Displaying items by tag: recession

Cryptocurrencies tumbled as concerns over a broader U.S. stock selloff overshadowed recent efforts by President Trump to support the industry. Bitcoin dropped more than 3% in early Asian trading, while Ether sank as much as 6% to its lowest level since October 2023 before recovering some losses. 

The decline followed a sharp selloff in technology stocks, with the Nasdaq 100 plunging 3.8%, its worst session since October 2022. Despite Trump’s executive order to establish a U.S. Bitcoin reserve, investor sentiment remained fragile as macroeconomic risks took center stage. 

Analysts noted that leveraged crypto-related ETFs were among the hardest hit, with some plunging more than 30% in a single day. While Bitcoin hovered around $79,300, traders were eyeing key support levels at $73,000 and $70,000, where stronger buying interest could emerge.

Finsum: While many think of crypto as hedge against market volatility, we need to remember that those hedges are a little effective on the currency side. 

U.S. crude oil futures dropped to around $73 per barrel amid widespread concerns of a looming recession. West Texas Intermediate (WTI) crude oil, now up less than 2% for the year, and Brent crude, slightly down for 2024, saw declines despite earlier gains fueled by Middle East tensions and anticipated market tightening. WTI reached six-month lows earlier in the session. 

The energy prices for the day showed WTI at $72.84 per barrel and Brent at $76.30 per barrel. The downturn followed disappointing U.S. job growth and continued manufacturing sector contraction. 

Adding to the market's unease, China's weaker imports and refinery utilization rates have also impacted sentiment. OPEC+ might reconsider increasing production in October, with potential cuts depending on market conditions. Geopolitical risks persist, notably with rising tensions between Israel and Iran.

Finsum: Weak demand is very common leading into recessions, but with rate cuts around the corner now might be the time to buy energy stocks.

Bonds have weakened to start the year, given increasing uncertainty about the direction of the economy and monetary policy. Weitz Investment Management notes that credit spreads have tightened even while long-term yields move higher. Thus, the firm believes there is greater potential for losses if inflation meaningfully picks up from current levels or credit spreads widen.

It also believes that massive fiscal deficits are an indication that the inflation issue is not going to disappear anytime soon. It notes that over the last 4 years, deficits have averaged 9% of GDP, which was only seen before during wars. Currently, the national debt is increasing by $1 trillion every 100 days. And this is a major reason why the Fed’s aggressive hikes have not resulted in a recession. It also means that Treasury issuance will continue to be elevated as debt will need to be refinanced at higher rates. 

Amid this backdrop, the firm notes that there is considerable complacency among investors. It notes that credit spreads declined across the board in Q1 and are now at 10-year lows. It believes this is likely a result of strong demand for bonds as new issues have been oversubscribed and there has been a flattening of yields in the credit curve. 

To combat these risks, Weitz recommends looking for opportunities in fixed income across the spectrum and beyond the benchmarks. It recommends diversified and broad exposure, including fixed and floating-rate securities. Ultimately, investors need to be nimble and prepare for various scenarios, such as the economy continuing to be robust, inflation resuming its ascent, or the economy stumbling into a recession.

Finsum: Weitz Investment Management sees considerable complacency within fixed income while also noting some risks. It recommends investors seek broad and diversified exposure to the asset class and pursue a more active and nimble approach. 

Oil prices have continued to defy Wall Street analysts. Last year, the consensus view was that prices would weaken as the US economy slipped into a recession, with the rest of the world facing a sharper contraction in economic growth. While growth did slow, the US economy continued to expand, and global oil demand increased more than expected. In Q1, the IEA upped its forecast for US oil demand by 110,000 barrels per day due to stronger than expected economic data. 

Additionally, despite predictions from EV boosters, there has been no material impact on oil demand from increased adoption. Similarly, China’s economy has been mired in a slump, yet Chinese oil demand also defied expectations and increased more than expected. In fact, a major lesson of the post-pandemic period is the inelasticity of oil demand. 

