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CIO Strategy BulletinArticle11 Feb 2024

Faster, Broader and Higher

CIO Strategy Bulletin

While sectors tied to manufacturing and housing have surged, other traditionally high beta segments remain in the doldrums.

Key takeaways from this week's bulletin:

In our Wealth Outlook for 2024, we observed that in 2023 “rolling recessions” across portions of the US economy would “roll off” in 2024. The idea that the US economy was already enduring major recessionary conditions anticipated by the long-inverted yield was novel. Now we are faced with a second novel possibility: perhaps all the rate increases and restrictive monetary policy on the past 18 months won’t slow the economy in 2024 as much as we thought.

When we look at sector performance since late ‘23, we can see that investors have already begun to price in elements of a cyclical recovery. But like most of the post-pandemic period, this is not a typical cyclical rebound. While sectors tied to manufacturing and housing have surged, other traditionally high beta segments remain in the doldrums.

Markets are also beginning to see results from the higher growth/lower inflation combination. Large-cap US industrial sector shares have already risen 21% since October 27 and trade at 21x estimated EPS for 2024. US small and mid-cap industrials having risen just as rapidly over the same period. All this while shares in other regions, foremost China’s, lag.

These better-than-expected circumstances have already created a tension between the Fed and bond traders, where Chairman Powell see economic resilience as a reason to delay rate cuts. The futures markets price 6 rate cuts of 25 basis points over the next year.

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