Transmit security stock price1/17/2024 ![]() ![]() ![]() Source: Federal Reserve, NBER, Bloomberg Finance L.P. This chart shows S&P 500 performance during Fed cutting cycles since 1965. S&P 500 performance during Fed cutting cycles since 1965, percentage Looking at soft landings even more broadly, the S&P 500 typically rallies by roughly 15% on average in the 12 months after the first cut (going back to 1965). The last time the Fed lowered interest rates pre-emptively (in 2019), the S&P 500 rallied about 30% and investment grade bonds returned nearly 9% that year. Markets are moving quickly, but there still may be more room to rally. One thing seems clear: The chase is on to add stocks and bonds in exchange for the record level of assets in money market funds. Nimble, experienced active managers could take advantage. Contained credit stress: Avoiding a recession means that credit stress should be more limited to areas such as commercial real estate and select pockets of corporate debt.If the data continues to turn out even better than we expect, valuations could have some more room to expand, and earnings could even grow a bit above the trend-like pace we expect in our base case. Stocks will likely march to new highs: A soft landing – marked by moderate inflation, solid growth and easier policy – spells for a sweet spot for stocks.The opportunity cost against cash looks even greater after this week’s central bank meetings, especially if we end up seeing more cuts than we expect. Bonds are more competitive: This also means that now looks like the time to consider locking in still-elevated bond yields.The cash conundrum: With the Fed (and other central banks) now on the verge of cutting (and potentially sooner rather than later), once-juicy yields on cash stand to fall – and fast.Inflation will likely settle: Price pressures are abating, and the Fed’s own forecasts show a durable path toward its 2% inflation target.As markets recalibrate, we think this environment offers attractive investment choices to consider today: This week confirms the constructive view we laid out in our recently released Outlook 2024, After the Rate Reset: Investing Reconfigured, with the path forward potentially even better than we expected. Markets are moving quickly, but we don’t think you’ve “missed it” That’s still well above the roughly 3.8% that markets are calling for, but it’s a big decline that implies the Fed thinks it will cut rates three times next year. After holding rates steady this week (as expected), policymakers said they’re penciling in more rate cuts than anticipated – 75 basis points in total next year, down to a policy rate of 4.6% (versus 5.1% the last time the Fed updated its projections). This backdrop teed up the Fed to message a pivot in its final policy meeting of 2023. That strong pace stands to fade, but the recession many of us fretted over never happened. Today, inflation across the developed world has since more than halved, all while growth has remained resilient. Following that came bank stress, the debt ceiling and government shutdown drama and geopolitical turmoil. Amid what felt like a tremendous amount of uncertainty, a record number of CEOs said they expected a U.S. This time last year, Chairman Jerome Powell said the Federal Reserve would “stay the course” with rate hikes “until the job done.” While inflation was slowing, it was still elevated, and the labor market was way out of balance. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Aggregate Index, and Commodities by Bloomberg Commodity Index. High Yield Corporate Index, USD Cash by Bloomberg U.S. Note: Equities represented by S&P 500 Index, World Equities by MSCI World Index, 60/40 Portfolio by 60% MSCI World and 40% Global Aggregate Bond Index (both in USD terms), U.S. For Commodities, the 2022 return was 16.1% and the 2023 YTD return is -10.2%.Bonds, the 2022 return was -16.2% and the 2023 YTD return is 3.1%. Bonds, the 2022 return was -13.0% and the 2023 YTD return is 4.2%. For USD Cash, the 2022 return was 1.5% and the 2023 YTD return is 4.9%.High Yield, the 2022 return was -11.2% and the 2023 YTD return is 10.9%. For World Equities, the 2022 return was -17.7% and the 2023 YTD return is 21.6%.Equities, the 2022 return was -18.1% and the 2023 YTD return is 24.5%. This chart shows returns in 20 year-to-date (YTD), across asset classes. Then and now: Markets flex strength in 2023 – a reversal of 2022’s pain
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