Putting a Bow on 2023

Hello, I'm Charles Boettcher, Managing Director and Senior Portfolio Manager at City National Rochdale. Welcome to the final Market Perspectives of 2023.

Those expecting the Fed to play Grinch were disappointed last week. Much to the market's delight, the Fed surprised with what some are calling a Dovish Pivot at the post meeting press conference.

Citing recent improvements in labor market normalization, continuing improvements on goods inflation, and a downtick in consumer near-term inflation expectations, Chairman Powell was very optimistic that the Fed is coming close to mission accomplished.

CNR is not quite in that camp yet.

Chart 1: 0:49 — Recent slowing in economic growth is expected to continue in the first half of 2024, but remain solid.

Consumer spending is expected to slow, although the strong labor market and wealth effect should mitigate the contraction.

By the time we get to the late January Fed meeting, it will have been six months since the last rate hike. If we say the tightening cycle is over, it doesn't necessarily mean the easing cycle is commencing.

Inflationary pressures are still high, And the recent decline in bond yields and oil prices are stimulative to economic growth.

But on a positive note, if the declines hold, then the chance of a soft-landing increases.

We do not anticipate any further rate hikes, but we do see and expect two cuts in the second half of 2024. In other words, we expect rates to stay at or close to the current levels for the first half of the new year.

Shifting to the markets, the dovish Fed comments turbo-charged the recent rally in both stocks and bonds. Yields fell sharply as the 10-year dipped below 4% for the first time since July. Recall briefly, it briefly touched 5% just a little more than a month ago, and the broad bond indices have given the stock market a run for its money since mid-October.

Speaking of stocks, the rally in U.S. equities reached 7 consecutive weeks, the longest such streak since 2017. Both the S&P500 and NASDAQ reach 52-week highs.

Continuing the recent broadening out of market gains, the S&P500 equal weight index outpaced its market weighted counterpart by over 1%, while the surge in the Russell 2000 lifted the index out of bear mark territory for the first time in over 20 months. We welcome this long-awaited market breadth improvement.

So, we're wrapping up the year on positive notes.

For the most part, it's been a pretty good year. Things we got right include: We anticipated higher for longer interest rates. We over weighted U.S. equities relative to non-U.S. We underweighted mid and small cap equities relative to large cap, and we anticipated the bounce back in high yield and municipal bonds.

Things we got wrong included: We underestimated the resiliency of the U.S. consumer, the timing of the U.S. recession, the relative weakness of income equities, and the impact of AI and tech stocks on S&P500 returns.

Peeking into next year, here are some of the potential next steps given various scenarios.

If a soft-landing is achieved, if we avoid a recession, and market breadth continues to improve, we may consider diversifying to areas beyond U.S. large cap stocks.

Chart 2: 3:22 — Moving to the bottom of this page, if the current downward glide path for inflation continues, we will want to focus on extending out fixed income allocations, especially for investors currently positioning cash and or short-term bonds who do not need the liquidity short term.

There will be more come when we meet in the new year. For now, Happy Holidays and Happy New Year from all of us at City National Rochdale. I'm Charles Boettcher with Market Perspectives, take care.