2024 Global Market Outlook

Our approach continues to be ‘stay alive and look for the ball’. That sports analogy is a perfect way to explain investment management in today’s economy. We expect significant divergence in asset classes and within different sectors. Tactically, it’s certainly desirable to be in the market for potential gains, but it is equally important to thoughtfully manage portfolio risk.

Scott Tremlett, CIMA®, CFP®, ChFC® | Managing Partner/Chief Investment Officer

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US Equity:	Neutral
Developed Int’l Equity:	Underweight Japan; Underweight Europe (overweight UK)
Emerging Markets Equity:	Overweight India; Underweight China
US Government Bond:	Neutral
US Corporate Bond:	Neutral to Overweight
International Bond:	Neutral
Emerging Markets Bond:	Underweight
REIT/Commodity:	Underweight
Alternative Assets:	Neutral
Preferred Sectors:	Financial Services, Utilities, Technology

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Paramount Global Rankings

(as of September 2024)

#11. United States

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2024 Paramount Economic/Market Themes

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2024 Scorecard and Outlook

(1) FEDERAL RESERVE WILL NOT CUT INTEREST RATES UNTIL SUMMER 2024, AT THE EARLIEST

This was not a popular theme to begin 2024. Markets were expecting 6 quarter-point rate cuts throughout 2024. The economy exhibited strength and growth, job availability was abundant, and inflation persisted, even showing an increase through March. It’s important to note that the Federal Reserve lowers interest rates to assist the economy, particularly to encourage growth or to prevent job losses. Considering that to be the Fed’s mandate, I did not see a reason to reduce rates until some cracks began to show. Unemployment has ticked up recently with vacancies and hiring both down. Although major layoffs have not yet occurred, the rising unemployment rate itself poses a risk if consumers start thinking, ‘the job market is deteriorating, I should cut back on spending’. Below is the latest ‘dot plot’ from the Fed (participants offer guidance on the direction, this is not an official projection nor actual policy) and you can see the disparity amongst the voting members. Future inflation numbers and employment factors will be considered, and actual policy moves will be data dependent.

FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate

Number of participants with projected midpoint of target range or target level Make Full Screen

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

(2) EARNINGS GROWTH IN THE UNITED STATES WILL NOT HIT DOUBLE DIGITS IN 2024

This one, I was incorrect. Q2 2024 earnings per share growth rate came in at 11.3%¹¹. To offer pretext, I could state that the year-over-year comparable added to the double-digit growth rate – however, no excuses here. Growth was stronger than expected, in fact the largest growth rate since Q4 2021. There are signs that revenue growth is slowing, and estimates for Q3 earnings per share are down over 35% since the end of June.

(3) UNEMPLOYMENT IN THE UNITED STATES WILL INCREASE ABOVE 4%

For the first time since the pandemic began, wage growth is now lower than the unemployment rate. While this section focuses on unemployment statistics, it’s important to note that wage growth has been nearly as significant an issue as housing inflation. Many businesses have struggled with higher wages, but increased worker productivity may help offset some of these costs. This impacts unemployment because, rather than hiring new employees, employers are demanding more from their current workforce. There are still more job openings than job seekers in the US. Quits have significantly decreased since the pandemic, and we haven’t seen mass layoffs. The labor force is aging both in the US and globally, and participation rates for those aged 18-64 are near all-time highs. In total the labor market is still tight, and employers are still struggling to find qualified candidates. The Fed does feel confident in attaining a soft-landing for the economy and in order to do so employment (pivot away from inflation) will be the focus going forward.

(4) THE DOLLAR WILL WEAKEN

I have to consider this a ‘mixed bag’. Beginning the year my expectation was for the dollar to weaken versus other currencies. However, as inflation remained sticky and earnings surged, the dollar gained strength as well. Following the Federal Reserve’s guidance on lowering rates, the dollar has experienced a notable decline. Currency valuations are determined by many factors, including:

1. Higher Interest Rates: When a country’s central bank raises interest rates, it often attracts foreign investors looking for the highest return on their investments. This increased demand for the country’s currency can lead to an appreciation in its value.
2. Lower Interest Rates: Conversely, when interest rates are lowered, it can lead to a depreciation of the currency as investors seek better returns elsewhere.
3. Interest Rate Differentials: The difference in interest rates between two countries can influence exchange rates. Investors might move their capital to countries with higher interest rates, affecting the relative value of currencies.
4. Economic Indicators: Interest rates are often adjusted based on economic indicators like inflation and employment. These adjustments can signal the health of an economy, influencing investor confidence and currency value.

My expectation for slowing growth led me to believe that the dollar would drop in value. For full transparency I changed my stance in February and made changes (that have since been taken down) to some international exposures. Today, these decisions are important with the divergence of monetary policy around the globe.

Why are currencies important? In many cases when investing internationally investors have a decision to make regarding investing in dollar-denominated investments or foreign currencies. Example: Total Return to Investors = Fund Returns (base currency) + Exchange Rate Fluctuations (base currency vs investor’s preferred exposure currency) Let us assume (1) Current Exchange Rate is 1 USD = 1 foreign currency unit (2) Dollar appreciates & the New Exchange Rate is 1 USD = 1.2 foreign currency units (3) This means that the Exchange Rate Fluctuation would be worth a gain of $200 for a $1,000 investment

(5) INTERNATIONAL STOCKS WILL OUTPERFORM

Reviewing the Paramount Global Rankings throughout the year I notice a trend. The current strength of the global economy is dominated by the emerging markets. As for Europe, Spain is the only European country to crack the top 10 year-to-date. The United States does fall within the top 5 – tied with Spain for #5 overall year-to-date. The top 10 is comprised of the US, Spain, and 8 emerging countries.

