Outlook 2024

Whitman Market Outlook 2024

We are nearing the end of the calendar year and as is customary an avalanche of investment outlook pieces has been arriving in our inboxes. Not wishing to be left out, we have performed the same exercise, and our own outlook follows below.

Active management has different meanings 

Our starting point in matters of investment positioning is to accept that it is practically impossible to construct the perfect portfolio ahead of time. This should not be read to imply that we advocate a purely passive approach, instead we believe that perfect is the enemy of good. Consequently, we actively manage portfolios based on a) our assessment of what is happening in the global economy, mainly the United States and China, and b) what we have concluded about the positioning of other market participants. 

It really matters what is in the price

Google has created a useful tool, known as Google Trends, which allows users of their search engine to track the popularity of specific word searches or combinations thereof over time. Their data goes back to 2004 and if one were to perform what Google call an ‘Interest over time’ enquiry with the word ‘recession’ (fall in economic activity) the results are quite striking. Obviously, recessions are bad news for stock prices because revenue contracts and in turn profitability.

There were notable spikes in interest about a recession in October 2008, February 2009 (Global Financial Crisis) and March 2020 (COVID19). More recently during the six months leading up to July 2022, the term ‘recession’ was searched with increasing regularity and, rather than spiking up like it had done previously, it trended gently higher. This makes sense because investors found themselves well into 500 basis points of successive interest rate rises in the US. It seemed to us at the time that the market consensus was that monetary tightening would cause a recession. However, it did not. Why? inflation began to moderate, consumers kept spending and the market rallied as concerns about a recession dissipated as the year wore on. More recent interest in a recession has, if Google is to be believed, receded. The point is that once opinion tends to coalesce widely around a certain topic in financial markets, it is reasonable to conclude that whatever anxiety, or indeed euphoria associated with it (the topic) tends to be discounted in the price. 

Never forget that central bankers are only human 

Therefore, if investors are no longer particularly worried about a recession, what are they expecting, and is it realistic, or least probable. There are several indicators (including Google) that we analyse to determine the answer and there appears to be a narrative forming that a ‘soft-landing’ might be achieved. Such an outcome would involve the continued moderation of inflation, without any loss of employment and the attendant impact on consumer spending. This seems to give too much credit to central banks who wield an already blunt instrument in the form of monetary policy and who were late to appreciate the inflationary effects of COVID to start with. Furthermore, there are several pieces of data that when considered together lead us to conclude that the economy may not be in great health. 

We therefore are of the opinion that there is too much complacency about general slowdown in economic activity in the world’s largest economy (USA) and consequently that it is now prudent to become cautious in portfolios, particularly as the assets that should help defend portfolios are still fairly priced. There is no way to say with certainty when it will be widely accepted that jobs and the consumer are under pressure, but by then it will be too late. 

What if we are wrong and the Chinese come to the rescue 

How could the analysis we have made be wrong and a so-called soft-landing achieved. One obvious consideration would involve looking eastwards at the other superpower, China, which is presently wrestling with decades of overinvestment. In the past Chinese policymakers have had various tools they could utilise to spur economic activity, but we wonder whether these would have the same effectiveness now as they once did. After all there is a point where overinvestment becomes indistinguishable from mis-investment. Whether that boundary has been crossed is a moot point, perhaps there is a realisation amongst the ruling class in Beijing that the economy needs to be reoriented and reformed and that additional significant stimulus is counterproductive. Recall that China has become much less open over the last decade under Xi Jinping and the surveillance state he has built might make the necessary tougher economic policies easier to implement. 

Our intention is not to be gloomy and in fact we remain optimistic about the years ahead. Nevertheless, it remains sensible to purchase insurance when it is cheap and focus on getting the balance correct in portfolios.

Disclaimer: This communication is issued and approved by Whitman Asset Management Limited (“Whitman”) which is Authorised and Regulated by the Financial Conduct Authority. The value of investments may fall as well as rise and your capital is at risk. The information does not constitute financial advice or recommendation and should not be considered as such. Conduct your own research and seek independent financial advice when required.

Although Whitman uses all reasonable skill and care in compiling this report, no warranty is given as to its accuracy or completeness. The opinions expressed accurately reflect the views of Whitman at the date of this document based on our views at such time regarding market conditions and other factors, may depend upon assumptions or projections that may not prove to be correct, and are subject to change. The opinions stated are honestly held, they are not guarantees and should not be relied upon. 

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