January – February 2024

Stephen Zielinski

U.S. Economic and Market Highlights

THE ECONOMY:

  • Real gross domestic product (GDP) growth rates and inflation rates in the fourth quarter 2023.
REGIONGDP 4Q- 2024ANNUAL INFLATION
USA3.3%3.1%
Eurozone0.1%2.8% est.
Asia4.7%3.5% est.
World economy3.1%3.9% est.
  • The world economy GDP projection for 2024 and 2025 is for an increase of 3.1% and 3.2%, respectively.
  • The most recent inflation reports show a continued decline, although higher than expected rates persist, leaving Central Banks on hold for the foreseeable future. World inflation in 2024 and 2025 is projected to be 2.8% and 2.2%, respectively.
  • This Goldilocks scenario characterized by weaker inflation and continued signs of economic growth is an indicator that a “soft landing” may be achievable which is a better outlook than was previously anticipated.  
  • The U.S. Dollar strengthened so far in 2024 against other major currencies as robust economic data led the Fed to push back likely interest rate reductions. In 2023, the USD depreciated slightly against other major currencies.
  • Consumer spending remains strong, fueled by legacy savings from the Covid slow-down and robust credit card spending.
  • In the U.S. job growth and payroll totals grew significantly in January more than forecasted at 353,000 jobs versus 185,000 jobs. Unemployment held steady at a historically low 3.7%.

FIXED INCOME:

  • The U.S. 10-year Treasury Bond yield experienced turbulence in 2023, starting at 3.88%, hitting a low of 3.29% in April, rising to nearly 5% in mid-October, and concluding the year at 3.87%. This volatility resulted in mostly negative returns in 2023, except for the last two months when yields declined, and the bond market rallied.
  • Key bond index returns were down slightly in January as interest rates crept upward above 4% for much of the month. The yield on the 10-Year Treasury Bond is currently 4.27%.
  • The Fed Central Bank Chair slowed expectations about the timing of potential interest rate cuts to after the first quarter 2024 because of robust economic data and sticky inflation numbers.
  • The inverted yield curve is approaching 2-years and usually indicates a higher probability of recessionary conditions to follow. As higher, short-term rates slow borrowing and push companies and consumers into a negative growth environment, the economy experiences increased lay-offs, defaults, and bankruptcies. Many analysts believe a recession may be avoided this time because of the early reaction by Central Banks to rising inflation, and a broader-based economy that is less affected by interest rate fluctuations.
  • Between 2001 and 2020, stocks and bonds exhibited almost no correlation and were, in fact, slightly negatively correlated, at -8%. This 20-year pattern gave a false impression that stocks and bonds exhibited no correlation to each other.
  • Investors often take for granted that stocks and bonds have a low correlation and therefore a built-in benefit of diversification. When one asset class goes down the other does not go down in value. The recent trend since the beginning of 2022 has been a dramatic increase in correlation between stocks and bonds.
  • The rolling 24-month correlation reached a 28-year high of 72% in September 2022, and correlation averaged 65% from January 2021 to March 2023. A high correlation results in stocks and bond returns moving in the same direction, which can reduce the benefits of diversification, when both asset classes are down at the same time.

U.S. EQUITIES

  • The major equity markets realized positive returns in 2023, with the MSCI All Country World Index reporting a robust 22.2% increase.
    • The S&P 500 large-cap index gained 26.3%, and the Russell 2000 small-cap index recorded a 16.9% increase. (See Market Tracker for January below.)
    • The “Magnificent Seven” tech giants, including NVIDIA, Facebook/Meta, Amazon, Microsoft, Google/Alphabet, Apple, and Tesla, collectively surged by 107% in 2023.
  • Investors are currently underweight in emerging market (EM) allocations, but there is potential for outperformance in 2024. Despite representing a significant portion of global land, population, and GDP growth, EM countries account for only 11.7% of global market capitalization.
    • Key factors for potential outperformance include a margin of safety in valuations, a likely weaker U.S. dollar (eventually), and unique stock-picking opportunities in India, Brazil, Southeast Asia, Greece, and Mexico. Brazil is highlighted as a promising cyclical opportunity due to its recent rate-cutting cycle.
    • The potential for a weakening U.S. dollar based on its current elevated value, is seen as an anticipated driver for EM equity performance, historically showing an inverse relationship. Factors contributing to potential U.S. dollar weakness include a positive signal from the Fed of their intention to lower interest rates, uncertainty in the election cycle, and diminishing confidence in key institutions.
    • EM Corporate profit growth is expected to rebound, led by China’s delayed reopening, India’s structural momentum, and monetary easing in Latin America. This growth outlook, combined with the eventual prospects of a weaker USD, could lead to healthier balance sheets and higher earnings revisions for EM equities. EM has historically been the best performing asset class one year following the last hike of a cycle.

This communication was prepared for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security/instrument or to participate in any trading strategy. Past performance is not indicative of future results. See below reference sources used in preparing the above information.