Since 1987, the average annual return of a portfolio consisting of 60% stocks¹ and 40% bonds² has been 8%. So far in 2024, it is up 12%, the second consecutive year of above-average returns for balanced portfolios. Global equities have gained 19%, led by U.S. large caps. Fixed income has produced lower but positive returns, as high yield bonds have buffered modest performance from high-grade credit and Treasurys. Going forward, we expect more modest gains for 60/40 portfolios with U.S. equities leading the charge again.

We maintain a preference for equities over fixed income, reflecting our base case of continued economic growth. As shown in the exhibit, the expected level at which the Federal Reserve policy rate settles this cycle has materially increased since mid-September. We believe this reflects a mix of stronger growth expectations and risk of higher inflation.

Our top two risk cases incorporate the possibility of inflation as a result of potential U.S. presidential policies. In the more benign risk scenario, stronger growth accompanies inflation. We believe this would result in equities outperforming fixed income. Equities historically have been able to maintain today’s valuations with inflation at or even above 4%, but growth is important. In the second risk scenario, there is no positive growth impulse. We would expect higher inflation to weigh on equities and most other major assets, with few other assets such as gold ending up as beneficiaries.

“Buy America” is another one of our key tactical calls. We expect U.S. equities to benefit from a better economic backdrop and healthier corporate profits than most other regions. We also believe that non-U.S. companies are more negatively exposed to the policies floated by the incoming U.S. government. For example, higher tariffs likely would weigh on Chinese and European company profits, while non-U.S. regions would see little benefit from U.S. tax cuts and reduced regulation. With that said, there is a wide range of potential outcomes, supporting regional diversification in a portfolio.

Within fixed income, we continue to like high yield. Its starting yield of above 7% is attractive given strong fundamentals and a supportive technical backdrop. We see more limited upside for investment grade credit and Treasurys given historically tight investment grade spreads and low odds of a sharp drop in rates. Given we do see incrementally higher inflation risks as a result of possible policies from the U.S. government, we think some inflation protection through inflation-linked bonds is prudent.

— Anwiti Bahuguna, Ph.D. – Chief Investment Officer, Global Asset Allocation 

Interest Rates

Intuition may suggest that as yields on money market funds move lower along with policy rates they would be less attractive and drive outflows, but we’ve seen the opposite in 2024, consistent with historical experience. Money market fund industry AUM has increased by more than half a trillion dollars, setting all-time-high records throughout the year. Money market fund AUM has been going up even as rates are going down.

As a reminder, changes in the Federal Funds Target range are the biggest driver of changes in money market fund yields. While we agree with market pricing for the remainder of 2024, uncertainty around the economic outlook and monetary policy in 2025 has increased substantially. A fairly wide range of outcomes with respect to the Federal Funds Target range are possible. While we believe the Fed will continue to gradually cut its policy rate, we and the markets see little chance that rates return to the zero lower bound anytime soon – a welcome change from much of the past 15 years of very low yields on cash.

— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income

• Money Market Fund AUM has been going up even as rates are going down.
  
  
• Uncertainty around the outlook for monetary policy in 2025 has increased substantially.
  
  
• We’ll continue to monitor money markets closely for any signs of stress that may impact Fed balance sheet policy.

Credit Markets

High yield saw the weakest monthly performance since April as rates sold off after an impressive employment report in early October and firmer than expected inflation data. Market participants reassessed both the pace and magnitude of upcoming Federal Reserve rate cuts. For the high yield bond market, duration-driven price declines were partially offset by spread tightening as the strong economic backdrop has proven favorable for risk assets.

High yield spreads continued to rally to new post-Great Financial Crisis lows after the election. However, the financing surplus¹ continues to be a supportive backdrop for high yield. There has been a persistent positive financing surplus of the U.S. non-financial corporate sector since 2020. A positive financing surplus means that the corporate sector is saving, so there is no need to raise new funding. This savings means reductions in net debt as companies increase cash balances, thus helping support high yield valuations. With the backup in yields across the asset class and new issuance continuing to be suppressed, this could serve as an attractive entry point for total return investors despite tight spread valuations.

— Eric Williams, Head of Capital Structure, Global Fixed Income

• A positive financing surplus means that the corporate sector is saving, so there is no need to raise new funding.
  
  
• This saving means reductions in net debt as companies increase cash balances, thus helping support high yield valuations.
  
  
• With the backup in yields across the asset class and new issuance continuing to be suppressed, this could serve as an attractive entry point.

Equities

U.S. large caps were range bound in October, finishing down -0.7% and ending a 5-month winning streak. Volatility stayed elevated heading into the election on November 5. However, following a convincing Republican win of the White House and Senate, markets shot higher and volatility dropped precipitously with the VIX¹ sinking 7 points in the week following the election. Broadly speaking, the day after the election, the relative winners and losers were thematically aligned with an unwinding of hedges, along with an anticipation of Trump policy initiatives. Despite some reversion in subsequent trading sessions, these gains have largely held.

With election uncertainty resolved, uncertainty around the net effect of Trump policies comes to the fore. Weighing policy implications, strong expected earnings growth over the next two years, and a likelihood of further rate cuts from the Fed, we maintain our overweight to equities. We believe the incoming administration’s policy initiatives raise the odds of U.S. outperformance, especially versus Europe. Therefore, we increased our overweight to the U.S., and moved to underweight from neutral in Developed ex-U.S.

— Jordan Dekhayser, Head of Equity Client Portfolio Management

• The initial market reaction to election results was largely consistent with Trump policy initiatives.
  
  
• Potential policy initiatives raise the odds of U.S. outperformance over Developed ex-U.S. equities.
  
  
• We added to our U.S. equity overweight and initiated an underweight to Developed ex-U.S

Real Assets

In 2023 and 2024, the most substantial U.S. apartment construction surge in 40 years flooded the market. With this supply, apartment owners have had to contend with higher vacancies and lower asking rents, particularly in Southeast markets. We have also seen residential REIT earnings growth pushed out further into 2025.

Yet, as we approach the end of 2024, it appears that pressures on the sector are abating. The national vacancy rate has stopped rising for the first time in two years and demand for apartments rose to its highest levels since 2021. This has occurred in part due to higher mortgage rates and single-family affordability issues. Renting is simply more attractive than home ownership in this environment. Along with higher completions and peaking vacancies, we have also seen starts drop dramatically over the last 12 months. With permit lead times, there is significant transparency into this pipeline and this a trend that is expected to continue well into 2025 and 2026. We expect this to prompt higher occupancy levels, tighter market conditions, and stronger rental growth and provide strong tailwinds and earnings growth for apartment landlords over the intermediate term.

— Jim Hardman, Head of Real Assets, Multi-Manager Solutions

• U.S. apartment fundamentals have been challenged, but we expect a slowdown in starts to provide strong tailwinds and significant earnings growth in the intermediate term.
  
  
• We view real estate as a portfolio diversifier and a way to protect against inflation.
  
  
• We remain neutral real assets overall with a 2% underweight to Natural Resources and 1% overweight to both Global Real Estate and Listed Infrastructure.