January 2024 MPS Market Review

• The stunning comeback from global stock markets stalled in January as uncertainty about interest rate policy checked investor confidence.
• Bond markets also suffered from central bank efforts to roll back expectations of imminent rate cuts.
• Despite the uncertainty, January was still a reasonable month for global equity indices, though the aggregate performance did mask an increase in dispersion between regional actors.
• Once again it was the US stock market doing the heavy lifting as the loosely defined Technology sector, or Magnificent 7, continued to power ahead.
• Serving to offset these gains, at least partially, we saw UK performance fall away, whilst Emerging Markets (chiefly China) posted a deeply negative number.
• The apparent increase in investor uncertainty likely stems from the struggles in formulating an optimal path for growth and interest rate policy.
• In the first instance, US economic resilience reduces the need for more immediate action on interest rate cuts, frustrating those anchoring to a ‘Fed pivot’ narrative.
• It appears however, markets are starting to digest the frustrations of a more measured approach to interest rate policy.
• Of most obvious relief is the reduced probability of an imminent recession.
• Deeper analysis, however, suggests markets may also be encouraged by the reduced probability of resurgent inflation and interest rate hikes.
• With labour markets still in such good health, a swift series of interest rate cuts might enthuse consumption to such an extent that demand and inflationary pressures reemerge.
• In such a circumstance the central bank would be compelled to take interest rates yet higher, determined to deliver a more punishing recession, and more firmly see off the inflation menace.
• Short-term disappointment may be giving way to optimism, therefore, as the probability of a more durable recovery increases.
• Beyond these ‘grand visions’, we would also suggest nearer-term forces retain a positive leaning.
• Primarily, evidence of the disinflationary trends continues to mount, interest rate hikes look to be in the rear mirror and growth remains resilient.
• This ‘Goldilocks’ combination has historically been a favourable one for equities, and largely instructs our modest positive bias within the current investment strategy.
• It is important to stress, however, there are non-negligible risks to this view.
• Whilst there is good reason to believe healing supply chains, housing market weakness and cracks in the labour market can prolong the disinflationary trend, hopes growth can remain positive throughout 2024 may yet be a step too far.
• No doubt the market has been surprised by the resilience of the economy to prior interest rate hikes, but the ‘long and variable lags’ to policy changes should remain front of mind.
• Whilst certain mortgage deals may allow segments of the economy to avoid the full force of interest rate hikes, not every consumer will be in such a fortuitous position.
• What is more, many channels of financing, such as credit cards, overdrafts and corporate lending will be much more sensitive to interest rate changes and will continue to bite into the economy as we move through 2024.
• Geopolitical challenges which threaten shipping lanes is evidently a worrying development too. Such forces drive input costs higher leaving business with the choice of raising prices or cutting margins.
• Should these challenges expand then stock markets will be left to deal with a drop in earnings or a return of inflation; neither of which are generally received well by markets.
• Investors should brace themselves for a more volatile period ahead, as markets fret between extremes of soft-landing euphoria, inflation resurgence and recession.
• Yet, even in recession, we would argue all may not be lost for equity investors. Of most comfort would be the hope any such recession wouldn’t be as severe as more recent episodes.
• This more benign view hinges upon the apparent absence of major economic imbalances i.e. corporations and households don’t (in aggregate) appear to be facing quite such daunting refinancings challenges (except maybe UK mortgage holders) as in prior economic cycles.
• We should also remind ourselves that having moved off the zero bound, there are now some interest rates to cut! Such policy options might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm.
• Recognising how uncertain the outlook remains, however, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
• Relative to stocks for example, high quality corporate and government bonds might offer a more defensive return profile in the face of less encouraging growth outcomes, particularly given the increase in yields observed over recent months.
• Alternative asset classes also assist Invesco in its efforts to help diversify portfolios in a more troubling period for stock markets.
• Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

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