Market and Economic Chartbook | February 1, 2024
- Stocks and bonds have both struggled recently due to rising inflation and interest rates.
- This breaks the historical pattern driven by falling bond yields which supported bond prices.
- Despite this challenging period, investors should continue to focus on diversification as interest rates stabilize.
- The economy slowed due to inflation and Fed tightening but the recession some anticipated has not materialized.
- Growth has been remarkably steady despite what many economists had feared.
- Unemployment is still near the lowest in over 50 years despite rising rates and broader economic challenges.
- Even the so-called under-employment rate has fallen to near-historic lows as jobs remain plentiful.
- The labor market remains strong despite higher rates, resulting in what many investors refer to as a so-called soft landing.
- CPI is a commonly cited measure of inflation. It uses a basket of goods and services to track price changes for consumers.
- In order to measure the underlying trend in inflation, rather than temporary shocks to food and energy economists often focus on core CPI.
- Price increases have been cooling but certain areas such as shelter remain high.
- The yield curve is still inverted due to the elevated level of Fed policy rates.
- The yield curve could begin to re-steepen as the Fed begins to cut rates in 2024.
- Long-term rates could also remain high or rise further if economic growth remains steady.
- Major central banks raised rates over the past two years to fight inflation, causing growth to slow.
- Balance sheets are also beginning to run down which could eventually push longer-term rates higher.
- Major stock market indices have taken very different trajectories over the past decade due to differences in growth.
- U.S. market valuations are elevated compared to other regions as it continues to outperform.
- International stocks, on the hand, are still cheaper in relative terms across both the developed and emerging world.
- Earnings growth and valuations are two important metrics when comparing regions and asset classes.
- The U.S. market is the most expensive due to its strong performance this year.
- Other international markets are still cheaper, especially emerging markets.
- Developed markets have trailed U.S. markets for over a decade despite improvements in some of their fundamentals.
- Over the past few years, these regions have struggled due to the pandemic, inflation, rising rates and geopolitical risks.
- The significant outperformance of U.S. stocks in prior years had led some investors to avoid other asset classes.
- There have been many historical periods when other asset classes outperformed. Diversification takes advantage of these trends.
- With cheaper valuations and global growth, it may be best to not overlook other regions.
Definitions and Methodology
The S&P 500 is a market capitalization-weighted index of large
cap U.S. stocks. U.S. mid cap and small cap are the S&P 400 and S&P 600, respectively. Value and growth are the corresponding Standard and Poor’s value and growth indices.
MSCI EM is and index of emerging market stocks. MSCI EAFE is an index of developed market stocks. MSCI ACWI is an index of global stocks.
The forward P/E is a ration of the current market price of an index divided by an estimate of earnings over the next twelve months. The Shiller P/E is based on Robert Shiller’s cyclically adjusted price-to-earnings ration.
The AAII Investor Sentiment index is based on a weekly survey conducted by AAII.
Unless stated otherwise, earnings and valuations data are from LSEG indices.
The LEI, or Leading Economic Index, is produced monthly by the Conference Board.
Consumer sentiment indices are based on surveys conducted by the University of Michigan Surveys of Consumers.
Asset Class Performance and Asset Classes Relative to U.S. Stocks charts: The EM, EAFE, Small Cap, Fixed Income and Commodities are these indices, respectively: MSCI EM, MSCI EAFE, Russell 2000, iShares Core U.S. Bond Aggregate, Bloomberg Commodity Index.
Fixed Income Performance: All sectors are represented by the Bloomberg Barclays bond indices except for EMD USD and Local which are JPMorgan EMBIG Diversified Index and JPMorgan GBI-EM Core Index, respectively.
The Balanced Portfolio is a hypothetical 60/40 portfolio consisting of 40% U.S. Large Cap, 5% Small Cap, 10% International Developed Equities, 5% Emerging Market Equities, 35% U.S. Bonds, and 5% Commodities.
The Bloomberg Commodity Index is a broadly diversified basket of physical commodities futures contracts.
The DXY is a U.S. dollar index based on a basket of currencies, including the Euro, Yen, Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
Portfolio Risk/Reward and Portfolio Drift Since 2009 charts: stocks and bonds are the S&P 500 and iShares Core U.S. Bond Aggregate, respectively. Each portfolio represents a hypothetical stock/bond asset allocation.
The MSCI Factor indices are created and maintained by MSCI to capture factor returns. They cover various factors including Quality, Size, Momentum, Volatility, Value and Yield. The Multi-Factor index tracks the performance of Value, Momentum, Quality and Size.
The MSCI USA index tracks large and mid cap U.S. stocks.
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