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PWM Market Comment (Apr '24): The Three Pillars of Change

PWM Market Comment (Apr '24): The Three Pillars of Change

April 22, 2024

As we progress through 2024, the global economic landscape is being impacted by a series of shifts that signal a departure from past trends, potentially reshaping investor strategies across the globe. Central to understanding these shifts are the dynamics around interest rates, inflation, and the geopolitical pressures uniquely defining this year.

Here are a few bullet points summarizing the Market Comment:

  • Interest Rate Policies: In 2024, countries like the Eurozone, Canada, and Australia are reducing their interest rates faster than the U.S. This unusual pattern might lead to a weaker U.S. dollar and affect global stock markets if the U.S. starts increasing rates.
  • Inflation Differences: While the U.S. faces higher-than-expected inflation, other countries are seeing quicker decreases. This could lead to higher commodity prices due to shortages caused by underinvestment and geopolitical conflicts.
  • Geopolitical Impact: Ongoing global tensions are affecting the markets for essential commodities like oil and gold, which are important for both economic and political reasons.
  • Adapting Investment Strategies: We prefer investing more in stocks, especially U.S. ones, anticipating stable or reduced interest rates. Our outlook is cautious about investing heavily in commodities like oil and gold despite current favorable conditions.

Interest Rate Dynamics and Monetary Policy Adjustments


A noteworthy trend in 2024 has been the diverging paths of monetary policies among the world's central banks. Historically, the U.S. Federal Reserve (Fed) has often led global interest rate cuts, but this year we may see a different sequence. The Fed, while poised to ease policy, could be outpaced by other central banks in developed economies like the Eurozone, Canada, and Australia, which are experiencing more pronounced disinflationary pressures (i.e. a faster reduction in inflation).

This development is peculiar and significant. It reverses the typical pattern where the Fed leads and others follow, underscoring a global economic environment that is increasingly asynchronous. The implications may be profound: equities tend to rise and the dollar generally weakens in scenarios where the Fed follows rather than leads rate cuts. However, if the Fed were to pivot back to hiking rates while other central banks cut rates, the potential for a strengthened U.S. dollar and depressed equity markets looms, echoing a dynamic last seen in 2015.

Inflation Surprises or New Economic Order?


Inflation dynamics in 2024 present a mixed bag. The U.S. has witnessed inflation rates exceeding expectations, a stark contrast to many of our global counterparts, where inflation is cooling more swiftly than anticipated. This discrepancy highlights varying economic pressures and could influence central bank policies in unexpected ways.

If the pattern of the past 12 months persists, the concept of the "New World Order" in economic terms will persist as well—a theory suggesting a move from abundance to scarcity across various commodities due to factors like underinvestment, climate change, and geopolitical tensions. This theory anticipates an inherently inflationary environment ahead, as heightened demand meets constrained supply, especially noted in the rising prices of gold, which are being propelled not just by market speculators but also by central banks and consumers in non-aligned countries.

Geopolitical Influences and Commodity Markets


Geopolitically, 2024 has been rife with tensions that have added complexity to the economic landscape. The standoff in commodity markets, particularly around oil and gold, reflects broader security and economic alliances reshaping global trade flows. These commodities are not only essential for economic infrastructure but also for the geopolitical leverage they confer on producing nations.

Market Strategy


In response to these economic indicators, our investment strategies have adapted. Pacific Wealth Management portfolios in 2024 continue to favor an overweight position in stocks relative to bonds and cash. We view U.S. equities, in particular, favorably due to strong market fundamentals and robust economic growth, despite global uncertainties. Regionally, the US remains the preferred market, but emerging markets are beginning to look more attractive.  While the concept of additional rate hikes would likely present challenges for US equity markets, we view that scenario as less likely than the alternatives: rates staying where they are, or rate cuts occurring.  While there are tailwinds for commodities like oil and gold, we do not anticipate these tailwinds to be long-lasting, and therefore are not opting to lean into those areas of the market.  We are taking advantage of the current momentum by participating in the greater Energy sector instead.

Looking Ahead


As we proceed through 2024, the key for successful investors will be to navigate this complex and multifaceted global economic terrain with a keen understanding of underlying trends and shifts. Adapting to the interest rate dynamics, inflationary pressures, and geopolitical risks will be vitally important. With careful analysis and strategic positioning, the potential to capitalize on these trends remains substantial, even in an environment brimming with challenges and uncertainties.

In conclusion, while the global economy of 2024 presents a landscape of both opportunity and risk, the overarching theme is one of transformation and realignment, with monetary policies, inflation rates, and geopolitical tensions directing our strategic decisions and policymakers alike.