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CIO Strategy BulletinArticle03 Mar 2024

Global Growth Gets Going

CIO Strategy Bulletin

Bullish markets are not known for patience. If markets behave as they typically do, there may be a pullback after a 22% gain for US equities in a little more than three months.

Key takeaways from this week's bulletin:

  • There is no reason for a post-pandemic economic recovery to follow an obvious path. Yet, there is a natural and understandable tendency to apply old norms to new circumstances. The Conference Board Leading Economic Index (LEI) is just one example. Based on their February data, their gauge of future economic activity had fallen for 23 consecutive months.
  • The US stock market is signaling something quite different. From January 1, 2023 to the present, the S&P 500 and Nasdaq are up 33.8% and 55.5%, respectively. In 2024 year to-date, they are up 7.7% and 8.4%, respectively. How is this possible? The short answer is earnings growth. We have raised S&P 500 EPS estimates, expecting a gain near 8% in 2024 (vs 5% previously) and +6% in 2025.
  • We have revised our real GDP estimate for the US in 2024 from +1.6% to +2.0%. For 2025, we reduced from +2.6% to +2.4%. Our global GDP estimate was also raised from 2.2% to 2.3% this year and cut from 2.8% to 2.7% in 2025. This indicates that growth has been pulled forward so much that our “Slow then Grow” thesis looks more like “Grow then Grow” now.
  • The January CPI seemed custom-made to interrupt bullish equity markets, but it did not. If there is a second hot inflation print, however, stocks could react poorly. And equity markets usually hate higher rates but have continued rising despite US Treasury yields being 40 basis points higher year-to-date.
  • Bullish markets are not known for patience. If markets behave as they typically do, there may be a pullback after a 22% gain for US equities in a little more than three months. However, a setback is unlikely to derail broadening economic growth.

Potential Portfolio Implications

  • Improving US and global growth has portfolio implications from interest rates to equity selection across regions. Investors have already begun to price in the cyclical recovery we see unfolding, but as with so much of this post-pandemic period, this is not a typical cyclical rebound. This asynchronous recovery has allowed us to identify health care technology and mid-cap growth shares as undiscounted opportunities.
  • Medium duration investment grade yields across various asset classes offer prospective real yields of 2%-4%, well above the average of the last 25 years.
  • High US mortgage rates are creating compelling yields for Investment Grade structured debt securities, near 6%.

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