As we approach the end of another decidedly positive year in U.S. markets, it bears noting that 2024 holds a great similarity to 2023, insofar as the key themes driving performance. Equities are hovering near all-time highs, buoyed by optimism that Artificial Intelligence (AI) will propel revenue, earnings, and productivity gains for both the enablers and adopters of these technologies. Paired with the rate-cutting cycle that the Federal Reserve (Fed) embarked upon in September, this could certainly provide an accommodating backdrop to equities for the balance of the year.
There are 50 days between the conclusion of the Fed’s September and November gatherings, the longest such inter-meeting period of the year, and one that occurs at a time of particularly heightened tension and uncertainty on economic, political, and geopolitical fronts. The Fed strives to be politically agnostic, and while we expect it to continue to make decisions solely on the data, market expectations for future rate cuts have been aggressively dovish of late, with inflation on the wane, just as the Fed’s other mandate of full employment begins to reflect increasing softness. Just prior to the meeting, the futures market was anticipating 1.25% in total cuts to the Fed Funds rate by the end of 2024, which remains tentatively the case after the Fed’s initial 0.5% cut on September 18. Notably, the market’s expected year-ending 2025 rate of 2.75% is well below where the Fed expects it to be based on its most recent economic projections.
If such a slashing of rates over a short period of time were to materialize, it would suggest that either the Fed successfully “stuck the soft landing”, or that the U.S. economy experienced a growth scare, or perhaps even recession, triggering highly accommodative policies. We have seen this type of dissonance between the market and the Fed before, in fact all throughout 2023 and 2024, during which the speed of rate cuts was continuously over-estimated by market participants. Each time these rate hopes have been dashed, but the market has powered on. Should the bridging of this latest expectations gap bring about volatility, we would encourage clients to remain focused on their longer-term objectives, just as our team of portfolio managers will remain attuned to revenue and earnings growth and quality, and fundamental relative value, the pillars of our investing philosophy at The Trust Company.
As we take a step back to contemplate the extraordinary performance of U.S. markets, one cannot help but make a comparison with U.S. chief rival, China, amid its economic and financial struggles in the post-covid period. While for many years China reigned as the world’s growth engine – often accounting for more than 30% of global economic growth as well as the destination for much of the world’s foreign direct investment (FDI), and an equally superlative stock market, the script has reversed of late. In 2022 and 2023, the U.S. delivered almost half of the world’s global growth, while China in fact detracted from global growth by 0.3%. FDI has collapsed to levels last seen in 1993, and the Chinese stock market has retreated 8% over the past 5 years, compared to the S&P’s 89% advance. While perhaps less stark, these favorable comparisons can be made for the U.S. relative to virtually every other global peer. The U.S. remains the unchallenged leader in innovation, technology, R&D, management talent, corporate transparency, complemented by deep and liquid capital markets, flexible labor markets, and critically, the rule of law and robust regulatory oversight. So should we encounter any choppiness in the period ahead, we would remind our clients that the U.S. has the best house in the neighborhood, by some distance.
TThe Sanibel Captiva Trust Company is an independent trust company with $4.5 billion in assets under management that provides Family Office and Wealth Management Services, including investment management, trust administration and financial counsel to high-net-worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered, independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Fort Myers, Naples, Marco Island, Tampa, Belleair Bluffs and Tarpon Springs. www.sancaptrustco.com
