Markets and Economy
Above the Noise: Countdown to a rate cut
The economic data indicates that we can expect to see the first Federal Reserve rate cut soon. What I don’t expect to see soon is a recession.
July 25, 2024
OPTIMIZE YOUR PORTFOLIOS
Portfolio Playbook: Shifting to defensive
Our macro framework moves into a contraction regime, although we’re not seeing signs of imminent recession risk. We’re now favoring fixed income and US equities. Optimize your portfolios with our outlook and allocation guidance.
Latest market outlook
After several months of stability, economic data around the world is pointing to a softening in growth momentum, particularly in developed markets. US leading economic indicators have registered the largest monthly decline since the summer of 2022. In addition, lagging indicators such as retail sales have also seen large downward revisions and negative surprises relative to consensus expectations, confirming the softer growth impulse in the second quarter of 2024 relative to initial estimates. For our longer-term perspectives, read our 2024 Midyear Investment Outlook.
Where do we go from here?
We expect the lagged effects of monetary policy to be a drag in our leading economic indicators for a few quarters. After a year of steady improvements, our barometer of global risk appetite is signaling a significant downshift in market sentiment, likely reflecting a combination of softer global growth momentum and a peak in future growth expectations. As a result, our macro regime framework moves back into a contraction regime, last recorded in second quarter 2023, signaling an environment of below-trend and decelerating growth expectations across all major regions. In our opinion, this macro backdrop is consistent with an incoming deceleration. We don’t think it’s indicative of imminent recession risks, however, given broadly stable consumption, limited volatility in financial markets, and low and stable credit spreads. Nonetheless, the cyclical peak in market sentiment, coupled with a low-growth environment we believe warrants a more defensive portfolio positioning, in our view, relative to the pro-cyclical posture of the past year.
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Economic cycle
- Global growth remains below trend.
- Broad-based deceleration in US leading economic indicators.
- Stable consumption and tight credit spreads aren’t consistent with a recession.
Market sentiment
- Financial market risk sentiment has already discounted a cyclical rebound.
- Global risk appetite to peak and revert towards its long-term average.
Policy implications
- Inflation momentum appears to be easing again.
- Rate cuts still postponed until later this year or early 2025.
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Economic cycle
- Global economy climbs to above-trend rate and continues to improve.
Market sentiment
- Risk-on sentiment returns as investors look ahead to reinvigorated economy.
Policy implications
- Inflation returns to the Fed’s “comfort zone.”
- Fed eases policy amid strong growth environment.
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Economic cycle
- Lagged effects of policy tightening more severe than expected.
- Prolonged recession emerges.
Market sentiment
- Flight to quality as the economy deteriorates.
Policy implications
- Fed lowers rates rapidly and normalizes US Treasury yield curve.
Asset allocations to consider
A challenge for tactical investors is preparing for the expected and anticipating the unexpected. The tactical asset allocation (TAA) framework from the Invesco Solutions team is designed to enhance a long-term strategic asset allocation (SAA) by making portfolio tilts based on near-term market views.
In July, we’re favoring long-duration fixed income and high-quality US equities. The tactical, dynamic factor rotation shown below is also utilized in the Invesco Russell 1000® Dynamic Multifactor ETF (OMFL).
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About our allocations
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The Invesco Solutions team develops portfolios for client-oriented outcomes over multiple time horizons. Our tactical asset allocation (TAA), regime-based framework dynamically adjusts exposures to asset classes, regions, sectors, and factors, to create multi-asset portfolios designed for the prevailing macroeconomic environment. Strategic asset allocation (SAA) positioning is derived from our rigorous investment process, which consists of long-term capital market assumptions (CMAs), portfolio optimization, and risk management.
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About our allocations
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The Invesco Solutions team develops portfolios for client-oriented outcomes over multiple time horizons. Our tactical asset allocation (TAA), regime-based framework dynamically adjusts exposures to asset classes, regions, sectors, and factors, to create multi-asset portfolios designed for the prevailing macroeconomic environment. Strategic asset allocation (SAA) positioning is derived from our rigorous investment process, which consists of long-term capital market assumptions (CMAs), portfolio optimization, and risk management.
