Investment outlook
2024 4Q outlook: The race against recession: Was the Fed too slow out of the gate?
Key takeaways
- Interest rates are falling, and economic growth is slowing, but that’s not a reason to move into a risk-off portfolio stance.
- Our portfolio construction themes argue for a continued focus on higher-quality equities, select credit risks in fixed income and capitalizing on real assets.
- With the U.S. elections in focus, investors should prepare for additional volatility and a variety of policy changes, but should also use the opportunity to move out of cash.
Explore the investment outlook by section
- Section 1: The race against recession
- Section 2: Portfolio construction themes
- Section 3: The economy and markets
- Section 4: Best ideas across asset classes
Section 1: The race against recession
Saira Malik, Chief Investment Officer
Perhaps the greatest innovation in track and field competition was the 1930s introduction of starting blocks, designed to ensure (literally) equal footing for all and prevent stumbles or false starts. Applied to the U.S. Federal Reserve in 2024, “starting block” takes on a different meaning — akin to writer’s block, except the blank page awaits policy decisions, not unpenned words.
Fortunately for the economy and investors, the Fed finally found inspiration to start lowering interest rates this year, given evidence that (1) core inflation had fallen to within striking distance of the central bank’s annualized 2% target, and (2) the economy, especially the labor market, had weakened enough to set off recession worries.
The Fed’s 50 basis points (bps) September cut certainly pleased financial markets, but we remain concerned that the Fed’s decision to turn the corner may be “too little, too late” to avert a recession. In this challenging environment, investors who need to adjust their portfolios but face their own version of “starting block” may discover their missing muse in the following themes.
Find a happy medium between the tortoise and the hare. It’s tempting to run a conservative race with an economic downturn looming. But being too “slow and steady” might pose a hurdle. On balance, we maintain a generally risk-on tone, with caveats. We think markets have priced in more policy easing than will actually materialize in the medium term. This view informs our fixed income preferences: a neutral duration stance overall, fixed- over floating-rate structures, higher-quality high yield bonds, and securitized assets. In equities, U.S. large caps offer a compelling mix of defense and offense. We also see opportunities in Japan. Investors comfortable taking on more risk can consider select emerging markets (EM) stocks over U.S. small caps. Other worthy diversifiers include alternatives, private markets and real assets.
The private credit run isn’t over yet. Private credit, a notable exception to our bias toward fixed-rate investments, is supported by strong investor demand, rising deal volumes and an expected increase in M&A activity. Additionally, falling interest rates could improve coverage ratios and make some transactions more compelling. Within private credit, our positioning leans defensive given recession prospects, but asset class fundamentals remain strong.
Another race to consider: U.S. elections. How will U.S. political outcomes affect financial markets and portfolio construction? Heightened market volatility leading up to (and beyond) the vote is likely, due to potential tax changes, debt ceiling debates, government shutdowns and any prospective U.S. role in global geopolitical conflicts. Prior election cycles show it’s wise to move out of cash and reallocate to fixed income and other asset classes. That’s not only a sound strategy as November nears, but also a step we’ve been advocating for the past several quarters.
The race against recession will require speed and strength, with the winner likely breaking the tape in a photo finish. Even if the Fed has indeed started too slow, the ensuing contraction may prove less severe and shorter than past declines. In the meantime, investors can take steps to help keep their portfolios on track. Runners, on your marks!
All market and economic data from Bloomberg, FactSet and Morningstar.
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All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
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