. While volatile month to month, US equity returns have been positive in 78% of all years over the same period.
With fear of recession and fear or loss driving investors to the sidelines as we end 2023, we remind investors that betting against equity market progress has historically been unprofitable.
As mentioned, there is no way to be certain this is THE turning point for markets.
However, we are seeing data that suggests our view for the direction of markets in 2024–25 is sound.
See our weekly CIO Strategy Bulletin for more details