CAG on "Three Themes of 2024"
Capital Advisors Group recently published "Three Themes of 2024 Whitepaper: The Ghost, The Wall, and The Known Unknowns." It tells us, "Last year, our credit team identified three themes in our 2023 outlook: a) interest rates nearing an inflection point, b) continued higher commodity prices, and c) banks heading off consumer credit risks. We were spot on with the Federal Reserve System at an inflection point, as it managed to hike the fed funds rate by 75 basis points (bps) more than the market had expected and held it there for five months and counting. At the December Fed meeting, the central bank officially pivoted towards easing in 2024. Despite a market consensus outlook of a shallow or moderate recession in 2023, gross domestic product (GDP) rebounded to 4.9% in the 3rd quarter. Headline consumer price index (CPI) improved from 7.1% at the end of 2022 to 3.1% in November, and the unemployment rate remained low at 3.7%. In this regard, 2023 was the best of times indeed." CAG continues, "On the credit side, the risk from rising consumer debt burdens leading to bank failures did not materialize, but high uninsured deposits and massive unrealized losses of Treasury securities led to three of the four largest bank failures in history (i.e., Silicon Valley Bank, Signature Bank, and First Republic Bank), all within two months of each other. By the end of the year, deposit outflows and interest margin compression have moderated or stabilized without a significant rise in credit losses. Banks are in a stronger position for 2024 than a year ago as the Fed is poised to lower rates." The piece states, "Looking to 2024, the strange melancholy in the market last year has now been replaced by a strange euphoria, with a powerful rally in risk assets riding on the impending rate cuts. Yet the Fed itself acknowledges that the road to 2% inflation is likely to be a long one, with a good chance of a long pause before cutting; and dare we say even a hike or two? A knock-on effect of the long Fed pause likely will be felt on the high pile of corporate debt issued at low coupon rates in the lean COVID-19 years that must be refinanced at much higher costs. In climbing this wall of maturing bonds, some credits may fare better than others." Finally, they write, "With this context in mind, our analysts will dig into these themes for 2024: 1. Ghost of the great inflation haunting the Fed in rate cuts 2. Corporate credit staring down the great (maturity) wall 3. Known unknowns in deglobalization may threaten growth and inflation.... Despite my allusion to Dickens in the opening, we hold guarded optimism for 2024 as lower rates often lift many boats. The Fed looks set to claim credit for a rare soft landing, guiding inflation towards its 2% target without destroying growth or killing jobs. Lower rates reduce funding costs and lessen stress on credit. Recent high-level talks between the U.S. and China are signs of both sides' reluctance for wider confrontations. A strategy of extending portfolio duration with laddered maturities may offer protection against lower future rates and help retain liquidity and flexibility for reinvestments in case the Fed pauses longer than the market expects."
