How an Economic Slowdown Could Surprise the Market
We think investors have sometimes interpreted bad news for the economy as good news for stocks, hoping that a slowing economy would temper inflation and the Federal Reserve's rate hiking campaign. That interpretation may change soon.
- Portfolio Construction
- Multi-Asset Insights
- Equity Insights
- Market & Investment Trends
Key Points
What this is
Our analysis shows U.S. stocks appear overpriced as consumer spending may decline and interest rates may stay elevated.
Why it matters
If consumer spending declines, the economy and corporate earnings may decline as well, potentially hurting stock prices.
Where it's going
We are underweight stocks globally, favoring high yield bonds, natural resources and cash.
Global markets remain volatile, with equities starting the month lower before declining long rates toward the end of the month brought investors back to stocks. Interest rates fell as investors read the Federal Reserve’s communication as relatively dovish. Further, U.S. economic indicators have softened, including a somewhat weaker employment report for October. With equity prices above fair value in our opinion, we think bad news about the economy will no longer be considered good news about Fed rate moves, leading to our global underweight to stocks. Let’s take a closer look.
With the recent decline in interest rates, investors pulled forward their anticipated timing and increased the magnitude of expected rate cuts in 2024, based on the . However, we expect the Fed to keep rates elevated until it sees clear signals of a deteriorating labor market. We see some additional downside to longer term rates, but we are less convinced that downside will be cheered by equity investors. The market does not appear to be priced for a material slowdown in growth, and we see consumer spending slowing due to depleted savings and already higher credit card debt. For the two-thirds of Americans who are homeowners, however, real wage growth may be better than it appears as those consumers are not feeling the shelter inflation component of the Consumer Price Index to the same extent thanks to fixed rate mortgages. This suggests some potential durability of spending capacity to help offset pressure elsewhere.
In terms of other potential risks to the economy, the continues to heat up but it hasn’t ignited oil prices, which moved lower over the past month. We are monitoring the situation closely as an escalation that threatens oil supplies could negatively impact global growth. We also are monitoring any developments around potential U.S. government shutdown, including the potential for headline risk should it act as a catalyst for a downgrade of the U.S. debt rating, as well as some economic impact if prolonged. Macro trends outside the U.S. are already weak, with part of Europe appearing recessionary and an economic recovery in China remains elusive.
In our that guides Northern Trust portfolio allocation, we maintaining our relatively modest underweight to risk, including a global underweight to equities. We prefer high yield bonds to developed market equities, given attractive yields and high yield’s potential to limit losses if equity market fall. We also favor natural resources to emerging market equities and maintain an overweight to cash.
Federal funds futures are contracts used to hedge short-term interest rate risk. They reflect the market's insight on the future course of the Federal Reserve's policy rate.
The Global Policy Model is a Northern Trust Asset Management moderate-risk multi-asset portfolio with asset allocation based on our 12-month tactical market outlook. The model informs the tactical positioning of other NTAM models and portfolios with different risk profiles.
Main Point
Positioning for Less Risk-Taking
The market does not appear to be priced for a material slowdown in U.S. economic growth, and we see consumer spending slowing due to depleted savings and already higher credit card debt. With equity prices above fair value in our opinion, we think bad news about the economy will no longer be considered good news about Fed rate moves, leading to our global underweight to stocks.
How an Escalation of War in Israel May Impact Markets
![large ship making its way through water](https://images.northerntrust.com/content/dam/northerntrust/investment-management/global/en/images/web/insights/2023/marketscape/how-an-escalation-of-war-in-israel-may-impact-markets/blue-container-ship.jpg)
Contact Us
Interested in learning more about our expertise and how we can help?
IMPORTANT INFORMATION
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Not FDIC insured | May lose value | No bank guarantee