• Hopes for a soft landing for the economy, fueled by the Federal Reserve, buoyed the markets in January. However, in March, problems began to emerge in the banking system. Although these problems could slow the rise in interest rates, an “accommodative” monetary policy is less likely to support the markets if financial conditions tighten.
• The challenge for the market remains striking a balance between the hope for a “soft landing” without significantly affecting corporate profits, employment, or credit, while at the same time hoping that inflation will fall quickly.
• Our base case remains that the debt ceiling will ultimately be raised or suspended, although an agreement will likely only be reached at the last minute and lead to greater market instability than is currently priced in.
• There remains a divergence between the fixed-income markets—which expect the Fed to cut rates this year—the equity markets—which view those potential cuts as positive for risk—and the Fed’s more hawkish rhetoric. This gap is likely to close at the expense of stocks, since rate cuts would only occur in a context of risk aversion, and if rates remain higher, they should weigh on stock multiples and economic activity.
• With weak growth and risks skewed to the downside, our main recommendation remains to overweight fixed income.
• Interest rates at the short- to medium-term end of the sovereign and investment-grade (IG) debt curves are attractive by historical standards. We remain neutral on duration (around 4 years).
• The risk-return ratio for stocks is low given the risks of a recession, stretched valuations, high interest rates, and tighter liquidity,
• The strong year-to-date performance of U.S. passive stock indices is masking growing risks. While the rally from October through January was a recalibration of peak rates and tight monetary policy, price action over the past four months has been extremely narrow, and most of the gains have come from a handful of large-cap technology companies, many of which are tied to AI. 
• A more balanced global exposure and active management are recommended to address the risk of concentration in passive indices.
• The fundamentals for the dollar have improved. Much of the dollar’s decline since Q4 2022 stems from the perception that the Fed is more dovish than other central banks and that the U.S. economy is weaker than those of other countries. However, that is not so clear-cut, at least recently. Economic data has been worse than expected in Europe than in the U.S., which can also be explained by some loss of momentum in China’s economic reopening.
• Doubts about the strength of China's economic reopening are weighing on demand for commodities. Industrial metals are being affected by the weakness of China’s real estate market.

For more details, you can access the full report here.

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker