Displaying items by tag: fed

In 2024, the major market narrative has certainly shifted from whether the Fed will cut or hike to when and how much the Fed will cut. According to Steve Laipply, BlackRock’s Global Co-Head of Bond ETFs, it’s a good time to lock in yields. Currently, investors can achieve yields of 4% in low-risk, diversified bond funds which is quite attractive relative to recent history. 

During the previous cycle, investors would have to buy riskier high-yield bonds to achieve such income. Overall, he believes that investors have been overly risk averse during this tightening cycle, and most are underexposed to the asset class. Despite the recent rally, there are plenty of opportunities to capture generous yields with lower levels of risk. Further, fixed income would benefit if the economy weakened further, and inflation continues to lose steam. 

While investors can get even higher yields in the front-end of the curve or with certificates of deposit, Laipply doesn’t see this as a prudent approach given underlying macroeconomic trends, and the Fed’s dovish tilt in the new year. He recommends that investors choose a diversified, broad bond fund like the iShares Core US Aggregate Bond ETF or an active fund like the Blackrock Flexible Income Fund.

Finsum: According to Steve Laipply, Blackrock’s Global Co-head of Bond ETFs, investors should lock in yields given the rising chance of a recession, slowing inflation, and a dovish Fed in 2024.

Hazelview Investments shared its bullish outlook for real estate investment trusts (REITs) in 2024. The firm sees gains in the fourth quarter of last year continuing due to earnings strength and relatively low amounts of real estate supply which should support prices. It also sees upside due to attractive valuations, 

It does see the economy slowing in the coming year but this should be offset by easing interest rates and the sector’s strong, underlying fundamentals. In addition, Hazelview points out that historically REITs have delivered their strongest performance during the interim period in between the Fed changing course on monetary policy from hikes to cuts. 

According to Corrado Russo, managing partner and head of Global Securities at Hazelview Investments, "The shifting tides of economic and monetary conditions, coupled with compelling valuations, create a canvas for strong performance in the REIT market in 2024." 

In terms of earnings, the firm sees a 10% increase next year on a cumulative basis. It also anticipates a decline in available supply given that construction has slowed to a crawl over the last 2 years given higher construction and financing costs. At the same time, demand has seen little indication of slowing. 

Finsum: Hazelview Investments is bullish on REITs for 2024 due to attractive valuations, strong underlying fundamentals, double-digit earnings growth, and improving monetary and economic conditions.

Entering 2023, the consensus was that fixed income would outperform. This turned out to be incorrect as the economy and inflation proved to be more resilient than expected. For the year, the Bloomberg US Aggregate Index returned 5.5% which is in-line with the average return although the bulk of gains came in the final months of the year.  

As the calendar turns, the consensus is once again that the Fed is going to be embarking on rate cuts. Currently, the market expects 6 cuts before year-end which means there is room for downside in the event that the Fed doesn’t cut as aggressively. According to Bernstein, this may be premature as the firm sees many reasons for upward pressure on yields including inflation re-igniting, heavy amounts of Treasury debt issuance, and an acceleration of economic growth. 

Bernstein recommends that investors eschew more expensive parts of fixed income like high-grade corporate debt. Many are unprepared for a scenario where spreads tighten or rates fall less than expected. Instead, it favors segments that would benefit from stronger growth like preferred securities and AAA collateralized loan obligations (CLOs). The firm also likes TIPS and the 2Y Treasury as these offer attractive yields and inflation protection. 

Finsum: While most of Wall Street is bullish on fixed income in 2024, Bernstein is more cautious due to its expectations that rates will fall less than expected, while valuations are not as attractive. 

JPMorgan issued its 2024 outlook for alternative investments. Overall, it sees continued growth for the asset class especially as economic and financial uncertainty remain elevated due to inflation, tight monetary policy, a decelerating global economy, geopolitical risks, and volatility in financial markets. 

According to Anton Pil, the Global Head of Alternatives for JPMorgan Asset Management, alternatives offer investors a means to diversify traditional portfolios especially as stocks and bonds have been increasingly correlated in recent years. It can also help to reduce volatility, increase income, provide protection against inflation, and boost returns on an absolute and risk-adjusted basis.

It notes some key growth drivers for the asset class in the coming year. One of the consequences of tighter monetary policy has been a slowdown in private market activity which has impacted many alternative assets. This has led to attractive valuations in some areas that could have upside especially in the event that the Fed meaningfully eases policy. 

Another catalyst for alternative investments is simply that access to these investments continues to increase due to technology and more awareness. Finally, traditional portfolios have failed to provide adequate diversification in recent years. In contrast, alternative investments were a source of outperformance and diversification during this period.  

Finsum: JPMorgan is bullish on alternative investments for 2024. It sees major growth drivers as increasing access, the need for diversification, and an improvement in financial conditions.

Stocks and bonds were both down following comments by Federal Reserve Governor Christopher Waller that rate cuts will be implemented slowly. Both are now in the red on a YTD basis. According to Waller, “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully.” As opposed to previous cycles, when cuts were implemented aggressively and quickly, Waller sees a slower, more gradual pace this time around. 

His comments had a chilling effect, especially as financial markets had been in a buoyant mood, looking ahead to rate cuts later this year and the possibility of a ‘soft landing’. While Waller injected a dose of hawkishness, recent economic data has also been on the weak side, adding to recession fears. Needless to say, such developments reduce the odds of a ‘soft landing’ scenario.

Currently, Fed futures markets indicate a 60% chance of a cut at the March FOMC meeting. Going into that meeting, inflation and labor market data will be major factors in this decision and market-moving events. Q4 earnings season is also starting, and it will be worth watching whether the improvement in Q3 will continue. The current consensus is for S&P 500 Q4 earnings to increase by 1.6% compared to last year.  

Finsum: Stocks and bonds weakened following hawkish comments from Fed Governor Waller. Waller sees a slower pace of rate cuts during this cycle than previous ones.