Quarterly Investment Outlook - Q1 2024

Investors are now confident that the rate hike cycle across Europe and the US is over. Having said that, there’s a fair amount of certainty as to when US rate cuts will begin and how far they will extend. While the Fed, which first entered the rate hike cycle, has ostensibly turned more dovish, the ECB and the Bank of England have maintained a hawkish stance and profess higher uncertainty over the course of inflation. The Fed is now projecting three rate cuts in 2024, but the bond market is pricing in six cuts for each of the three major central banks.

The bond market performed its sharpest rebound in over three decades in the last weeks of 2024. The equity market followed suite, with major indices (S&P 500, Dow Jones, Dax, FTSE 100 trading at, or fairly near their all-time highs.

The equity rally was very narrowly led, by technology and communications, and US assets. This is leaving a valuation gap with the rest of the market. Non-tech assets are trading significantly below other stocks, as are European and UK stocks vs US equities.

In terms of fixed income, credit spreads narrowed significantly over the last weeks of the year. Yield curves, however, and despite the markets pricing in rate cuts, remain inverted. Average yields are now below their all-time highs, but remain attractive.

Gold has enjoyed a very good run, mostly as a result of central bank buying.

At the time of writing (3/1/2024), equities and stocks maintained their year-end momentum. However, momentum and valuation indicators are somewhat stretched. Markets pricing in double the rate cuts from the most optimistic central bank projection creates more downside than upside, on a medium-term basis. Thus, while we feel that rate will indeed begin to be reduced in 2024, we feel that investor positioning as to how, when and by how much this will happen might be on the optimistic side. As Quantitative Tightening continues, we feel we don’t have a basis for a sustainable equity rally.

The key risk, apart from the markets being disappointed, is inflation and growth volatility, which could translate into more conservative decisions by central bankers. Another key risk is that too much tightening may cause, or may already have caused, some parts of the market to become unstable.

Despite the extremely positive momentum, we would exercise caution going forward, for the next few months at least, until markets begin to price rate cuts more correctly and until the US Federal Reserve provides us with an indication as to when they might stop Quantitative Tightening.

George Lagarias – Chief Economist

Santiago Rossi – Senior Economist

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