Momentum rankings are more volatile, and year-to-date momentum rankings do include the United Kingdom, Spain, and Switzerland from Europe. The major players in emerging markets also do show up in the momentum rankings, except for China. The United States does not fall in the top 10 year-to-date on momentum.

Going into 2024, I believed that US growth would slow, and the dollar would follow. As stated above, growth remained strong, and the dollar rode the wave up and back down. Overall, the broad-based international indices have not outperformed US stocks. Fortunately for our investors, our foreign investments in India and the United Kingdom have outperformed. Dollar denominated in investments in Japan and Europe had pockets of outperformance as well. We currently have less than 1% of total equity exposure in China. China has been fighting against a complete real estate collapse – remember how that economy felt back in 2007? Measures taken by the Peoples Bank of China are needed in order to correct the confidence issue that is holding back the Shanghai Stock Exchange.

*JAPAN* – An important part of deciding which assets in which to invest is managing the overall risk of the portfolio. There are times when increased volatility or risk outweighs the potential reward. Japan is in an interesting situation where job growth is strong, service growth is strong, and the Bank of Japan is starting to get increased inflation which they hope leads to increased domestic consumption. These are positive aspects, yet they also present a chance to observe the impact of currency valuation fluctuations on foreign investments.

YEN CARRY TRADE:

What is a Carry Trade? It is when an investor buys (or short sells) a less expensive currency (in this case yen vs dollar) to invest elsewhere. This strategy may be profitable if the currency remains less expensive. However, if the currency gains strength and in turn the funding costs of the strategy this is can create negative returns. Recently, the Bank of Japan raised its interest rates, while concurrently, Federal Reserve officials signaled a reduction in U.S. interest rates. Movements in central bank policies often influence currency valuations. In this case, the yen appreciated quickly, further driven by investors covering their short positions on the yen. This surge led to a nearly 20% drop in Japanese stock markets within two days. Although international markets have partially recovered, the divergence in monetary policies and the narrowing currency spread may lead to increased volatility, potentially offsetting the positive economic trajectory.

(6) SMALL CAPS WILL NOT OUTPERFORM

WHY DO INVESTORS BELIEVE SMALL-CAP STOCKS WILL OUTPERFORM WHEN RATES GO DOWN?

1.Lower Borrowing Costs – Small-caps typically have higher levels of debt than large-cap companies. Lower interest rates reduce their borrowing costs

2.Economic Sensitivity – Small-caps are generally more sensitive to economic conditions. When interest rates are lowered, it often signals an effort to stimulate economic growth

3.Valuation and Growth Potential – Small-caps often trade at lower valuations than large-cap stocks. When rates and the cost of capital drops, this could potentially lead to higher valuations and growth prospects for small-cap companies

4.Increased Investor Appetite for Risk – Lower interest rates can lead to a search for higher returns, prompting investors to move from safer investments to riskier assets like small-cap stocks

There has been much discussion this year about small-cap stocks, value stocks, versus large-cap growth technology stocks. Throughout the year I have been reducing large-cap growth technology in favor of utilities, insurance companies, and industrials. I do see broadening as the way of least resistance however I am not in favor of small-cap stocks given the current economic backdrop. I see rate cuts as measured so the significant cost savings in borrowing capital will take some time. The biggest drawback is economic sensitivity. I admit that earnings growth has been stronger than I expected. Yet, I am also seeing earnings estimates coming down, and most importantly revenue projections dropping as well. This doesn’t mean I foresee a recession (I made it this far without mentioning recession) however slowing revenues and increasing unemployment do not lead me to believe in a roaring economic backdrop that would favor small-cap stocks.

(7) IT IS A TIME FOR ACTIVE MANAGEMENT AND STOCK SELECTION, WITHIN SECTORS THERE WILL BE A WIDE DISPARITY BETWEEN WINNERS AND LOSERS

Below are two examples of disparity year-to-date. The initial chart highlights the disparities within sectors, showcasing the stark contrast between the highest-performing chip manufacturers and the least successful ones. The second chart presents the various global markets and their respective stock market performances, highlighting significant discrepancies throughout. I would argue we are not in a buy-and-hold stock market and what is in favor will change quickly over time. I expect greater volatility as the year progresses and the election grows closer. Whether we are discussing stocks within sectors, countries in which to invest, money managers to hire – I foresee this disparity to become an even greater point of emphasis.

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Investor Education

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REFERENCES

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DISCLAIMER

The views expressed represent the opinion of Paramount Associates. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources believed to be correct and current, but it should not be regarded as complete, an endorsement or personalized investment advice. Forward looking statements are speculative and based on assumptions as well as known and unknown risk and uncertainties. Past performance is not indicative of future results. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Nothing contained herein constitutes financial, legal, tax, or any other type of advice. A professional advisor should be consulted before implementing any investment strategy.

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