Outlook on the economy
Outlook for stocks less favourable after first quarter rally
After a remarkable stock market rally in the first quarter of 2024 with rising stock prices and rising bond yields, we are now in a period of reconsideration of our investment positions. Interest rates appear to have peaked and stocks are seen as both overbought and expensive. This does not necessarily imply a significant change in the equity and interest rate markets, it rather suggests that a more restrained tactical positioning may be appropriate.
Opportunities?
Although some equity markets seem overheated, this does not apply to all categories. The technology sector looks overvalued, while at a regional level US stocks and growth-focused stocks are considered relatively expensive. However, opportunities are still to be found, especially in certain regions and sectors. There is still some limited upside for corporate bonds, especially in the form of narrowing credit spreads.
Expectations for interest rate developments
For the interest rate markets, current interest rates seem reasonably priced, meaning that they are in line with what the market expects. However, while the central banks are currently expected to gradually lower interest rates, there is still a risk that this will not materialise. This could be the case, for example, if economic conditions do not develop as expected, potentially making central banks more cautious with interest rate cuts than the market currently anticipates. Central banks are not rushing to cut interest rates, as inflationary pressures remain high and the economic growth outlook is better than expected. At the beginning of 2024, the interest rate markets were still expecting both the Fed and the ECB to cut rates for the first time around the end of the first quarter, and that they would implement 6-7 rate cuts throughout 2024. In the meantime, expectations for a first rate cut have been pushed back to June or July 2024, and only three or at most four rate cuts have been discounted for the whole of the year. The current expectations in interest rate markets seem to be much more realistic than they were at the beginning of the year, and are also more or less in line with what central bankers themselves expect. This does not mean that expectations cannot change again in the coming months, but this will depend heavily on the development of economic data and, of course, inflation.
Inflation expectations
It is likely that inflationary pressure will gradually ease towards the central banks’ 2% inflation target. As a result, the current interest rate outlook remains fairly intact. At the moment, it seems that the macroeconomic data will be better and inflation figures will be higher. Central banks will thus keep interest rates higher for longer rather than cut interest rates. Of course, the latter could occur in an unexpected crisis situation, such as the corona crisis in 2020 or the credit crisis in 2008, but it is difficult to prepare for such a development. Looking ahead to the rest of the year, it is important to remain alert to economic and geopolitical developments affecting the financial markets. There are still opportunities for stocks, albeit potentially in more selective regions and sectors. Inflation remains a focus, along with expectations for central bank monetary policy.