Economic Insights 2024: Navigating Uncertainty and Opportunities

speaker1

Welcome, everyone, to today's episode of Economic Insights 2024! I'm Jim Baird, Chief Investment Officer, and I'm joined by Trisha Newcomb, Senior Portfolio Strategist. We've got a lot to cover today, from Fed policy to market trends, and even the impact of the upcoming 2024 election. Let's dive right in! Trisha, let's start with something that's been a hot topic: the inverted yield curve. Did it give a false signal this time?

speaker2

Great question, Jim. You know, the inverted yield curve has historically been a strong indicator of an impending recession. However, this time around, things are a bit different. For one, about 80% of mortgages today are fixed-rate, which means that despite the high rates on new 30-year mortgages, the effective interest rate on all outstanding mortgages is closer to 3.8%. This has taken a lot longer to bite into consumer spending compared to previous cycles. On the business side, large-cap companies have been able to lock in lower rates, which has helped them weather the storm. So, while the yield curve inversion is still a concern, it might not be as predictive as it has been in the past.

speaker1

That's a great point, Trisha. The economy's response to higher rates has been less sensitive, which is why the Fed has had to keep rates restrictive for longer. But what about the labor market? We've seen some signs of normalization. What's your take on the current state of the labor market and its impact on consumer spending?

speaker2

The labor market is definitely showing signs of cooling down. The pace of job creation has slowed, and wage growth is gradually easing. While the unemployment rate is still relatively low, it's starting to creep up a bit. The depletion of savings that consumers built up during the pandemic and the slowdown in wage growth mean there's less fuel for consumer spending. However, consumer spending isn't poised to fall off a cliff. It's just that the initial burst of spending fueled by excess savings and strong wage growth is now in the rearview mirror.

speaker1

That makes sense. Now, let's shift to the broader economic growth and market outlook. We've seen some strong momentum in the markets this year. What's driving this, and what should investors be watching for in the coming quarters?

speaker2

Absolutely. The market rally we've seen this year has been driven by a combination of factors. The Fed's pivot towards a more dovish stance has been a key catalyst. Earnings growth has also been strong, with Q1 earnings coming in about 6% higher, which is the best reading in almost two years. Market breadth has also improved, with more sectors and stocks contributing positively. However, it's important to note that while the market momentum can extend, no asset class will outperform indefinitely. Diversification remains key to managing risk and achieving long-term goals.

speaker1

That's a great point, Trisha. Speaking of elections, the 2024 presidential race is heating up. How might the election outcomes impact the markets and the economy?

speaker2

The markets generally like certainty, and the election season can bring some volatility. However, historical data shows that regardless of the outcome, whether an incumbent is elected or a new party takes office, the market typically performs well during election years. The real impact will come from the policy changes that follow. For example, changes in fiscal policy, taxes, and regulatory environments can have significant implications for various sectors. It's also important to watch the congressional races, as they can affect the balance of power and the ability to pass legislation.

speaker1

Absolutely, the political landscape can have far-reaching effects. Now, let's talk about equities. We've seen some strong performance in certain sectors, particularly in tech and AI. What's your outlook for equities, and where do you see the best opportunities?

speaker2

The equities market has been robust, with large-cap stocks leading the way. The earnings recession seems to be in the rearview mirror, and earnings guidance, while a bit softer, is still in line with historical norms. However, it's important to remain diversified. While tech and AI have been hot, other sectors like utilities have also shown strong performance. We're also seeing opportunities in international equities, particularly in markets trading at a discount to the U.S. But it's crucial to manage geopolitical risks and select the right managers to navigate these markets.

speaker1

That's a great point. International markets can offer attractive valuations and diversification benefits. Now, let's move to the bond market. What's your outlook for fixed income, and how should investors approach this segment?

speaker2

The bond market has become more attractive, especially with yields in the 5-6% range. We're seeing opportunities in longer-term instruments, and extending duration can be a good strategy for locking in higher yields. However, it's important to balance this with the risk of short-term volatility. We prefer an up-in-quality bias, focusing on investment-grade bonds and core fixed income. For those with a higher risk tolerance, there are pockets of opportunity in private credit and direct lending, but manager selection is critical.

speaker1

That's sound advice. Let's talk about credit markets. What are the risks and opportunities in this space, and how should investors approach credit risk?

speaker2

Credit spreads are quite tight, near their lowest levels in about 15 years. This means that the risk-reward trade-off is skewed towards risk. High-yield bonds, in particular, are not as compelling as they were a few years ago. We prefer to maintain an up-in-quality bias and look for opportunities in areas like opportunistic fixed income, private credit, and direct lending. Manager selection is crucial in these spaces, as they require a deep understanding of the market and the ability to navigate illiquidity.

speaker1

Great insights, Trisha. Now, let's touch on real estate and alternative investments. What's your outlook for these asset classes, and what should investors be considering?

speaker2

Real estate is a nuanced asset class, and it's important to look at it on a regional and sectoral basis. The office sector is under pressure due to changing work dynamics, but multi-family and industrial properties are showing strong demand. For alternatives, suitability is key. These investments often require a long-term commitment and can be illiquid. They're not for every investor, but for those who can lock up capital, there are opportunities in areas like private equity, venture capital, and hedge funds. It's important to work with skilled managers and understand the risks and tax implications.

speaker1

That's a comprehensive overview. To wrap up, what words of wisdom would you share with our listeners to help them navigate the current economic landscape?

speaker2

I'd say it's important to maintain a long-term view and a well-defined strategy. Avoid making short-term, emotional decisions based on the latest market news. Stay diversified and focus on what you can control—your risk tolerance, asset allocation, and investment time horizon. Markets often climb the wall of worry, and what seems like a sure thing can turn out to be a false signal. Stay disciplined, and you'll be better positioned to achieve your financial goals.

speaker1

Excellent advice, Trisha. And to add to that, I'd say that not taking risks can be an extremely risky strategy. Most investors need to take some degree of risk to meet their long-term goals. The key is to take sensible risks and remain diversified. Thank you, Trisha, for joining us today, and thank you, everyone, for tuning in. We hope you found this episode insightful. Stay tuned for more updates and insights. Have a great day!