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Q1 2024 Market Update Webinar: US Growth Outlook, the Fed and Spending Shape Q1 Portfolio Strategies

Q1 2024 Market Update Webinar: US Growth Outlook, the Fed and Spending Shape Q1 Portfolio Strategies

March 06, 2024

The Highlights:

  • The U.S. Consumer will be the last domino to fall before any recession

  • The Fed is in restrictive territory - the question of how much they may cut rates is less important than the fact that they will begin to cut a healthy amount over the next 18 months

  • Investors should not be concerned about a big equity market drop because the Fed “put” is back and there is over $2 trillion in cash on the sidelines thanks to attractive money market yields and cautious sentiment, which will come back into the stock market if we have a sell-off

Please watch the replay of our February 15th webinar below.

Easier financial conditions, rising home prices, rebounding consumer sentiment, and a stabilization in manufacturing activity all augur well for near-term US growth prospects. Nobody is talking about recessions anymore, but that is usually when they happen. The flu starts when you’re feeling good and it’s normal for a recession, like the flu, to come when the economy looks fine.

A key reason why a recession is still highly probable over the next two years is that the personal savings rate remains abnormally low, and one can argue that the U.S. economy has been temporarily boosted by having the government run a larger budget deficit, including the effects of the CHIPS Act, an infrastructure bill, and the Inflation Reduction Act. But that artificial boost should soon come to an end, and when it does job growth should slow sharply.

An abundance of pandemic savings allowed households to consume a larger-than-normal share of their incomes during the past two years. However, those savings have largely disappeared, especially for households at the bottom end of the income distribution who have the highest marginal propensity to spend.

Softening labor demand will raise precautionary savings while rising consumer loan delinquency rates will cause credit growth to decelerate. With labor participation back to pre-pandemic levels and wage growth moderating, income growth will slow over the remainder of the year. This will further curb spending.

Despite these potential negatives for the economy, there are reasons to be bullish for 2024. The last Fed rate hike was July of 2023, and at the end of December 2022, the aggregate bond yield was 4.7%. Today, the aggregate bond yield is at the same level but we are no longer looking at rate hikes (quite the opposite)! Therefore, the interest rate trajectory is positive for markets and investors no longer have to worry about the old mantra of “don’t fight the Fed.” Additionally, there remains a great deal of investor cash on the sidelines with a “buy the dip” mentality, which would mitigate any market sell-off. Lastly, similar to the PC revolution that accelerated the growth and productivity of companies in the 80’s and 90’s, we are still likely in the early stages of the Artificial Intelligence adoption curve.

Updates to Portfolios in Q1 Include:

  • We are neutral weight equity overall while reducing exposure to developed international equity

  • We are adding to technology exposure to capture AI macro trends

  • We are overweight fixed income, and reducing short-term government bond exposure as we prepare for rates to decline

We will continue to carefully monitor market developments and welcome the opportunity to speak with clients in more detail about portfolio strategies.