Strong labor supply gains should keep unemployment low
Strong growth in the U.S. labor supply, driven by increased labor force participation and a surge in immigration, has supported impressive job gains without higher inflation. With job openings still elevated, moderate economic growth should support steady job gains ahead. While this should put downwards pressure on the unemployment rate, the continued influx of migrants adding to labor supply could keep the unemployment rate within a narrow range of 3.5% to 4.0%.
Inflation should continue its slow descent to 2%
Stalling progress on disinflation in recent months has sparked concerns that inflation may be sticky above the Fed’s target. However, stable supply chains, moderating wage growth and substantial decreases in shelter and auto insurance prices should allow inflation to continue its slow descent to 2%.
Broadening profit leadership should highlight opportunities outside of the “Magnificent 7”
After a lackluster 2023, profits could experience healthy growth in 2024, although downbeat management commentary and falling inflation present downside risks to analyst expectations for double digit earnings growth. However, after the “Magnificent 7” drove the lion share of earnings growth last year, broadening profit leadership should present opportunities in other parts of the market.
The Federal Reserve is patiently preparing to ease policy
The Federal Reserve has made meaningful progress on taming inflation, although stronger data in recent months kept them on pause at their March meeting. The
committee still has a clear bias to cut rates, although they will need more evidence that inflation is sustainably moving toward their 2% target before acting.
In a slower moving global economy, some countries could outshine others
While the global economy struggled last year, 2024 could see better performance for places like Japan and some European countries while others, like China, may continue to weaken without meaningful policy action. That said, with U.S. consumer activity expected to slow, growth differentials between the U.S. and other economies could still narrow and allow global markets to surprise to the upside.
Bonds can provide income and diversification as rates stabilize
Bonds have struggled in the early stages of 2024 as resilient economic data reigned in market expectations for rate cuts. That said, with market and Fed expectations now aligned, interest rate volatility should fade. While resilient economic activity may keep rates from moving meaningfully lower, fixed income can still play its traditional role of providing income and diversification in portfolios.
Active management is key for investing at all-time highs
Resilient corporate profits and hopes for policy easing have pushed markets to new all-time highs this year. However, market performance remains concentrated as the largest stocks in the index have continued their dominant run. While valuations might look stretched, there are still plenty of attractive opportunities beneath the surface, and an active approach can help investors identify those companies with high quality earnings and attractive valuations.
Fundamentals are improving for select international markets
With the exception of China, strong returns from global equity markets since the beginning of 2023 have pushed valuations higher. Still, in both absolute terms and
relative to their own histories, international markets look attractively priced compared to the U.S. This, combined with improving earnings expectations and margins, presents an attractive opportunity for U.S. investors to diversify abroad.
Alternatives can meaningfully enhance portfolio outcomes
With equity valuations elevated and bond yields low relative to history, investors should consider alternative assets in the portfolio construction process. There are a wide range of assets in the alternatives landscape, each catering to the different investment objectives of alpha, income and diversification. As such, adding a sleeve of alternatives can meaningfully improve portfolio outcomes and help investors reach their strategic goals.
While liquidity is important in any portfolio, holding too much cash can be costly
Investors may feel tempted to lock in cash yields above 5% before they move lower. However, there is an opportunity cost to holding much cash. In fact, history shows that there has always been a better asset than cash to deploy capital after a peak in interest rates. Instead of sitting on the sidelines, investors should put long-term money to work in long-term opportunities.
