Why did we see? I don't know.
Is the chip that you're expected that kind of reaction?
He sure got it. Did the markets overreact?
Well, I think you always have to put it into context.
So for just about the past seven weeks, the markets have been starting to price
in much better inflation data. Just remember, at the end of the third
quarter in September, bond markets were getting very nervous.
Yields were climbing close to 5%. And there was some concern that the Fed
was still going to be increasing interest rates.
But I think with the slowing that you've seen in the economy and the slowing that
you've seen in the employment data and the good progress on inflation, the Fed
was really able to bring the message home to the markets this year.
It may indeed be a bit ahead of what the Fed had wanted.
You saw John Williams today from the New York Fed saying, everyone, just a
moment, hold your horses. But we do think that the progress we've
made on inflation is real and we do see the economy slowing.
But looking into next year because it's time now to start thing about next year,
Have they steered that difficult course between recession on the one hand and
continued inflation on the other? Have they managed that, do you think?
We think so. At Voya.
We have a number of inflation probability indicators and models that
we like to look at, and we're forecasting less than a 30% chance of a
recession in 2024. In fact, if the data continues on this
road that it's on, we think it's probably even likely that you wouldn't
see a recession much before 2025. So what does that say to the investor
going into 2024? I mean, what is different now than it
was six months ago, for example? Well, let's put some things in context,
David. Over the past two years, the S&P 500 has
made very little headway. While stocks are up almost 20% this
year. They were down almost 20% last year.
So since December of 2021, you've basically been flat on the equity
market, which is very unusual. We do see earnings able to climb about
10% over the course of 2024. And if bond yields continue to to fall
modestly, you know, she can get rates down to about three and a half percent.
You might be able to get a little bit of multiple expansion.
That should give you 10 to 12% in equities over the course of 2024.
I would say it will not be smooth and there will be bumps along the way.
But there's reasons to be optimistic. But that's the case for equities.
If I'm trying to say that 6040 split between equities and bonds going into
2024, which do you think you tilt more toward the bonds because bonds are
looking more attractive than they did certainly in recent years.
Over the very short term, I would say this over the past seven weeks, the most
people have really started to pile into the equity market.
Most of our sentiment indicators that we look at in terms of short term
temperature of the markets are looking quite extended at this point.
You're susceptible to any type of garden variety pullback at this point, just
like we had in the summer. There is a 10% peak to trough decline.
But I would say that the reason that bonds have real yields at this point is
about 1.7% on a real ten year treasury. That is great news to asset allocators
and investors alike. It means that you're getting a return on
bonds in excess of inflation is the first time I can tell you we've had
positive real yields sustainably since the global financial crisis.
So it's a great time for investors to be looking at the actual value and the
material value that's in the fixed income markets right now.
Looks like we have a rising tide which is lifting most of the boats.
I think it's fair to say as you look into 2024, where do you think some boats
might get more of a lift in, some less? Well, it's interesting, David.
So when you think about the Federal Reserve cutting interest rates, you
immediately go to some really heavy cyclical parts of the market that should
do very well. The US small caps have been on a tear
since the Federal Reserve started to say that they were going to be potentially
not raising interest rates and even nudging them down.
But there are some other parts of the market that should have been doing
better, but they're not. So something like the emerging markets,
you would expect them to do very well when the Fed is taking their boot off
the neck of the markets. They have lagged behind significantly,
in part because while they're leveraged to the global interest rate cycle, their
underlying fundamentals are not particularly strong at this time.
So I think you have to be careful when you're talking about the rising tides
lifting all the boats. We would definitely stay allocated more
towards the US than the rest of the world.
Europe is still in recession. I'm concerned that the yen may not rally
as much as everyone expects this year, and I think the emerging markets are
still in trouble. So for us, we're keeping our US home
country bias very much alive and well. We're 2024 within that US home country
bias. One of the biases we've all had is the
Fed. It seems like every single day all we
care about is the Fed. Is that going to continue to pay for?
Are we ever going to get past the point where all we care about is what the Fed
thinks it's doing or we think it's doing?
David That's a great question. And we all have have had the Fed on the
brain since really 2021. I think the real issue that we're going
to face in 2024 that's going to change the market's view is going to be the US
presidential election over the past couple of elections that we've had, say,
20, 20, 2016, 24, 2020 as well. It's kind of been this pattern that
follows the. Market tends to make some decent gains
into the beginning of the year, really the first half.
And then right around the June primaries, the market starts to say,
hmm, there's some things that could be uncertain about this election.
Could it be another Supreme Court decided election?
Is it too difficult to determine who the winner is going to be?
And the market tends to get a little bit nervous.
The equity market generally has a weak third quarter, and then right around
October, there starts to be enough information that the market starts to
sniff out who the winner is going to be. And then equities generally march higher
into the end of the year and we would see that is likely replaying this year.
That June timing could be tricky because everybody, even the Fed agrees we're
going to be slowing down the economy through the first half of the year.
You could have a slowing economy. I'm not necessarily going in the
negative, but a lot more modest is now. At the same time, you have that market
uncertainty in the middle of the year. What you're saying, I think, is it could
be tricky. It could be very it could be very choppy
for sure. So why we think that you're going to
make decent gains in 2024, in part because you're starting point is
relatively good. It could be a bumpy 2024 for sure.