It’s vital to consider a variety of market views where asset allocation is concerned and in the case of the US, there’s been no shortage of opinions. Coming into 2023, the words on the lips of many US investors were white collar recession.
Increased automation and post-Covid over hiring – among other things – were expected to hit the professional sector hard. And the fear was that reduced spending, along with elevated inflation and geopolitical instability, would usher in a considerable recession.
The concerns were somewhat justified – we did indeed see a rise in unemployment along with jobless claims. However, with the former already beginning to fall and the latter coming down to seasonality, we’d say things could have been a lot worse. Especially with the job market remaining so robust throughout.
What we’re now looking at is a combination of higher nominal interest rates and stronger economic growth likely to favour the average stock. With this in mind, there are three areas we are focusing our attention on right now.
1) The rise of the machines
The dawn of AI has come around quickly. Programmes like ChatGPT have become an everyday part of our lives, particularly at work where they can automate everything from data entry to financial analysis.
It could also prove extremely interesting from an investment perspective.
The productivity gains AI is granting to businesses stand to lower operational costs and amplify output, potentially increasing revenues and enhancing profitability. It goes without saying that this stands to be highly positive for stock market performance.
We’re not just talking about mega cap businesses where economies of scale are largest either – this is something that stands to light a fire under businesses of all sizes. Especially given we’re only at the tip of the iceberg with this particular trend.
It remains to be seen which areas will benefit the most from AI and the degree to which their performance will be boosted. For now, however, we are watching with great interest.
2) The gift of China’s slowdown
As the rest of the world battles rising prices, China has officially entered a period of disinflation.
Its Consumer Price Index fell for the first time since early 2021 in July, with slowing domestic spending weighing on its post-Covid economic recovery.
There’s a lot of talk of the potential tail risks of this shift among investors – delayed purchases, lower oil prices etc. But there could also be a pretty big opportunity for US investors.
After all, China remains a manufacturing-led economy. So, to maintain some semblance of economic growth, there’s a good chance it will ramp up exports and push down prices to eliminate competition.
The net impact of reduced import costs can be more purchasing power and spending for US consumers paired with lower production costs and higher margins for businesses The effect would be particularly strong in an expanding economy, which will allow prices to remain strong.
Given the positive impact this would likely have on many stocks and the US market as a whole, it’s another story we will continue to follow.
3) The inevitable correction
Most years, the US market endures a late summer/autumn correction to the tune of 5-10%. So, given how unusual macro conditions have been this year (not to mention the last few years), one question we’re being asked a lot right now is “What’s in store over the coming months?”
The short answer is, we believe we will, once again, see a correction. And we see two potential catalysts.
The first is an extra rate hike from the Fed to achieve its goal of getting inflation below 3% and the second is a sudden spate of profit-taking among investors towards the end of the year in response to weaker-than-expected 2024 earnings predictions.
We don’t know which will play out. Maybe both. Perhaps neither.
The important thing for now is that we believe the US economy will avoid recession regardless of the outcome, and potentially even strengthen. This provides us with a strong backdrop around which to position our portfolios right now.
Moz Afzal is Global CIO of EFG Asset Management