Real Wealth Concepts

Good, Bad and Ugly: What We’re Hearing

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First, the Good

David Bailin, Chief Investment Officer at Citi Global Wealth

As rates move higher, it has increased Treasury market volatility and reduced liquidity. Higher rates and a surging oil price have broken the upward momentum of equity markets. Equities had benefited from a difficult-to-maintain combination of rising EPS growth expectations, falling inflation and expected rate cuts priced into US Treasuries.

Equity corrections begin when short-term traders try and protect profits and the “momentum shifts” downwards. For bonds, we expect the gradual slowing in US employment to eventually limit the upward pressure on yields.

When a new equilibrium level of rates and petroleum costs is clearer, the cheaper valuations of both equities and may offer stronger returns in 2024. As we noted last week, distinct value opportunities are becoming evident in segments of US growth equities.

Next, the Bad

David Rosenberg, Rosenberg Research

What happened to all those calls this past spring and summer about the onset of a whole new bull market? That was always a case of missing the forest for the trees, and ignoring the weak market breadth, even during the rally phase. Now, the weak breadth is even more notable — but even when the market was rising sharply earlier this year, the fact that the banks, small-caps and equal-weighted S&P 500 were lagging so far behind, made it very difficult to believe this rally had legs. And as powerful as it was, and we saw similar reflex rallies in 2002 and 2008, without the traditional early-stage leaders blazing the trail, all bets were off on the veracity of this up-move. We said it then and we say it now.

Karen Ward, Chief Market Strategist EMEA at J.P. Morgan Asset Management

It’s always worth remembering that economics is a social science and that we are forecasting human beings. This is what makes forecasting turns in the cycle and judging the lags in monetary policy so very difficult. Households often don’t react incrementally and rationally to incoming adverse news as our economic models predict, but instead switch quickly and collectively from excess optimism to pessimism. I find myself these days recalling the 2006/07 cycle, when again the consumer was resilient for far longer than anyone expected. We all know how that cycle ended. While a lurch down of the magnitude seen in the financial crisis looks unlikely, I suspect the ‘injustice’ of the pandemic and consumers’ desire to make up for lost time has meant households have been resistant to act pre-emptively in the face of headwinds. But as savings are depleted, the labour market softens, interest rates bite, and fiscal largesse ends, there will be belt tightening ahead and much weaker US economic activity.

Finally, the Ugly

François Trahan, Trahan Macro Research

  • At its trough, the S&P 500 index will drop to around 2,800 points.
  • Consumer economies are sensitive to changes in interest rates. With 68% of its GDP coming from consumption, it is the American economy that responds the most to a change in interest rates.
  • We have everything to have a severe recession. I don’t know if there will be a financial crisis, but the risk is very high at a time when investors no longer believe in this. The story has only just begun. The worst is ahead of us.
  • If rates have peaked, the economy will be at its worst in the third quarter of 2025. For leading indices, like the stock market, this is 18 months after the peak of interest rates, so six months before the trough of a recession. If we assume that rates are currently at their highest level, the stock market bottom will therefore be reached in March 2025.
  • Opinions around me have changed a lot since last fall. If previously a majority of my clients believed in a recession, a majority of them now believe in a slowdown and believe that we are on the verge of emerging from it. They believe the story pushed by the Fed of a soft landing for the US economy. What’s coming will surprise a lot of people.
  • We are going to have other bear market rallies where people will think that the recovery has arrived. In a typical bear market, there are three.

Ray Dalio, Founder Bridgewater Associates

We’re going to have a debt crisis in this country. How fast it transpires, I think, is going to be a function of that supply-demand issue, so I’m watching that very closely.