Will there be a period of volatility in the near future?
Reflecting on the past month, Jeremy Richardson explores;
- Rotation within equity markets
- Bond market expectations
- Upcoming earnings season
Watch time: 3 minutes 18 seconds
View transcript
Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update.
The Federal Reserve really changed the game on investors with this announcement that just before calendar year ends that, in its view, inflation to go to such a level where it can now begin to start thinking about cutting interest rates. That led to quite a significant rotation within equity markets, with capital margin flowing out to some of the large defensive technology companies and into the more economically sensitive businesses.
The other thing that we saw was the bond market very rapidly priced in the success of cuts for 2024. So between five and six, 25 basis point cuts is the current expectation. Now if we get 25 basis point cuts, I think a lot of equity investors will probably be very, very pleased. But of course there is a question about why do we get that number of interest rate cuts? Could it be that the bond market is concerned that actually the Fed won’t achieve a no landing kind of scenario and actually a bumpier form of landing is on the cards, in which case interest rate cuts will be the necessary medicine to keep the wheels turning. In that type of an environment, the outlook for equities is probably a bit more mixed.
At the end of last month we spoke about an earnings forecast for 2024, around about 11%. And that does appear to be still to be the case. If we get that 11%, I don’t think equity investors would be too or too concerned. The risk, though, is that we end up seeing some sort of retracement expectations come back in. Why might that be the case?
RWell, we’re just at the beginning of the calendar year. We’ve got an upcoming earnings season and we're going to hear from a lot of companies in the near future about their thoughts for 2024. Maybe we’ll get some new guidance. And it wouldn’t be the first time that management teams looking at an uncertain picture of the year ahead decide to play cautious and actually look back on expectations and some sort of perhaps a weak guidance.
And so there may be a period of volatility in the near future sort of navigate this sort of contesting forces. However, from a fundamental equity investors point of view, actually this sort of segue, we’ve gone from tightening to more easing conditions is actually very helpful, very constructive. And the reason is because we’ve been so concerned collectively as investors about both the level of profits, but also how to discount those back to today’s values with this announcement in December, the Federal Reserve is essentially telling us that the chances of interest rates going up even higher, shortening investors time horizons even further is actually significantly reduced.
That should in theory mean that investors can once again, instead of worrying about what the discount rate should be and start focusing their attention about what the profit should be. And for bottom up, investors are focusing on investing in great businesses. That’s a much more constructive place to be.
I hope it’s been of interest and look forward to catch up with you again soon.