On the supply side, US production also surpassed forecasts and made up for any production cuts from OPEC. A major factor is increasing well productivity due to newer drilling techniques. 

Looking ahead, many were skeptical that OPEC+ would remain disciplined, given individual countries’ incentives to increase revenues by boosting production. So far, the cartel has managed to successfully reduce production, which is contributing to the current tight market and a major factor in oil’s upward move YTD. 

Finsum: Last year, many analysts got it wrong when it came to oil. Overall, they were too bearish on the economy and overestimated how much a weak economy would impact oil demand. 

Natixis Investment Managers issued its outlook for 2024. It notes that cash levels are higher than normal due to volatility and uncertainty. However, it does believe that some of this cash will be put to work in model portfolios. 

Overall, it sees uncertainty continuing given a tense geopolitical situation in multiple parts of the world, an upcoming presidential election, and the risk that the economy stumbles into a recession. But these conditions are positive for fixed income given attractive yields, falling inflation, a more accommodative Federal Reserve, and equity valuations which are once again getting expensive. 

According to Marina Gross, the head of Natixis Investment Managers Solutions, model portfolios are one of the biggest trends in wealth management. She notes that “Firms are looking to provide a more consistent investment experience for clients in an increasingly complex market, advisors are looking to grow their practices and know clients want more than an allocation plan, and clients are looking for broader more comprehensive relationships with their advisors. Models offer a solution that fits the bill for each in 2024 and beyond.” 

Model portfolios are particularly suited for the current environment as they help manage risk and increase the chance that clients will stick to their financial plan through market turbulence. For advisors, it leads to more confident clients while freeing up time for revenue-generating and business-building efforts.  

Finsum: Natixis is forecasting that model portfolios will continue to gain traction in 2024. Given high levels of uncertainty, model portfolios are particularly useful for advisors and clients. . 

PIMCO sees a changed environment in 2024 as the Fed will pivot to rate cuts. However, it sees the impact of prior rate hikes still impacting economies and leading to stagnation or a mild contraction. 

Financial markets will be focusing on the timing and pace of rate cuts. Based on history, central banks don’t ease in anticipation of economic weakness. Instead, they tend to cut only after recessionary conditions materialize and tend to cut more than expected by the market. 

PIMCO agrees with Chair Powell that inflation and growth risks are now more ‘symmetrical’. However, it believes the market is underpricing recession risk especially given that some assets are already priced for a soft landing given the strong rally in many assets over the past few months. 

It also believes that fixed income is particularly appropriate for this environment given that yields are still close to multi-decade highs. It also offers protection and upside in the event of economic conditions deteriorating. Within the asset class, it favors mortgage-backed securities and believes investors should stick to medium-duration bonds as yields are attractive while interest rate risk is reduced. On a longer-term basis, PIMCO sees neutral policy rates to reach similar levels to before the pandemic which is also supportive of the category. 

Finsum: PIMCO sees financial conditions easing in 2024 as the Fed cuts rates, but economic conditions will deteriorate given the delayed impact of tight monetary policy.

Allworth Financial manages $19 billion in client assets. Recently, Allworth CIO Andy Stout shared the firm’s approach to managing model portfolios for clients. The firm has a scorecard in which it quantitatively evaluates all investable mutual funds and ETFs. It follows up by having conversations with managers of funds with high marks to see if their process is ‘repeatable’ prior to investing.

Allworth’s core portfolio is a 60/40 mix between equities and bonds, respectively. The equities side is composed of 48% US stocks and 12% international. The fixed income side is a combination of short-term fixed income funds, investment grade, total return funds, and a handful of active funds.

Allworth believes in spreading allocations between multiple asset managers. For instance in its core portfolio, they use SPDR, Vanguard, Blackrock, and JPMorgan. When it comes to fund selection, the firm looks for securities that are equipped to navigate the entire business cycle. Stout also noted that consistency is valued more since success is more about ‘avoiding strikeouts’ than hitting a home run. In terms of risks, he sees recession risk as remaining elevated and thus favors more defensive sectors and investments.   

