Collectively Forecasted, Never Arrived - Q1 2024

Collectively Forecasted, Never Arrived

In some respects, not much has changed with the US economic outlook besides the year. Yes, inflation has declined, which should give the Fed far more flexibility going forward. But growth seems vulnerable to a downside surprise far more than in a typical year, and strangely at the same time, the US economy continues to defy expectations to produce above trend growth and may continue to do so. The takeaway is that this is not a macro environment where investors should have much confidence in any “base case" scenario unfolding, including the soft landing. Like driving on ice, the trick to surviving 2024 may be not over committing in one direction. Staying flexible at the beginning of the year should allow for more insightful decisions down the road.

Additional highlights

• Pension Solutions Monitor: We estimate that pension funding ratios increased over the fourth quarter of 2023. Based on market movements, the average funding ratio is estimated to have increased from 102.6% to 104.1%.
• Fixed Income: We prefer to start the year neutral high-grade credit as we see elevated risk of continued strong inflows into the asset class in advance of the Fed cutting rates and considering the record $6 trillion in cash currently residing in money market funds.
• Equities: We have shifted our view from fairly bearish to merely cautious as the historically improbable soft landing becomes more likely. However, that puts us—and many other investors—in the uncomfortable position of navigating a more favorable macro backdrop with very challenging valuations.
• Real Assets: We view the risk-adjusted returns in investment grade and crossover private credit as attractive, and so is duration. In terms of sector exposures, we lean towards needs-based assets, borrowers with resilient business models and/or long-term structural shifts, which we believe are better able to cope with macroeconomic and/or geopolitical volatility.