SNAPSHOT2 min read

Market update – February 2024

Markets continue to anticipate a “soft landing” for the US economy.

05/02/2024
Market update feb 2024

Markets in wait-and-see mode

The rally that drove global stocks and bonds higher at the end of 2023 has lost some momentum this year. However, markets are holding onto earlier gains as they continue to anticipate a “Goldilocks” scenario of falling inflation, reasonable growth and lower interest rates. Recent data has been broadly supportive of this narrative. The latest inflation readings from the US and UK were slightly higher than expected, but they continue to suggest that inflation is moving in the right direction. Meanwhile, the US economy is estimated to have expanded at an annualised pace of 3.3% in the last quarter of 2023, once again defying forecasts of a sharper slowdown. Activity data from the UK and Europe has also been encouraging. However, this economic strength means that central banks will be wary of cutting interest rates prematurely and risking another rise in inflation. Schroders’ economists now expect the first Fed rate cut in June. 

Fed rate cuts have historically been good for US stocks and bonds

The US stock market suffered its steepest fall since September after Fed Chair Jerome Powell indicated that an interest rate cut in March was unlikely. Stocks have since rebounded, but the episode highlights the fact that the outlook for inflation and interest rates remains a key risk for markets this year. More reassuringly, historical data suggests that US stocks and bonds have tended to perform well once the Fed cuts rates. Schroders’ analysts have looked at 22 interest rate cutting cycles since 1928 and found that US stocks delivered an average return 11% ahead of inflation – and 9% ahead of cash - in the year after the first cut. Government bonds generated an average real return of 5%. You can read the research in more detail here.

Geopolitical risk continues to rise

The situation in the Middle East remains perilous and could escalate at any time. Like the previous crises of the 2020s, a broader conflict in the region could trigger supply chain disruption as well as significant energy shortages. Even if major conflict is avoided, continued tensions could lead to further rises in shipping costs and higher oil prices, jeopardising the progress that has been made in the battle against inflation. Investors are not currently pricing in a high probability of escalation, but we are mindful of the risks. In practical terms, this means understanding what different scenarios could mean for the economy and markets and how portfolios may need to be adjusted in response to developments.    

Positioning

We increased our equity exposure in the second half of 2023 and now have a broadly neutral stance on the asset class. This reflects our view that the outlook for monetary policy is becoming more supportive for growth and corporate profits. However, buoyant market sentiment and relatively rich valuations keep us somewhat cautious. We remain overweight fixed income but have focused our exposure on shorter-duration bonds with less interest rate risk. We continue to see the appeal of alternatives, which can provide valuable diversification benefits, especially in light of rising geopolitical risks. However, we have been trimming our exposure to take advantage of more attractive opportunities in equities and fixed income. High levels of inflation in the UK have made meeting inflation-plus return targets more challenging in the near term. Despite this, we remain confident in the ability to meet inflation-plus targets over the longer term.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

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This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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