MARKET OUTLOOK

Maybe it really is different this time. A typical business cycle usually consists of an overheating economy followed by higher policy rates imposed by central banks. This eventually leads to a slowing economy, and in 6 out of the last 7 monetary tightening episodes in the U.S since 1970, the economy has fallen into recession. Higher lending rates slow consumption, leading to layoffs, which further slows consumption and more layoffs, and so on. However, this cycle has been different so far. When the Fed began raising interest rates in 2022 to fight inflation, the personal consumption response was much more muted than usual, thanks to previous emergency pandemic stimulus. The U.S. economy has slowed somewhat in response to tighter monetary policy, but employers have been mostly reluctant to implement significant layoffs with the fresh and painful memory of the 2020-2021 pandemic reopening when consumer demand rebounded sharply but employers had a hard time finding workers to satisfy demand. So-called “labor hoarding” has become a significant attribute of the current economic cycle, which has contributed to the relative strength in the labor market, consumption, and the economy in general.

Outside the U.S., the experience has been largely the same, with some economic softness but no abrupt and violent collapse in economic activity or corporate earnings. As a result, the All Country World Index (ACWI) has returned 19% year to date through the third quarter of 2024 with similar double-digit returns across all national markets in our universe. There is a saying in the investment industry “buy the rumor, sell the news”, meaning stocks tend to perform well when expectations are for lower borrowing costs in the future, but they tend to weaken once the easing cycle begins because investors have already bought shares in anticipation of lower rates. With global central banks now in easing mode, but equities so far continuing to march higher, it seems we are in a “buy the rumor, buy the news” investment environment.

Looking forward to the rest of 2024 and into next year, we estimate the likelihood of a U.S. soft landing is higher today compared to a few months ago. The global economy has withstood the tightening cycle remarkably well and is now in the loosening phase. That said, raging equity bull markets typically start with severely depressed economic data, oversold equity conditions and very attractive valuations, none of which are present today. Furthermore, long duration Treasury yields are closer to 4% today rather than the 2% average level for the ten years before the pandemic, so there is an alternative to stocks, when and if sentiment turns sour towards equities. So, while a recession seems less likely, conditions suggest equity returns will be muted, and volatility could be quite high. We continue to focus on diversified portfolios for our clients made up of well-managed, global companies across economic sectors to protect against market downturns and offer strong returns when conditions change.

A note on the looming US Presidential and Congressional elections: While there can be very short-term reactions in markets to surprise election results, the intermediate term is unlikely to be impacted meaningfully while policies are being implemented by a new administration. In the long-term, inflation, currencies, trade, and capital investment can all be impacted by the political environment, but more important to the economy and markets are technological advancements, responsible monetary policy, and global trends.

Impact Update

Despite growing political opposition and absurd accusations from far-right groups, we were able to file our first resolution of the 2025 proxy season on Apple’s lobbying spending. This is a testament to our resilience, even as critics claim we’re part of a so-called “climate cartel.” We visited an Amazon fulfillment center and saw firsthand the disconnect between human needs and the demands of automation, while the company takes small steps to improve conditions. We also celebrated wins, like Chubb’s decision to stop insuring a controversial Rio Tinto project and Unilever’s long-awaited exit from Russia show that our efforts are making a difference. Read our Q3 2024 Impact Update to learn more.

Disclosures: Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes. This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. All expressions of opinion are subject to change. You are cautioned not to place undue reliance on these forward-looking statements. Any dated information is published as of its date only. Dated and forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any dated or forward-looking statements.