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The US Federal Reserve will begin its easing cycle this month, capping a remarkable period of restrictive monetary policy that has not been experienced since the early 1980s. The tighter policy stance has helped cool inflation and moderate economic activity. Now, the Fed hopes to ease off the policy brake in a way that preserves continued disinflationary progress towards its long-term 2% inflation target while also supporting their second mandate of "maximum employment". In this note, we highlight the uniqueness of this monetary policy cycle, how financial markets are anticipating significantly more policy easing than seen in recent easing cycles, and the financial market implications.
A series of weak US data in July questioned the market narrative of a soft landing and brought back fears of recession. The rise in the July unemployment rate to 4.3% (latest reading in August is 4.2%) triggered a significant market concern about a possible weaker-than-expected US labor market, raising the risk of an impending recession. We do expect a significant slowdown of the US economy, but not a recession. We expect a significant deceleration in the next few quarters, consistent with a broader weakening of many labor market indicators.
Passive strategies have generally have fared well over the past decade, which has made it easy to forget the long periods during which active managers outpaced passive approaches. The reasons we believe market concentration will decline include (1) a shrinking earnings advantage for the top ten companies, and (2) seemingly unsustainably high valuations. We believe investors may benefit from investing with active managers that thoughtfully select their exposure based on the earnings and valuation profile of each stock.
We anticipate fundamental market shifts in 2024 resulting from global dynamics and geopolitical events, and continue our agile emphasis on value, quality and growth across asset classes.
Look beyond near horizons to pockets of resilience and change in a transitioning economy.
Rate cuts in 2024 may be the catalyst for reducing portfolio risk by moving allocations to longer-term, higher-quality bonds.
Consider shifting equity holdings away from concentration risk by infusing quality across cyclicals, defensives and industries primed for the next-stage economy.
Market volatility is an expected undercurrent in 2024, and alternatives to traditional assets may offset the potential downside.
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