Over the past few decades, the investment landscape has been characterized by declining interest rates, low inflation, and globalization. However, this is now changing. Interest rates are at a 23-year high, inflation remains elevated, and globalization is facing headwinds. Additionally, geopolitical tensions have increased.
And despite the highest Federal Reserve policy rate in 23 years, the U.S. economy has shown remarkable resilience. With robust labor markets, strong consumer spending, and healthy corporate fundamentals, the economy’s adaptation to the new interest rate environment has been impressive.
Here are a few of the themes to highlight:
- A shift away from dominance by a narrow group of highly valued companies.
In today’s interconnected global market, there is a wealth of opportunities beyond the renowned “Magnificent Seven” tech stocks of the United States. Many dividend payers are currently trading at or near historically appealing valuations. Europe’s equity market presents a diverse array of companies that rival their American counterparts. Similarly, Japanese equities have surged this year, reaching levels not witnessed since the late 1980s.
- Continued strong performance in U.S. markets, but not as the sole source of superior returns.
The United States continues to play a crucial role in driving global economic growth, despite challenges faced by other major economies. According to the International Monetary Fund (IMF), the U.S. economy is projected to expand by 2.7% this year, more than twice the rate of Europe (0.8%). This growth is supported by robust consumer spending, a strong labor market, and investments in diversified supply chains.
The U.S.’s economic resilience is a testament to its underlying strength and its ability to weather challenges. Its continued growth serves as a beacon of hope for the global economy, providing support to other countries and helping to maintain global stability.
- Increased attractiveness of bonds as income returns improve.
Despite recent market turbulence, the bond market presents compelling opportunities for investors. As the economy continues its steady pace and investor demand remains robust, the Federal Reserve’s rate hikes have pushed yields higher and be opened opportunities within bonds.
We expect Treasury yields to likely remain steady in the near term due to a robust economy and elevated deficit, tempered by the Fed’s bias towards rate cuts. However, there are potential catalysts that could break rates out of this range. A sharp economic slowdown could prompt deeper rate cuts by the Fed, while a dramatic upswing in inflation could force a return to rate hikes. In light of these uncertainties, we have adopted a flexible investment approach that allows for selective investment decisions.
- The U.S. election could bring significant changes in political leadership and policy.
Market volatility is expected in the lead-up to Election Day, politics can bring out strong emotions and biases. Over the next few potentially nerve-wrecking months, it’s crucial to approach it strategically. Keep in mind that long-term investment returns have historically been unaffected by which party wins elections and market timing is a risky strategy.
As we navigate the current market environment, it is important to remain informed and focused on our long-term investment strategy. While we recognize that we may be entering a period of potential volatility, we are confident in our ability to weather these short-term storms.
We will continue to monitor market developments closely and make any necessary adjustments to your portfolio while staying true to our long-term strategy.
We will stay in touch and hope you have a wonderful summer.
