Mid-year outlook: Will U.S. markets stay strong?

Chhad Aul, Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.

As 2024 began we asked ourselves if major economies across the globe would experience a hard landing (recession) or a more muted soft landing.

The definition of a soft landing was a moving target back then. In our mind, a slowdown that reins in inflation without a significant spike in unemployment would qualify as a soft landing. The first half of 2024 has given us the following hints:?

1. Soft vs. hard landing

• Growth across major global economies continued to cool and labour markets remained strong
• Inflation continued to moderate and allowed a few major central banks such as the Bank of Canada (BoC) and the European Central Bank (ECB) to begin cutting interest rates
• U.S. growth continues to be more resilient than other regions but inflation has also been stickier. This has pushed out U.S. interest rate cut expectations to the fall of 2024

2. Economic divergence

• The divergence in the U.S.’s growth, inflation, and policy response over other regions has spurred a strong U.S. dollar
• However, economic surprises in the U.S. trended downward over Q2 2024, and it looks set to continue into the second half of 2024
• On the inflation front, we expect shelter inflation which is measured with a lag to real time measures of rents, to moderate. We think it may take a bit longer for wage growth to normalize.?We expect inflation to slowly fall over the second half of 2024
• The economic divergence between the U.S. and other regions may take a breather in the second half of 2024 as policy expectations for the U.S. move more in line with other major economies. This could limit further gains for the U.S. dollar

?3. Stress events

• Could the U.S. election present a stress event for markets in the second half of 2024?
• For broad equity markets, neither of the two U.S. presidential candidates or parties present clear danger as both are well known to the market. Markets have performed well under both U.S. Presidential candidates
• For bond markets, the focus may shift to persistent budget deficits in the U.S.?Neither Democrats nor Republicans appear interested in tackling the budget deficit – whether by raising taxation or by reducing spending.?The best bet to break a further deterioration in the deficit may be a split government outcome
• The U.S. treasury market will likely be relieved by a split outcome between the U.S. Presidency and the U.S. Congress. But if the odds of a sweep were to rise for either party, we think bond markets could demand higher risk premium for U.S. debt.?We got a taste of this at the end of Q2 2024, when the first Presidential debate raised the odds of a Republican sweep and the treasury market saw a quick spike in longer-term bond yields

4. Return of diversification

• The diversification benefits of combing equities and bonds in a portfolio has been challenged in the past two years due to higher inflation. When high inflation is the main driver of yields, bond prices and equities tend to correlate
• Our research shows that the diversification benefit between equities and bonds reasserts when inflation falls below 3%. While inflation was sticky above the 3% level in the U.S. for the first half of 2024, we think inflation could fall below the 3% level and bring back diversification benefits to equity-bond portfolios in the second half of 2024
• As inflation continues to cool, economic growth becomes the main driver of bond yields and the diversification benefit of bonds against equities typically reasserts itself
• Importantly, if markets are wrong and we experience a hard landing, stocks will fall as earnings expectations are marked down. But bonds stand to perform well as interest rates drop

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc.?These views are subject to change at any time and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds. Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and Sun Life Financial Trust Inc., all of which are members of the Sun Life group of companies.

? SLGI Asset Management Inc. and its licensors, 2024. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.