Evan Harp sat down with Main Management’s founding partner Kim Arthur to discuss the broader market situation going into 2024.
Evan Harp: What’s the most important story for investors to track as 2023 comes to a close?
Kim Arthur: All eyes have been on rates since they peaked in October. The Fed Funds futures, in particular, are now pricing in roughly four cuts in 2024, compared to just two cuts projected by the Fed in their latest “dot plot.” Continuing to watch how rates move across the curve should be top-of-mind and have significant implications for the rest of the market.
At the same time, the latest data also shows inflation continuing to moderate from those 40-year highs hit last year. If we see further confirmation of that disinflationary trend faster than expectations, it may give the Fed room to change course on rates sometime next year. Both rates and inflation trends should therefore stay center stage for investors. Where they point will determine how monetary policy and growth evolve.
Strange Economic Indicators
Harp: Economic indicators continue to send mixed messages. What does Main Management see as likely to happen in the first quarter of the year? And what does the economy look like on the one-year anniversary of this interview?
Arthur: We believe things will probably continue moving in the right direction for the most part. GDP growth will likely slow but remain positive. We expect we’ll see quarterly annualized growth settle in around the 1.5%-2.0% range — slower than the 5.2% reading we just saw but still expansionary. Inflation may also continue to grind its way lower, but not without some hiccups. We could easily see monthly variability cause headline CPI to reaccelerate temporarily.
However, we expect the core inflation trend to keep descending toward the Fed’s 2% target. That may allow them to move toward rate cuts, perhaps even in the front half of 2023 depending on the urgency to support growth. The most probable path right now seems to be a soft landing scenario playing out, though we can’t rule out additional turbulence if inflation pops back higher. As long as consumers keep spending and the job market remains resilient, this economic expansion may well be poised to continue in 2024.
Kim Arthur on AI’s Growing Importance
Harp: AI is an increasingly popular topic. With strife at OpenAI, and controversy around copyrights illuminated in the WGA and SAG AFTRA strikes, what does 2024 look like for AI? Do we continue to see more advancement and a bullish market, or is there a rocky road in the short term?
Arthur: The recent strife at OpenAI and debates over copyrights and compensation highlight some of the growing pains that the technology is experiencing. However, we believe that in the long run, these will prove to be short-term struggles on the path towards advancement.
Looking ahead to 2024, we expect to continue seeing innovation in AI, though the road may be rocky at times. The dismissal of some early lawsuits indicates that copyright issues are complex but surmountable. There will likely be ongoing tensions as creators and corporations grapple with monetization. But precedents set in the courts should help establish guidelines over time.
For investors, it is critical to take a balanced perspective on AI. The hype cycle can lead to extreme opinions on potential impacts (on both sides!). We should aim to realistically assess how AI can transform industries and lives without drinking too much of the “Kool-Aid.” It is important to note that the technology released so far from OpenAI and others, though still evolving, is still estimated to have considerable economic impacts even if progress stalled today.
Geopolitical Tensions and What They Mean for Investors
Harp: Geopolitical tensions are extremely high right now. There’s a host of bad news out there. How will it impact the markets in 2024, and how can investors prepare?
Arthur: As we head into 2024, geopolitical tensions are a point of caution for investors. While a lot of the current news is already priced into markets, it’s the unpredictability of future conflicts that poses a real challenge. Investors should focus on diversification to mitigate risks across sectors and geographies. Staying vigilant and informed is key, as new developments can occur and impact the markets.
However, maintaining a long-term perspective is also crucial. Short-term conflicts, though concerning, often have a limited impact on well-diversified, long-term investment strategies. So, the focus should be on adaptability, informed decision-making, and keeping an eye on the long-term horizon.
How the US Elections Could Impact Markets
Harp: 2024 is an election year in the US, and it promises to be a contentious one. What impacts on the markets could we see as a result of a closely contested election?
Arthur: Early polls indicate the next presidential election may well be extremely tight. Although, surveys a year ahead – where we are now – average 10-point errors historically, so the outcome remains highly uncertain. While this uncertainty itself poses risks for market, ultimately, markets track fundamentals more than politics. With earnings continuing to grow at a steady pace while inflation eases, conditions remain constructive next year regardless of November’s result.
There are some policy differences that could impact sectors, taxes, and spending at the margins. But major reforms generally do not transpire. There’s also potential for bipartisan progress on infrastructure and energy. So while polls may waver and generate headlines, the economic and earnings backdrop argues for resilience. Tensions around a close vote could spark modest volatility, but markets have a record of progress despite Washington. The big picture for investors still hinges on rates, profits, and economic momentum beyond election-year theater.
International Politics: Is the EU in Danger?
Harp: Looking at international politics, a right-wing extremist won the Dutch election. Will the Dutch follow the British and exit the EU, and what could this mean for investors?
Arthur: Context is important. The Netherlands is roughly 1% of world GDP, 1.3% of the MSCI ACWI and 3.3% of the MSCI ACWX. So even if they do leave, it feels like the effects would be fairly minimal from an investment standpoint. Also important to remember is that even if they leave the EU, there are still many issues to be negotiated that could result in the end product being far less severe than the headline departure from the EU.
Kim Arthur’s Approach to 2024
Harp: How is Main Management planning to strategically approach 2024? Walk us through what happens if the economy does well, what happens if it stays topsy-turvy, and what the worst-case scenario could be.
Arthur: We remain focused on being nimble and reactive to events as they occur. We have a broadly barbelled approach across our strategies with exposure to growth at a reasonable price and value/cyclical areas in order to take advantage of various market environments.
If the economy behaves well, there’s the possibility of 15-20% returns, but with an election year, you will likely get some uncertainty in August/September/October ahead of the election, so be prepared for that. I don’t know that I’d define the economy as topsy-turvy right now. Things are moving forward relatively smoothly, with GDP growth and inflation continuing to grind lower while the labor market is solid.
If you are comfortable with the way things have worked out for you this year, you may opt to stay on that course. However, should one envision more uncertainty, our firm’s BuyWrite strategy — also available as an ETF — may be worth a look.
Otherwise, if markets take a negative turn, you may see a flight to safety that could drive bond yields down and help the fixed income space as a whole. That would likely warrant some more defensive positioning to be sure, but again, it depends on what spurs that downturn. Is it another unforeseen geopolitical event? Or a broader weakening in economic data both in the U.S. and around the world? Those two scenarios would likely warrant different approaches.