Finsum: Allworth Financial CIO Andy Stout shared the firm’s approach to model portfolios, and what opportunities and risks he sees at the moment. 

Gold prices ended the year on a strong note by making all-time highs and finished the year with a 13% gain. Next year, the outlook remains bullish due to expectations that real interest rates will decline as inflation falls and the Fed shifts to a dovish policy, leading to increased demand. JPMorgan has a year-end forecast of $2,300.

Some of the factors that could lead to gold outperforming are the economy being weaker than expected which could lead to more aggressive cuts by the Fed. Additionally, there is a risk that geopolitical tensions could inflame even further whether it’s in the Middle East or the conflict between Russia and Ukraine. Budget deficits in the US remain high for the foreseeable future with another close and contentious presidential election on the horizon.

Another positive catalyst for gold prices is that central banks are net buyers. According to the World Gold Council, they will purchase between 450 and 500 tons in the upcoming year. This is in addition to strong investing demand from ETFs which have seen substantial increases in assets over the past year.

The major risk to the outlook is if the economy remains robust enough so that the Fed can keep the fed funds rate elevated for a longer period of time. During the last 2 ‘soft landings’, gold had a total return of -1.6%, while Treasuries returned 16% and equities were up 33%.

Finsum: Gold prices are flirting with all-time highs. Recent catalysts for strength include geopolitical turmoil and expectations that the Fed is in the midst of a pivot.  

The last FOMC meeting saw the Fed put a pause on hikes. Recent economic data, specifically softer inflation prints, is also supporting the notion that the Fed’s next move will be to cut rather than hike. Adding fuel to the rally was comments from Fed governor Christopher Waller that Fed policy was ‘well-positioned’ to bring inflation back down to its desired level. Waller’s concession is noteworthy given that he has been among the most hawkish FOMC members.

It’s already resulted in longer-term yields dropping, as the 10-year yield has declined from 5% in mid-October to 4.3%. As a result, equities have surged higher, and bonds posted their best monthly performance in nearly 40 years. The Bloomberg US Aggregate Bond Index was up nearly 5% in November. This performance is likely to attract inflows especially as bonds will further strengthen if the economy does fall into a recession. 

With these gains, the asset class is now slightly positive on a YTD basis. Many investors may also be eager to lock in these rates especially as the ‘higher for longer’ narrative around interest rates seems to be passing. There’s also increasing chatter of a rate cut as soon as spring of next year, while the odds of another hike have diminished. 

Finsum: Bonds enjoyed a strong rally in November. Some of the major factors behind this strength were dovish comments from FOMC members, soft inflation data, and the Fed nearing the end of its hiking cycle.

In its 2024 investment outlook, Morgan Stanley shared why it’s bullish on fixed income. A major reason is that it expects for inflation to continue moderating. Within fixed income, the bank likes high-quality bonds and government debt from developed markets. In terms of equities, it sees less upside given that markets have already priced in a soft landing.

According to Serena Tang, Chief Global Cross-Asset Strategist at Morgan Stanley Research, “Central banks will have to get the balance correct between tightening just enough and easing quickly enough. For investors, 2024 should be all about threading the needle and looking for small openings in markets that can generate positive returns.”  

The bank recommends a more cautious approach in the first half of 2024 as there are numerous headwinds including restrictive monetary policy, a conservative earnings outlook, and slower economic growth. However, it sees rate cuts starting in June of 2024 which should provide a boost to the economic outlook in the second half of 2024 due to inflation falling to the Fed’s target.

It also expects lower levels of global growth in the US, Europe, and UK while also seeing weak Chinese growth as a risk, although it believes that the country will avoid a deflationary spiral that could have negative ripple effects for the wider region. 

Finsum: Morgan Stanley shared its 2024 outlook. Overall, it’s bullish on fixed income due to expectations that inflation will continue to fall while growth will disappoint in 2024.