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About our allocations
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The Invesco Solutions team develops portfolios for client-oriented outcomes over multiple time horizons. Our tactical asset allocation (TAA), regime-based framework dynamically adjusts exposures to asset classes, regions, sectors, and factors, to create multi-asset portfolios designed for the prevailing macroeconomic environment. Strategic asset allocation (SAA) positioning is derived from our rigorous investment process, which consists of long-term capital market assumptions (CMAs), portfolio optimization, and risk management.
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How to approach alternatives
Allocations to alternatives like private credit, equity, real assets, listed real assets, commodities, digital assets, and hedge funds can help improve growth, potential income, and diversification.
If you're looking to incorporate alternatives into your portfolios, we suggest considering a 7% allocation, regardless of market or economic regime. Consider using 4% from your equity allocation and 3% from your fixed income allocation to allocate to alternatives. Learn about a unique opportunity in private markets from Invesco Real Estate. Additionally, learn more about our new spot bitcoin ETF, BTCO.
Additional resources
Explore further research and analysis from our market and investment experts.
Markets and Economy
What the narrow market means
Recent market gains have been heavily concentrated in a handful of top names. Here’s what that may mean for the strength of the market’s rebound.
July 25, 2024
Markets and Economy
What Biden’s historic election decision means for markets
Nominating a new Democratic presidential candidate this late in the race creates additional uncertainty in the markets.
July 23, 2024
Asset Manager of the Year for Portfolio Playbook
The 2023 MMI/Barron’s Industry Awards chose Invesco as Asset Manager of the Year - AUM of more than $100 billion. This category
honors a larger asset manager that exemplifies innovation in delivering better outcomes for investors and financial professionals.
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Learn more about the MMI/Barron’s Industry Awards. You are leaving for another site that is not affiliated with Invesco. This site is for informational purposes only. Invesco does not guarantee nor take any responsibility for the content.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Past performance does not guarantee future results. An investment cannot be made directly into an index.
All investing involves risk, including the risk of loss.
Some products are offered through affiliates of Invesco Distributors, Inc.
The opinions referenced above are those of the author as of July 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
Tightening is a monetary policy used by central banks to normalize balance sheets.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The Bloomberg US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.
Credit spread is the difference between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.
An investment in emerging market countries carries greater risks compared to more developed economies.
BTCO Risks
See the prospectus for more information.
The Fund is speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment in the Fund.
Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.
The Fund is not a mutual fund or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
Shares in the Fund are not FDIC insured, may lose value and have no bank guarantee.
This material must be accompanied or preceded by a prospectus. Please read the prospectus carefully before investing.
The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
Bitcoin has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value. The value of the Trust’s investments in bitcoin could decline rapidly, including to zero.
The further development and acceptance of the Bitcoin network, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development or acceptance of the network may adversely affect the price of bitcoin and therefore an investment in the Shares.
Currently, there is relatively limited use of bitcoin in the retail and commercial marketplace in comparison to relatively extensive use as a store of value, contributing to price volatility that could adversely affect an investment in the Shares.
Regulatory changes or actions may alter the nature of an investment in bitcoin or restrict the use of bitcoin or the operations of the Bitcoin network or venues on which bitcoin trades. For example, it may become difficult or illegal to acquire, hold, sell or use bitcoin in one or more countries, which could adversely impact the price of bitcoin.
The Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap value stocks. The Russell 1000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co. An investment cannot be made directly in an index.
The Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap growth stocks.
The S&P 500® Low Volatility Index consists of the 100 stocks from the S&P 500® Index with the lowest realized volatility over the past 12 months.
The Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap value stocks. The Russell 1000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co. An investment cannot be made directly in an index.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Russell 1000 Quality Factor Index is comprised of securities within the Russell 1000 Index and tracks the performance of the ‘quality factor’. The quality factor is a recognized factor return premia supported by academic research that shows high-quality companies tend to outperform low-quality companies over the long-term.
The Russell 1000 Size Factor Index is comprised of securities within the Russell 1000 Index and tracks the performance of the ‘size factor’. The size factor is a recognized factor return premia supported by academic research that shows smaller companies tend to outperform larger companies over the long-term.
The MSCI Emerging Markets TR Index captures large and mid-cap representation across 24 emerging markets (EM) countries. With 1,375 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
