Advisors can now join our thought leaders as they discuss current markets and actionable investment solutions. This small-setting format allows for advisors to ask questions and enter into a dialogue, leveraging our thought leadership to navigate the market uncertainty. The schedule is updated weekly.

The Decade of Dividends: U.S. Equities

Outlook: Our primary concern with regard to the S&P 500’s earnings outlook for 2023 is that banks are indicating a buttoning up of their lending standards, an occurrence that sometimes indicates corporate profit trouble. We await Q2 data on this front, as the Silicon Valley Bank (SVB) and Signature Bank failures were Q1 events.

Growth-oriented stocks led for some time, largely since the Global Financial Crisis, but was 2022 a turning point to kick off a value cycle? Historically, the value/growth cycle has been a pendulum with periods lasting several years.

• What We Like: The bear market has already aged—and maybe ended in October 2022—indicating a chunk of the pain may be behind us. Additionally, valuations are more reasonable than they were before the market peaked in January 2022, while the market is heartened by the ever-nearer prospect of a Fed pivot to lower rates. Further, unlike conditions at the peak of the mania, sentiment is sober. Equity longs are certainly not engaging a market that is populated by giddy, unrealistic expectations.

• What Could Go Wrong: The value cycle turns out to be just a value trade—a shorter term run for value. This risk was readily apparent in Q1, which witnessed growth outperform amid interest rate declines.

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The Decade of Dividends: International Developed Equities

Outlook: We keep coming back to the dollar’s bull market, which got itself to the point where its real effective exchange rate (REER) reached highs last seen at the turn of the century. Should the dollar come off the boil, it may be the setup needed for non-U.S. developed market stocks. Like others, we are concerned that the war in Ukraine may not find resolution anytime soon. Nevertheless, we have eyes on two major components of developed market equity baskets—Britain and Japan—both of which are showing valuation appeal and potentially some newfound competitiveness because of the multi-year collapses in the British pound (GBP) and Japanese yen (JPY).

• What We Like: Many single-digit price-to-earnings multiples pervade across numerous developed nations. In terms of diversification, developed markets’ lighter exposure to Tech may round out a more even keel approach than allocations that are U.S.-heavy. Not yet appreciated by the market is the opening up of a large wage arbitrage between developed markets and the U.S., as Americans find themselves with notably higher wages than peers in places such as Europe and developed Asia. Finally, the EU’s natural gas crisis has been less severe than expected.

• What Could Go Wrong: Ongoing turmoil or worsening outcomes in Ukraine, the US- and Swiss-centric bank headlines become more global, Japanese bond market risk and stickier inflation causing the European Central Bank (ECB) and Bank of Japan (BoJ) to keep raising rates.

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The Decade of Dividends: Emerging Markets Equities

Outlook: Especially in light of China’s COVID-19 reopening, we continue to believe China is investable, though the central government’s further concentration of political power breeds risk in equities. However, there’s significant inefficiency in the market’s pricing of China risk; overreactions to both good and bad news are common.

We continue to assess very low risk of U.S.-China conflict over Taiwan. At this juncture, due to the unknown path of the reopening process and the fact that China’s political calendar started in March, it is premature to put too much conviction behind the Street’s economic forecasts.

• What We Like: Many deep value and even quality-oriented value mandates have dividend yields that are near double digits. Emerging markets Value is also contrarian play, owing to years of historical underperformance. The emerging world could also benefit from a U.S. dollar that has become “too” strong, portending weakness that alleviates dollar-based debt burdens.

• What Could Go Wrong: China cozies up closer to Russia, Taiwan headline risk, firm-specific risk in companies that have close ties to the Chinese Communist Party and a possible continuing of tightening credit conditions.

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Fixed Income: A Return to Normalcy

Outlook: The global sovereign debt markets arguably experienced their worst year on record in 2022. However, an interesting development has occurred in the process; the era of negative and ‘zero’ interest rates has seemingly drawn to a close. Government bond markets in the developed world (ex-Japan) have now seen yield levels move into positive territory for the key 2-, 5- and 10-year maturity sectors.

This development has created an interesting phenomenon: there’s “income back in fixed income.”

• What We Like: Yields have risen to (normal) levels that a generation of advisors and investors have never seen before.

• What Could Go Wrong: We could see no recession, with inflation remaining ‘sticky’. As a result, the Fed (global central banks) either raise rates more than expected, or don’t cut them until 2024. Or we could see a deep recession where the U.S. economy (labor market) rolls over and the Fed cuts rates sooner than expected. Other concerns include geopolitical developments (such as Ukraine or a China/Taiwan escalation).

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