Wealth Insights | Weekly Market Analysis | US | Asset Allocation | Economy
Weekly Market Analysis - More Growth = Less Easing
Posted on3 Things to Know
A US Recession is Nowhere in Sight
A strong employment report for September doesn’t erase a trend of slowing employment gains in the US. But it is consistent with solid output data, tracking above 3% for real GDP in the third quarter. Corporate earnings are rising broadly. A US recession simply isn’t in sight.
The Citi View: Fed Easing May Not Dip Below 3.5% in 2025
Quite similarly, the US CPI was slightly stronger than expected in September, but we still believe the Fed can dial back from restrictive monetary policy at a “measured pace.” We doubt the Fed will ease below a 3.5% policy rate next year.
How Will the Global Economy Fare in 2025? It Largely Depends on the US
As fears of a harder landing have been erased, US Treasury yields have rebounded to an average near 4%, in line with our estimates of long-term fair value. Macroeconomic easing steps will continue across the world in 2025, including in China. However, their extent depends in part on US polices as we described in our CIO Bulletin two weeks ago.
Summary
The strong performance of US markets – and our own tactical overweight for the US in both equities and bonds – is a risk we need to manage. As we discussed two weeks ago, how US fiscal and monetary policy evolve post the November 5th election creates two-sided risks for the US dollar, domestic, and international asset prices. Knowing what the Fed will eventually do doesn’t matter much for short-term market performance. Expectations for US monetary policy are highly erratic compared to the central bank’s actual rate cutting path. The important question across asset classes is how the economy will perform. Why the Fed is setting policy rates as it does is easily more important than the particular rate level. Certain months have deviated, but the US economy this year has seen inflation slow while output and profits accelerate. This unusual circumstance has helped the S&P 500 rise in excess of 20% for a second year.
Portfolio considerations
- US bond yields are slightly more appealing after jumping nearly 50 basis points across the yield curve since mid-September. The US dollar recovered slightly on signs that the Fed will not need to ease as aggressively as feared.
- Investors should remember that forecasts for Fed rate cuts have been highly erratic and of limited value. The extent of US rate cuts in 2025 is uncertain, but we believe markets have erased some of the risk of excessively strong easing expectations. More importantly for equity markets, there’s no sign of an overheating economy.
- Returns in the US equity market have been negative on average in the Octobers prior to US presidential elections over the past century. The last election year with a positive October return was 2004. This was followed by gains in all but the 2008 financial crisis. Investors shouldn’t allow near-term volatility to mislead them.
Source: Bloomberg, October 7, 2024. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
A US Recession is Nowhere in Sight
US inflation has slowed sharply as unemployment moved just gradually higher. Even with an upward surprise in September, headline US inflation has fallen to 2.4% over the past year. This is below the 2.5% pace we expected for year-end 2024 in our 2024 Wealth Outlook. Following a period of intense upheaval in the pandemic and initial recovery, productivity growth is picking up, allowing output to flourish as profits grow and labor demand slows.
A powerful round of hurricanes has hit the US late in the season, delivering pains for many Southeast residents in a world of multiple, man-made crises (please see last week’s CIO Bulletin for a discussion of the Middle East). In this case, the historic data are quite clear. Beyond the sad loss of life and property, natural disasters have had limited impact on macroeconomic performance. Only when productive capital is significantly impaired – as was the case in 2005 and 2017 when the costliest hurricanes (Katrina and Harvey respectively) wrecked much of Louisiana and Texas – could we discern lasting employment losses on a macro scale.
The Citi View: Fed Easing May Not Dip Below 3.5% in 2025
After a “big cycle” in 2020-2022, global markets have continued to feel aftershocks, arguably “mini cycles.” Arguments over where the Fed would stop tightening (some said at 6-7% for cash rates) are over. In August, some argued that an economic collapse had finally begun and the Fed would need to quickly act with “emergency” easing steps.
After hinting for much of the year that restrictive US monetary policy could someday relax a bit, Fed Chair Powell delivered a 50 basis point rate cut in September. The move sparked much debate within the Federal Open Market Committee, just as it did in markets. Action was a bit later than we suspected coming into 2024, but also a bit larger to “reward our patience.” The extent of the easing this year may be similar to our initial expectations or just a bit more aggressive (please see Wealth Outlook 2024).
How Will the Global Economy Fare in 2025? It Largely Depends on the US
As discussed two weeks ago, the power of the US President and policy differences of the two candidates are significant enough to generate different outcomes in markets favoring either domestic or international assets. Continued Fed easing and declines in the US dollar might be clearer if Harris continued the Biden administration’s policy course. A return of Trump to the White House with a “Red Sweep” of Congress would deliver tariffs and perhaps new domestic tax cuts, boosting the dollar and limiting the extent of Fed easing. In either case, however, markets may quickly adjust to these conclusions. China’s incredibly swift repricing of macro policies over just two weeks might be a good indication of how markets can swiftly adjust to public information.
The post-US election environment can create a sharp movement in asset prices. History shows that pre-election periods – most acutely the month before – tend to be biased toward negative returns on uncertainty and apprehension. The last October before a US election that posted a positive equity market return was 2004. No President delivers magical cures, but as uncertainty fades, post-election returns have been biased positive in all but the most extreme negative economic environments (November/December 2008 is the last example). Of course, in a world of AI data mining, it would not surprise us if investors attempt to act on this historical pattern, confounding a repeat (past performance is no guarantee of future results!)
