Past the peak: But not downhill yet

Our previous outlook, Stay in the game, reinforced a key investment theme we’ve been advocating throughout 2023: Get off the sidelines. Lighten your cash holdings. Stop waiting for the one perfect moment that might never arrive. This tenet still applies, but for wary investors needing additional clarity, a new observation may help: Both global inflation and central bank tightening have most likely peaked for this cycle.

Acknowledging that these twin peaks are behind us doesn’t mean investors can simply glide down the mountain, obstacle-free. In fact, we anticipate more tough sledding ahead. But with the lay of the land now in sharper relief, we can assess which portfolio allocation decisions offer the clearest path forward.

While U.S. inflation has crested, it’s still higher than the U.S. Federal Reserve’s 2% target. Pinpointing how rapidly it falls from here is no simple task, but our analysis suggests further moderation over the course of 2024.

Policy rates aren’t poised to plunge from their precipice either. Instead, they’ve more than likely plateaued — extending the “higher-for-longer” rate environment and making the trajectory of monetary policy for the next few quarters look like a cross-country trek rather than a downhill run.

We’ve already seen markets get ahead of their skis at various points in this cycle, prematurely anticipating rate cuts. And they may be gearing up to be let down again, judging by the number and pace of cuts they’re pricing in for next year. In fact, rates probably won’t be lowered until the cumulative (and lagging) impacts of the Fed’s historic hawkishness come home to roost in the form of a mild recession, which we expect will occur in the second half of 2024.

Against this backdrop, our current outlook emphasizes the following investment themes:

Follow the trails to fixed income. Though bond yields have retreated from their cycle highs in October, investors can still take advantage of today’s yields by overweighting fixed income in their portfolios. We anticipate intermediate- to longer-maturity yields will decline modestly, creating attractive return opportunities across higher-quality fixed income segments.

Deploy cash into areas of relative value. Despite the clarified investment terrain, a fog of doubt remains for many investors. The longer they delay, the more opportunities they miss. One way to get moving is to dollar-cost-average their way back to their strategic allocations, leaning into areas that offer the best relative value, as discussed throughout our year-ahead outlook.

Get real with portfolio positioning. Real assets, both public and private, figure prominently in our guidance. These asset classes can thrive during periods of still-elevated (albeit moderating) inflation, while offering potential resilience during economic slowdowns or contractions. Real estate, infrastructure and farmland are among the categories we favor.

Bottom line: For those who may still be waiting, it’s time to start making tracks. And while we’re confident the most challenging peaks will continue to recede from view, we’ll be on the lookout — as always — for twists and turns ahead.

For the remainder of our 2024 outlook, click here.