2023 Fourth Quarter Economic & Market Outlook

Takeaway 1: Interest rates have significantly impacted the bond market, introducing a lot of volatility.

Brian Andrew began the discussion by bringing up the recent volatility in the bond market due to the Federal Reserve's shift in policy, resulting in a rise in interest rates from zero to over 5%. Ron Alberts explained the impact, revealing, "Ten-year Treasury yields are up about 70 basis points for the year and 45 basis points of that increase occurred in the month of September alone." Alberts attributed the rise in interest rates to the lack of fiscal discipline, with the deficit being higher than expected, as well as global risks and political dysfunction in the US.

Takeaway 2: Inflation continues to be a key factor influencing the market outlook.

The group addressed the issue of inflation, which has remained persistent and above the level preferred by the Federal Reserve. Jason Herried explained the impact of inflation on stocks can be offset over time by good management teams by raising prices and getting more efficient in running the business. And from an investment perspective, current valuations suggest returns of about 8% in stocks over the next 10 years on average, which compares to five or 6% for bonds, which makes bonds increasingly attractive considering the return comes with lower volatility. Alberts added that they are considering the scenario of stagflation in their investment committee meetings which would result in higher rates and corporate bond underperformance.

Takeaway 3: Diversification remains a crucial strategy in managing the uncertainty in the market.

Jon Henshue highlighted the importance of diversification in the current market environment filled with uncertainties. He stated, "Given a broad and diverse set of potential outcomes, the value of diversification becomes increasingly important." This sentiment was echoed by Herried who emphasized that they "try to stay diversified and not chase the latest shiny object." According to Henshue, the role of alternatives in the portfolio is to incorporate assets that have a differentiated return stream, which can help narrow the range of outcomes.

Takeaway 4: The rise in interest rates has introduced new considerations for asset allocation.

The rise in interest rates has brought about a new dynamic in the market where fixed income can produce returns of over 5%. Herried addressed the shift in clients' asset allocation to accommodate the changing interest rate environment. He stated, "It really comes back to, you know, you hear this term about financial planning and I think a lot of people just say, is that going to be am I going to run out of money? The way we look at planning is much deeper and it's tying portfolios to the goals we're trying to accomplish out of those portfolios."

Takeaway 5: Bonds are becoming more attractive in the current market environment.

In the context of the Federal Reserve cycle and the anticipation of rate cuts, Alberts suggested that bonds are becoming more attractive. He cited a study by Lord Abbett that examined the last seven Fed rate hike cycles and found that "following the last hike in those cycles, short term bonds have on average outperformed money markets by 2% and intermediate bonds outperformed money markets on average by 4%." Therefore, the panel concluded that bonds could be a promising investment in the current market landscape. View our recent commentary for more information on this topic.