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.

Taking Precaution in Quality: U.S. Equities

Outlook: Our primary concern for the S&P 500’s earnings outlook is that the stage of the credit tightening cycle is manifesting in tough responses in the Fed’s Senior Loan Officer Survey. However, we were particularly worried a half year ago that what we called the “bank walk,” whereby deposits were to flow out of banks and maybe bring some other regional banks down the path that was taken by Silicon Valley Bank (SVB), could be a multi-year overhang. Fortunately, that has not happened."

The market has been selling off since July 31, but with little conviction either way with respect to Growth or Value in U.S. equities (though Value has been trouncing Growth in many overseas markets). Some groups that have been characterized by speculative fervor, such as solar and wind companies and other unprofitable or “story” stocks have been hard hit. Still, it is tough to draw conclusions, as there are also some new 52-week lows being made in traditionally stodgy groups such as food companies and utilities. This is a stock market in flux.

• What We Like: We are concerned that the market does not fully appreciate the game changer that a 5.5% Fed funds rate may well bring to this economy. Owning baskets of high-quality companies at reasonable valuations seems a prudent course of action, as any reincarnation of 2022’s ugly stock market environment would necessitate a posture that errs on the side of mitigating downside.

• What Could Go Wrong:The market has been no stranger to sudden, bold up-moves in speculative stocks that have no earnings in recent years. What if that happens again? Though we do not suspect anything like that, such a market would leave many WisdomTree strategies behind.

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Taking Precaution in Quality: International DM Equities

Outlook: We have been heartened by Japan in particular. The economic data in that country has held up, while the collapsed yen has created a generational corporate competitiveness set-up. To some extent, a similar situation has occurred with sterling and the euro.

• What We Like: Japan’s 2024 NISA program expansion, which is akin to a traditional IRA, may help pull retail investors into the stock market. Additionally, we believe the Tokyo Stock Exchange’s push for corporate governance reform may have some staying power. In broad developed markets, we are routinely seeing our baskets showing up at multi-year valuation lows across much of our dividend business. Some of our overseas quality screens are showing up with return on equity (ROE) results that are double those of the broad market.

• What Could Go Wrong: We must remember that Mother Nature gave Europe a gift last winter, in that temperatures did not necessitate heavy use of Russia-provided natural gas for home heating. Not every winter will be balmy. Additionally, global stocks have been having a rough couple of months, after having surged relentlessly during the year’s first seven months. The key risk is that central banks went too far, too fast.

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Taking Precaution in Quality: Emerging Markets Equities

Outlook: 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, though the constant cloud is problematic for investor sentiment in the region. India may be a beneficiary, as it appears to be leveraging its membership in the so-called BRICs while at the same time maintaining friendly relations with the likes of the U.S. and Japan.

• What We Like: Many deep value and quality-oriented value mandates have dividend yields that are near double digits. Emerging Markets Value is also a contrarian play, owing to years of historical underperformance. We are hopeful that indications of Value trumping Growth this autumn, which we have witnessed in both developed markets (DM) and emerging markets (EM), can persist into a 2024 regime that battles a tightened global credit environment.

• What Could Go Wrong: China could continue to forge closer ties with Russia or saber-rattle Taiwan. In panics, investors often sell emerging markets first and ask questions later. A source of pessimism from somewhere in the developed world could end up causing underperformance in the emerging world, at no fault of its own. India is in the middle of a diplomatic feud with Canada that may hinder U.S. relations, though we have trouble seeing how this could adversely affect equity valuations near term.

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Fixed Income: A Return to Normalcy

Outlook: The narrative for the U.S. fixed income arena has experienced a ‘sea-change’ in attitude due to the surprising resiliency in economic growth and a subsequent restrictive Fed policy. Treasury yields have risen to new high watermarks not seen in sixteen years. Until the U.S. economy begins to reveal signs of a significant slowing in activity, it would appear as if interest rates will remain at elevated levels. We expect rates to be ‘higher for longer’, with volatility continuing to be a part of the broader bond market investment landscape.

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, returning fixed income to its more traditional role in portfolios.

• What Could Go Wrong: We could see no recession, with inflation remaining ‘sticky’. As a result, the Fed (global central banks) either continue to raise rates more than expected, or don’t cut them until mid to late 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, China/Taiwan and/or Middle East escalation).

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