Equity markets delivered stronger-than-expected performance last year, highlighted by the S&P 500’s double-digit returns. Between excitement around artificial intelligence and budding conviction that the Fed can achieve a soft landing, investors chose optimism over caution throughout 2023. The economy wasn’t the only surprising area last year. It takes an active approach to stock selection to find investments that are well positioned for the road ahead. Many of these indicators are giving warning signs typically observed at the end of an economic expansion. We prefer to focus on more forward-looking, or leading, signals that can provide a better sense of how the economic sands may be shifting beneath our feet. However, these indicators are notoriously poor signals of future activity that will not sound the alarm until it is too late. Our outlook may seem at odds with many of the most widely followed measures of economic activity including unemployment, GDP growth, and consumer spending – all of which suggest a relatively healthy backdrop. Our view is that a recession is the most likely outcome, and if nothing else, the economic backdrop remains a challenging one. However, we believe that the full gravity of the rate hike cycle on the broader economy has likely yet to be observed. With that dramatic drop, the Fed has signaled growing confidence in achieving victory in their battle against inflation while simultaneously avoiding a recession. What was once an astonishing 9.1% inflation rate in June 2022 has fallen to 3.1% as of December 2023. Thus far, inflation has been one of the few economic measures to fall in the face of the Fed’s aggressive rate hike campaign, which brought interest rates to a 22-year high with 11 consecutive increases. Lagging indicators suggest that all is well in the economy, however, more forward-looking factors present reasons for concern. Economy: Inflation may not be the only thing slowing Our team of investment professionals is focused on seeking out the signal amongst this noise, on the lookout for not only risks, but opportunities as well. Odds are good that there will be more noise than ever for investors to sort through amidst a presidential election at home and, unfortunately, rising geopolitical risks abroad. The coming year promises to be no less eventful than 2023. Those risk-taking conditions will eventually emerge again, and you can be sure we will be there to capitalize when the moment is right. By promoting safety today when risks are elevated, we can preserve capital to deploy into more attractive opportunities when conditions are more supportive. We believe that risk management should take priority in times like these. This sort of divergence between leading and lagging indicators frequently occurs near the end of economic expansions. Many leading measures of economic activity suggest that more difficult times are ahead. While headline measures of economic activity such as GDP and unemployment look okay, these are lagging factors that only tell us where we have been. Our outlook remains cautious as the impact of the Fed’s rate hike campaign continues to work its way through the economy, at the same time valuations and sentiment leave room for relatively little to go wrong. Positive stock and bond returns were certainly welcome on the heels of a difficult 2022 but we are skeptical of the market’s near complete embrace of the soft landing scenario. Stocks and bonds cheered slowing inflation and language from the Fed that suggested that the rate hike campaign is over and lower rates could be on the horizon. The dynamic trio of inflation, the Federal Reserve, and interest rates all factored in the equation. The prospect of a soft landing went from a low probability scenario in the minds of many investors at the start of 2023, to an assumed given by year-end. If they were to select an investment phrase of the year, it would almost certainly be “soft landing”. Soft landing: - a rare economic phenomenon of a central bank able to bring inflation under control via higher interest rates without creating a recession.ĭictionary publisher, Merriam Webster, recently announced that “authentic” was selected as the word of the year for 2023.
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