ICM Monthly Outlook - February 2024

Last month we stated "We are now ready to say that 2024 will be the year that this bull market grows up" when covering the section on market implication in our last edition. Given the rally we have seen in equities already, we have not been disappointed. We remain confident that US financial markets will continue to perform strongly this year, thanks to growing corporate profits, continuing disinflation, and easing monetary conditions in the second half of the year. Equity markets are not priced to reflect any material probability of a recession. Any meaningful economic slowdown would weigh on corporate profits, but we believe the Federal Reserve has the levers to re-stimulate growth if unemployment or deflation become problems.

ICM Monthly Outlook - January 2024

Omne trium perfectum. This trio of Latin words, in principle, suggests that all good things come in threes. We believe it is a very apt description of where we find ourselves in the current investment cycle at the beginning of 2024. Even though 2023 was a strong year for returns across many asset classes, we believe 2024 will see a continuation of this strength, and it is more likely than not to last into 2025, making for possibly another two years of strong returns. The premise underlying this constructive view can be distilled down to a simple fact - we are now in a new cycle of easier monetary policy where all good things for risk assets tend to follow. Such a cycle takes time to run its course fully, implying that market conditions will probably be supportive for risk asset markets for all of 2024 and most, if not all, of 2025. According to Alpine Macro research, the average price gain in US stocks in the two years following a bear market is about 60%. So far, the S&P 500 index has risen 32% from its 2022 lows, which supports the view that more price gains can be expected this year.

ICM Monthly Outlook - December 2023

As we draw toward the end of another eventful investing year, evidence suggests that the fog of uncertainty around the course of inflation has finally cleared. Of course, some voices will continue to argue that inflation will remain sticky and that the last mile of disinflation will be the hardest. Yet, regular readers of this letter will know we have never subscribed to this dubious theory. Could we be on the cusp of a new US cycle where we could see a Goldilocks-type economy where conditions are ‘just right’, typically characterised by a combination of low inflation, low unemployment and steady economic growth? Read on to find out more.

ICM Monthly Outlook - November 2023

Storm clouds gather, and gentle breezes become gusting winds. Hauling in the sail and setting down anchor is suddenly a tempting option, yet this decision will come at a cost. Greeting loved ones and the enjoyment of home comforts will have to wait. Like sailing a yacht, every investment decision comes with consequences. Deciding not to take a risk can avoid the cost of making a financial loss but will come at the opportunity cost of losing out on a potentially profitable opportunity. The investment manager's skill is to weigh these explicit and implicit risks or costs and decide which option offers the best, probability-weighted, expected outcome. There are no free shots, unlike the usual commentators in the business news media who offer an opinion one week only to offer a very different view the following week, seemingly free of consequences. Beware of any investment advice given without obvious skin in the game. The talking heads would have you believe, this time around, that bonds are crashing as yields surge, equities are overvalued, and economic peril lies ahead. Read on for our view...

ICM Monthly Outlook - October 2023

JK Galbraith, the famous economist, once said, “The only function of economic forecasting is to make astrology look good”. Indeed, the one certainty about forecasting is that it will give you plenty to be humble about. It is fair to say that the ongoing strength of the US economy since the Federal Reserve embarked on its programme of tighter monetary policy has been underestimated by most market participants. Despite short-term volatility, we remain constructive on developed world equity markets in the medium to longer term. We believe the outlook for equities and other risk assets, in general, is improving. Forward indicators of the business cycle point to an improving economic outlook as we move through 2024 and into 2025, and this should further benefit corporate earnings. Of course, there are plenty of risks in the short term, such as the factors driving the recent spike in bond yields, the threat of a US Government shutdown, or a stronger US dollar. Still, looking further out, we believe we are in the early stages of an equity bull market, which will be supported by an economic environment of rising growth, peak interest rates and falling inflation.

ICM Monthly Outlook - September 2023

After running hot for a couple of years, the US economy continues to decompress slowly like a kettle taken off the boil. While inflation is falling and the job market is declining, it is all happening relatively slowly. Economic momentum is declining, but this weakness does not appear to be accelerating, which is good news if we hope to avoid a meaningful recession. Indeed, this slowing momentum, engineered by tighter Federal Reserve policy, has the economy on a glide path to a soft landing and a targeted inflation rate of around 2%. We believe the probability of the US falling into recession is receding, and even if we have a recession, our view is that it will not be a deep or long-lasting recession. Of course, GDP growth will slow and will be weak for a few more quarters, but it is increasingly likely that GDP growth will post positive rather than negative quarterly numbers over the coming year.

ICM Monthly Outlook - August 2023

Imagine driving a car in reverse gear along a mountainous, cliffside road while only looking out the rear-view mirror. Now imagine it’s not the rear-view mirror, but rather a video of the rear-view mirror which is already three months old. It’s a ridiculous scenario, yet this is how Elon Musk colourfully described how the Federal Reserve manages US interest rate policy. While the primary purpose of this hyperbole is presumably to garner a few laughs, it does contain a number of truths which perhaps explains why the Federal Reserve seems so out of touch with the current pulse of the business cycle. Firstly, it is true that the Federal Reserve is focused on backwards-looking rather than forward-looking indicators. Its dual mandate is focused on inflation and jobs data which are lagging indicators. Secondly, when the data used in those indicators arrives, it already tends to be several months old, which again militates against effective decision-making by the Federal Reserve.

ICM Monthly Outlook - July 2023

Contrary to consensus market opinion at the time, we stated in our monthly letter last December that we expected 2023 would be a good year for risk assets in general. Clearly, we are pleased with our call given how equity markets have performed in the first six months of the year. We remain constructive on risk assets such as equities and corporate bonds for the remainder of 2023 and especially as we go into 2024, given our view that the global liquidity cycle which has already started to turn. We expect this turn in global liquidity to be further boosted by the Federal Reserve Bank, by mid next year at the latest, however we maintain our view that in the short term to medium term it is better to adopt a more cautious view on US equities and risk assets in general.

Market Outlook - June 2023

Momentum is a measure of an object's motion and is determined by its mass and velocity. Let’s assume that the US economy is an ocean liner, and that the Federal Reserve’s monetary policy and level of interest rates is the force that is applied to slow or quicken the speed of this enormous ship. Even if the engines of the ocean liner are put into full reverse, its momentum, at first, will still push it forward. Of course, it will begin to slow, but it will take time for the entity to come to a complete standstill and even longer to move into reverse. The US economy works similarly with monetary policy and the level of interest rates as the engines that build or reduce momentum across the economy. This explains why the US economy, and certain components of that economy, such as the jobs market, can seem initially to defy the economic brakes applied by the Federal Reserve. Yet, it is inevitable that if the brakes are left applied, the economy will come to a complete standstill and, indeed, most likely will go into reverse if not lifted.