As the U.S. Fed signals numerous rate cuts could be on the way in 2024, the focus for investors is shifting to the year ahead for markets. Brad Simpson, Chief Wealth Strategist at TD Wealth, discusses with Greg Bonnell the benefits of a diversified portfolio and why investors should remain vigilant when it comes to inflation.
Originally published December 18, 2023
US Federal Reserve has delivered perhaps its strongest message yet that not only are rate hikes finished, but we may see several cuts next year. While that has set off a rally in the markets, the Fed isn't the only issue that investors need to be focused on. Joining us now to discuss what he sees ahead is Brad Simpson, Chief Wealth Strategist at TD Wealth.
Brad, great to have you with us, as always. Lots of stuff to get through, and an excited market based off of the Fed. Where do you want to begin with all this? There's lots to follow.
How many times have you said Fed in the first couple of minutes? I know that's always our starting point. [LAUGHING]
End the year where we started the year, the Fed.
With the Fed, yeah. "And then the Fed said." Well, Greg, it's good to be here, by the way. Thanks so much for having me.
So look, I guess we're going to have to start-- I think we really are going to have to start with the Fed. And I think the reason for this is even your introduction reminded me a little bit of years ago, there was a Steve Martin movie called LA Story, where he was a weather forecaster. Basically, he'd come on air and all they do is throw sunshine up on the screen. "It's sunny, it's sunny, it's sunny, it's sunny.
And in a little bit, when you look at how markets are, they're very much-- you can look at either fixed income or equity, and it's sunny. It's sunny. And you can get-- and that's indeed. And a lot of that is that-- if there's something we've said more than the Fed over the last year, it's we've used the word inflation. And a lot of that's been the driver of either upside or downside for fixed income and equity markets for much of the last couple of years. And there's increasing signs, clearly, that great progress is being made. And I think maybe that's the starting point.
If you look through Powell's comments, over and over again he used the words "very good" and "really good" when he was talking about inflation and the progress that was being made there. And that, I think, alone tells you an awful lot of that. Then he kind of went through this process and talked about, look, we had this-- if we go at the beginning of the year, the supply side really did surprise on the upside and allowed the economy to expand a lot faster while inflation was cooling. And so they've kind of even started to frame that story out.
So the last one is, I think, maybe what he didn't say, as well. And I think if we went back and looked at a tape from when you and I met in the summer, one of the things that we were talking about there is looking at financial conditions index. And back in August of last year, when the financial index was softening, I mean, boy, they absolutely went, wait a minute, that's not what we want here. We want the opposite.
And they've really consistently, since about the summer of last year till now, just over and over said, let's look at these financial conditions. We're going to see them loosening, and we're going to tighten them up. Well, if you look at financial conditions index in the last couple of months here, they're starting to trade like it's 2008, 2009, like at the beginning of a loosening cycle, where you want to get things going again.
And clearly, we're not there. We're at the end of 2023, where we've done everything we could to tighten things up, to slow things down. And there was no concern about how loose some of these financial conditions index are looking right now. So good, really good, and not concerned about loose financial conditions gives you a really good idea of what his comments were.
So I think officially, he's basically coming out and saying, listen, we're not satisfied with inflation. We've got more to go. But kind of unofficially, they think that inflation is real close to their kind of 2% target rate that they're looking towards. They're feeling pretty good about things. And then both fixed income and equity markets are trading off of that.
Now, you have a chart to show us, Brad, because there is an old saying, right, that the last mile can be the hardest mile. Talking about the fact that getting actually back-- we've made great progress, but getting back to 2, where you want to be, could be a bit of a slog.
Yeah. And I think that's when-- so clearly on this, we kind of have this giddiness at the moment. But I think, at the end of the day, there still is this process that we need to go through. Rents, they are looking a lot better. We saw a little bit of a move upwards on the CPI numbers, where the used car prices were starting to move upwards. But that's probably a temporary thing, as well. Rents are still a concern.
And so we're going to be publishing, either today or tomorrow, our year-ahead document. And that's where this chart is from. And as well as we're feeling good about all this stuff, any sign, anything that says that there could be a reversal in inflation, that you could see things tighten up very, very quickly.
And I think that while we're feeling good about things, I think we're not at a place where you're declaring victory yet. And that's really all the point we were trying to make there. And we'd better continue to be making sure that we're pretty diligent.
What could that mean, then, for investors? I mean, we take the win for now, and the markets are rallying, and yields are falling, and you're feeling a bit better about the situation. But could this mean just more volatility in equities? As you said, the fight against inflation isn't over yet. It's going to be a bit of a slog. A bit of a bumpy ride on the equity side?
Well, I mean, first of all, right now, what we're seeing right now this is a really-- in the short term, anyways-- a really pro-risk environment. And so that's why you're seeing these kind of equity assets really start to rally here in a much broader-based rally.
And it's also obviously good news for yields and for fixed income returns in the short term, as well, which is why we've seen the move that we've seen there. And also, typically, this also means that you should have a lower US dollar. And that's what we're seeing, as well. So in the short term, undoubtedly, there is that.
Now, I would say an awful lot of our discussion so far today has been short-term, short-term, short-term. And this will start to evolve and change. And I think we have to start thinking about, OK, where are we going to go from there? Let's enjoy the moment, but let's start framing out where we are next.
So I think to your point, one of the things that, if you think about all the remarkable things and difficult things that we've gone through in 2023, there's been absolutely almost no equity volatility whatsoever. And so again, one of the things that we think as we start moving into 2024, that one thing that we might want to be mindful of is that this lack of volatility is probably going to start moving away. We'll probably see more of it as we move forward.
We're kind of at a pricing part now where an awful lot of the good news, any good news you want to find is increasingly getting closer to being priced in. And so if you think about some of the other things we're going to have to work our way through, that we should see some more equity volatility as we move forward.
If we think about volatility, some investors see it as opportunity, as well. But there the old saying again, too, you've got to have a sharp pencil. Is it going to be that kind of 2024, where you've really got to pick your spots?
Yeah, well, I think an interesting way of looking at that is I think it's been well documented that, in 2023, it was you had to pick the spot, right? And until really October, this was very much a one-story market we had. And we've belabored that to death, which is the Mag 7.
And I think that the good news is that, since October, we've seen a pretty broad-based rally, both in equity markets and if you look at that spread of-- if you take the S&P 500 and look at the difference in return, even still kind of year-to-date, and you look at how much of that return has been through that big group of seven, and then how much the other side has lagged, and then if you kind of look over at the Russell 2000, just to get kind of a broader scope on what the kind of baseline small-cap company has done, the return has still been very low there.
So I think that picking your spot there might be is ways of looking at it is that, as we're moving forward in 2024, is that there's probably going to be a market where you can be invested in more spots. And if you're invested in more spots, that's going to be more beneficial for you based on rate of returns.
And it's also going to mean that it'll be better for folks who are running diversified investment portfolios, which, quite frankly, have, up until, again, kind of this October, when things really started to rally-- and we're pretty pleased about this rally, because one of the things you and I have talked an awful lot about is that you can't set your calendar by it or set your watch by it, but there's all things pointing to, especially on the fixed income side, that you would see that rally start to kick in. And indeed it has.
And so I think that you could look at 2024 is going to be a market where the people who are running diversified investment portfolios are going to be really happy that they did. And I think that's going to be a good year for that. [AUDIO LOGO]