Leading investment strategists’ insights on the markets:
Market Support: Yields to Drift Lower in 2024
Solita Marcelli, Chief Investment Officer Americas, UBS Global Wealth Management
The market’s fortunes reversed this week as Treasury yields fell sharply and the S&P rallied to its best week of the year. What drove this sudden reversal?
The bottom line is the market became less concerned that rates will stay higher for longer.
This shift in sentiment started when the Treasury’s refunding announcement came in lower than expected and alleviated some concerns around supply as an ongoing technical headwind.
The next domino to fall was the FOMC meeting and press conference. While the policy decision to keep rates unchanged was in line with expectations, markets found dovish tea leaves in the fact that Chair Powell acknowledged tighter financial conditions.
And finally, all eyes turned to today’s jobs data for confirmation that the economy was slowing in a healthy way. And it delivered just what investors were looking for.
Overall, these developments support our view that 1) the Fed tightening cycle is over, 2) the economy is headed towards a slowdown and softish landing, but not a recession, and 3) Treasury yields will trend lower towards 3.5% by the end of 2024.
The Resurgence of Canadian Defined Benefit Plans
Stephen Poloz, special adviser at Osler, Hoskin and Harcourt, and author of The Next Age of Uncertainty. He is a former Bank of Canada governor and sits on the boards of Enbridge Inc. and CGI Inc.
The volatility will only continue to rise as multiple tectonic forces rock the global economy. An aging global workforce will lead to slower trend economic growth and persistent worker shortages. The Fourth Industrial Revolution – the digitization of our economy, use of robotics, and artificial intelligence – will disrupt a wide range of occupations and further worsen income inequality.
The growing cohort being left behind by technology will continue to foster rising populist, nationalist or isolationist policies and a drift toward a multipolar world, opening the door to even more geopolitical shocks. Meanwhile, high and rising indebtedness will amplify and propagate the aftershocks of every new disturbance. We must also transition to net-zero carbon emissions, a complex and highly disruptive undertaking. Taken together, we face a highly unusual confluence of forces.
These tectonic forces are shifting market power from employers back to employees. We are seeing evidence of this already: Companies paying starting wages above the legal minimum, employer flexibility around working from home and rampant strike activity. In the end, inflation-adjusted employee compensation will rise, halting the long-term decline in the share of total income that has been going to workers. Behind the scenes, companies will digitize their operations, and deploy robotics and artificial intelligence, thereby boosting productivity to make this compensation realignment sustainable.
All of this paves the path for a rise in DB pension plans. An extra dollar dedicated to one is a far more effective means of assuaging rising life insecurity for employees than an extra dollar in income.
Some Fed Governors (Probably) Believe Market Expectation for Rate Cuts Premature
Janet Mui, Head of Market Analysis at RBC Brewin Dolphin
Fed Chair Powell said the recent surge in long-term US bond yields has done some of the Fed’s job for it. The financial conditions index (comprising things like bond yields, corporate spread, US dollar, equity market, etc) was at its tightest level in a year before the FOMC meeting.
The dilemma here is that tighter financial conditions allowed the Fed to do less. But with the notable drop in bond yields and a rebound in equity prices, financial conditions are easing again.
I won’t be surprised to hear more Fed speakers trying to push back against dovish market expectations (four cuts expected by markets in 2024 vs two cuts expected by FOMC) to limit the pre-mature easing in financial conditions.
“It’s a Really Good Time to Have a Diversified Portfolio”
David Bailin, CIO Citi Global Wealth
There is no way to be certain this is THE turning point for financial markets. However, we are seeing sufficient data that suggests our positive view for the direction of markets in 2024-25 is sound.
In summary, we believe:
● Inflation is coming down.
● Employment growth is slowing.
● Corporate profits are rebounding.
● Wage growth – even in services – is moderating.
● Expectations for global growth are very modest.
● Most equity valuations are more reasonable than many investors believe.
● High short-term interest rates and today’s intermediate bond yields are unlikely to be available later in 2024.
● It is a really good time to have a diversified portfolio.
On October 18th, Citi Wealth’s Global Investment Committee (GIC) raised the allocation to global equities from neutral to overweight. This is our first such move since early 2020. And we did this in the face of falling share prices.
We expect no synchronized economic collapse and no “V-shaped” rebound. The US economy is going through a series of “rolling recessions” as we head into 2024. But these will “roll out” in the coming year.