SUMMARY
The US economy is seeing different sectors contract at different times. In this rolling recession, we stress fully invested portfolios and seek potential opportunities globally.
- We see evidence that the resilience in markets parallels the actual resilience of the economy in the face of Fed tightening. The resilience in markets also reflects numerous meaningful differences between bearish expectations and not-so-bearish realities. And the arrival of a game-changing shift in technology that promises increased productivity and profitability catalyzed investors. All of these factors have contributed to a shift in investor sentiment that should propel markets into 2024.
- The “simple rules of thumb” for how the economy will perform are inadequate to understand the current environment. We do not see a V-shaped collapse in everything, everywhere, all at once. Rather, we see a rolling recession of below-trend growth globally that ends some time in 2024.
- A significant source of recent market optimism comes from a major drop in inflation. Not only have headline US consumer prices slowed to 3% from a peak of 9% a year ago, but the most troubling components of core inflation are moderating in a similar way.
- Aside from the AI-infused indices, most of the remainder of world equity markets are not expensive. Mid-cap growth shares are “cheap for no reason” at 14.5X. Similarly, many shares in emerging markets will have stronger long-term returns starting at 11X EPS. Equities accrue the gains of both technological advancement and global economic development, generating higher returns in the process.
- Real yield opportunities could reach 4% above inflation over the next five years. Therefore, buying bonds in lieu of cash is advisable.
- If you’re wondering now if you should invest after the “rally is over,” you have missed the point of this Bulletin. Markets are looking to the beginning of the next cycle. There is more to come in 2024, 2025 and beyond with many geographies, themes and sectors that have significant positive return potential.
