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January 2024



Market Update:
Capitalizing on U.S. Exceptionalism




Tom Galvin Chief Investment Officer

Key Points

  • Risks to U.S. outlook diminishing, mild recession risk down to 50%.
  • Prospects for 2024 stock and bond returns positive, but remain vulnerable to near-term correction.
  • Expecting U.S. financial markets to continue to outperform global counterparts.

Defying most predictions, 2023 marked the return of investor optimism and surprising economic strength. Only a year ago, a full 98% of U.S. CEOs were preparing for recession in the next 12 to 18 months.*

Following that came a regional banking crisis, government debt ceiling drama and persistent geopolitical turmoil. If not for a surge in a handful of tech companies linked to artificial intelligence, the S&P 500 might have spent much of the first half of the year in the red. Yet through it all, U.S. economic growth continued to prove resilient, and a late-year rally supported by unexpectedly dovish shift in tone from the Federal Reserve (Fed) ultimately resulted in a banner year for both stocks and bonds.

Our expectations of recession resulted in us maintaining a moderately defensive positioning. However, from a broader perspective, we got many things right last year, including our higher for longer outlook on Fed interest rates; a recovery in the 60/40 portfolio after two historically negative years;  and, perhaps most importantly, our conviction that U.S. equities would continue to outperform their international peers. 

A core tenet of our investment philosophy, as laid out in CNR’s proprietary 4Ps framework, has been our approach to global asset allocation, which has consistently recognized what, we believe, are the benefits for investors of focusing on U.S. exceptionalism. Indeed, many of the abiding structural strengths of the U.S. economy — fiscal responsiveness, labor flexibility and innovative capacity — go a long way toward explaining why the U.S. has navigated the pandemic better than nearly all other countries.  

With Europe teetering on recession as we enter 2024, and China slowing to its weakest non-COVID-19 growth rate in over three decades, prospects for the U.S. economy continue to appear more promising by comparison, and our probability of a mild recession has fallen close to the consensus 50%. Although some sort of period of economic weakness in the first half of the year still seems likely, cooling inflationary pressures are paving the way for a less restrictive Fed policy, which, along with ongoing consumer resilience, should help set the stage for a reacceleration in growth in the second half of the year.

Such an outlook is supportive for continued positive, albeit more modest, U.S. stock and bond returns in the year ahead. However, for markets, the over-pessimism that categorized expectations for 2023 has turned to an over-optimism for 2024. Since last fall, investors have shown a one-track mind, anticipating a perfect combination of falling inflation, solid economic growth and sustained corporate margins, all supported by as many as five Fed interest rate cuts, beginning as soon as March. 

Chart 1: Gross Domestic Product (GDP)
%, indexed to “0.0” on Dec. 31, 2019

Source: Bloomberg, as of December 2023.
Past performance is no guarantee of future results.

That seems too aggressive to us, and we continue to expect a more modest two to three cuts beginning sometime around midyear. Despite considerable progress, the stickiness of service prices, remaining labor market imbalances and geopolitical developments all pose threats that could stall the disinflationary process underway, and we suspect Fed officials will stay on hold until there is more compelling evidence that inflation remains on a sustained downward path toward 2%.

For investors, the problem with one-track minds is that they are easy to derail. This argues for a cautious and opportunistic approach to increasing risk exposure, as we gain clarity on the direction of economic growth, corporate profits and interest rates. As we saw in February and September of last year, markets priced for perfection can be vulnerable when changing macro conditions force recalibration of expectations around the timing of Fed policy changes. 

If 2023 reminded us of anything, it is how difficult it can be to predict the path of markets that can shift quickly over the short term. Our job, as we see it, is managing risks and working to ensure clients meet their financial goals. From that perspective, 2023 was a successful year for clients. We expect more of the same in 2024 and will continue our investment strategy of focusing on high-quality U.S. bonds and stocks. But we will also maintain our disciplined approach to investing, eyeing potential pullbacks over the coming months for better opportunities to diversify client portfolios into the lagging segments of the equity market like Mid small cap stocks and to extend duration in fixed income allocations ahead of the coming Fed easing cycle.

Chart 2: Index Performance
As of 12/31/23

Sources: FactSet, CNR Research, as of October 6, 2023.
Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results.


* The Conference Board Measure of CEO Confidence, as of Q4 2022.



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