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SageView's Perspective: Navigating the Economic Landscape in 2024

SageView's Perspective: Navigating the Economic Landscape in 2024

February 09, 2024

Key Takeaways:

 

As 2024 begins, investors are optimistic about the direction we’re headed economically. Inflation is staying low and it continues to appear that the Federal Reserve (Fed) might cut interest rates soon. While the S&P 500 Index saw a modest increase of 1.6% in January following its remarkable 26% gain in 2023, strong Q4 GDP numbers and a positive jobs report suggest the US economy is on track for steady growth without too much inflation.

With this in mind, we at SageView wanted to share what we expect for the global economy and capital markets this year. As stewards over your investments, it’s our job to spot long-term opportunities while managing around potential risks.

Economic Landscape:

Right now, we're cautiously optimistic about the US economy (with an emphasis on caution). We are wary because coming into the year, economists were predicting headwinds to growth in the US and globally. Factors like tight monetary policy, rising debt costs, and a slowing job market were expected to dampen growth. 

Jobs Market & Consumer Analysis:

January's jobs report was a pleasant surprise, showing a big jump of 353,000 new jobs in the US, way higher than the +185,000 that were expected. Corporate profits are also doing better than anticipated halfway through the earnings season. But let’s not get carried away:

  • Some companies boosted profits in Q4 by cutting jobs and costs, not by driving revenue growth.
  • There were 82,000 new layoffs in January, mostly in technology and finance, adding to the 721,000 in 2023.
  • Even though the job numbers looked good, a lot of them were part-time. The US Census Bureau’s household jobs survey showed 2 million full-time job losses in December and another 1 million in January. Even after seasonal adjustments, these numbers were -1.5 million and -62,000, respectively.
  • Strong Q4 profits followed significant downward revisions in earnings estimates before the reporting season began.
  • Companies are playing it safe with their growth forecasts for 2024.


Figure 1

Source: FRED https://fred.stlouisfed.org/


It’s important to see the whole picture here. While things aren't dire, we’re noticing some worrying signs, like more layoffs and people shifting to part-time work (or full-time workers taking on side jobs to make ends meet). A recent report indicated a lot of people, especially younger households and those on lower incomes, struggling with their debts, which could spell trouble down the line. The report (the Federal Reserve Bank of New York's Center for Microeconomic Data’s Q4 2023 Household Debt and Credit Report) showed 8.5% of credit card balances and 7.7% of auto loan balances transitioned into delinquency status in late 2023.

 

Figure 2

https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2023Q4


Equity and Fixed Income Opportunities:

We’re advising a cautious approach to investing in today’s market, but there’s still room for growth.

The biggest stocks in the S&P 500 (aka the "Magnificent 7") have crushed everyone else recently, especially those expected to cash in on artificial intelligence (AI) adoption. These companies are looking frothy now from a valuation perspective, but there are plenty of lesser-known stocks out there with reasonable prices and potential for growth. Smaller companies could benefit disproportionately from falling interest rates since they rely more heavily on bank financing. Foreign stock prices also look attractive (which is unsurprising given current economic woes in Europe), and these could rally if the dollar weakens as the Fed cuts rates.

We’re bullish on AI’s potential to boost productivity in the long run, but for now, the hype might be getting ahead of reality.

In the bond market, yields are dropping as investments gear up for rate cuts in 2024. According to futures markets, investors expect short-term rates to drop 1.25% by year-end. Bonds (and particularly longer-term bonds) should do well in this environment. If you’re a conservative investor who relies on cash or money market interest payments, now might be a good time to lock in current market rates.


Figure 3

https://alpinemacro.com/mr/January29_2024/Strategy_for_a_Well_Recognized_Perfect_Landing.pdf


Closing thoughts:

Heading into 2024, we’re sticking to our tried-and-true investment strategy, maintaining a proper, diversified asset allocation and looking out for opportunities. We are maintaining a pulse on the markets and are ready to make appropriate adjustments for our clients as conditions change. Please don’t hesitate to reach out to your advisor if you have any questions on the positioning of your investment portfolio.