Rich Weiss, CIO of Multi-Asset Strategies at American Century Investments, believes that there is not much upside for US stocks in 2024. In his view, stocks’ recent rally is predicated on overly optimistic corporate earnings estimates. That’s because earnings recessions almost always follow Federal Reserve (Fed) tightening cycles. In addition, it’s still not clear if we’re in for a hard or soft landing. Weiss analyzed twelve interest rate tightening cycles that the Federal Reserve engineered going back to the 1960s. The US landed in recession in eight of the twelve instances, while four resulted in soft landings. In addition, banks have tightened lending standards and consumers have depleted their pandemic-era excess savings.
Weiss admits there could be room for stocks to move higher in a Goldilocks scenario where inflation falls to 2%, stocks have consistent earnings, and the labor market remains strong. He thinks this outcome is unlikely, however. In addition to doubts about the economy and earnings, inflation also remains well above the Fed’s 2% target. Consumer Price Index (CPI) came in at 0.3% in December, the latest data we have. Annualized, that means inflation is running at a 3.7% rate. That’s nearly twice the Fed’s target.
He concedes that if he’s wrong and the Fed is able to pull off the soft landing, then small-cap stocks could benefit, especially given their significant valuation discount relative to historical levels. Weiss cautions, however, that small-cap stocks have tended to do better emerging from recessions than during the beginning of a downturn, so the economic question remains crucial.
Weiss isn’t so much bearish on stocks as he is bullish on fixed income—he believes that fixed income could outperform stocks in 2024, particularly on a risk-adjusted basis. Of course, it’s impossible to know if or when or how many interest rate cuts the Federal Reserve might enact. But in a scenario where they are cutting interest rates, bonds would be likely to benefit. That’s because bond prices and yields move in opposite directions, so the mathematics of bond returns means rates down, prices up. That means that if the Fed cuts rates as aggressively as the market expects, investment-grade bonds would be expected to benefit even before taking into account coupon payments. As a result, if bonds can potentially offer solid total returns, we think investors don’t need to take equity market risk to realize healthy performance this year.
Resources:
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Multi-Asset Strategies Outlook
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments’ portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
CPI is the most commonly used statistic to measure inflation in the U.S. economy. Sometimes referred to as headline CPI, it reflects price changes from the consumer’s perspective. It’s a U.S. government (Bureau of Labor Statistics) index derived from detailed consumer spending information. Changes in CPI measure price changes in a market basket of consumer goods and services such as gas, food, clothing, and cars. Core CPI excludes food and energy prices, which tend to be volatile.
Historically, small cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
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