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November 2023

Market Update: Investing in Uncertain Times

Key Points

  • CNR maintaining modest defensive positioning.
  • Normal recession now likely to be avoided, but still expect mild recessionary period in early 2024.
  • Equity prospects becoming more attractive, but too early to give the all-clear signal.
  • Continue to see better risk-reward opportunities in fixed income.

Despite a U.S. economy that continues to shine with unexpected resilience, financial markets have found themselves under increasing pressure as we head toward year end. 

From surging bond yields to government shutdown fears to geopolitical concerns, there’s been plenty for investors to worry about — but there’s also reason for optimism. We suspect markets may remain volatile in the near term, prompted by temporary uncertainties as well as more structural challenges like the impact of higher interest rates on the economy and corporate profits. But for long-term investors, the decline in stock and bond prices is creating more attractive buying opportunities if one is patient.

In recent months, stocks have largely taken their cues from the bond market, as the Fed’s message of a higher-for-longer interest rate environment seems to have finally been absorbed by markets. The rapid move higher in government bond yields has increased volatility in both equities and bonds. Higher yields can increase the cost of borrowing, weigh on bond price returns and put downward pressure on stock valuations. Notably, mega-cap technology stocks, which have driven the lion’s share of equity gains since last October’s low and often trade at a premium due to their growth prospects, find themselves particularly exposed.  

Although it’s been disappointing to not capture more of the upside concentrated portion of U.S. stock markets this year, with major U.S. equity indices now near correction territory, we believe that our mild defensive positioning is proving prudent. Near-term challenges should keep volatility elevated and perhaps vulnerable to additional pullbacks. We don’t think that the impact of the prior Fed rate hikes has been completely felt by the economy. Higher borrowing costs are soon likely to show a more noticeable impact on the consumer spending and business investment. While a still-strong labor market and solid household finances will help mitigate a slowdown ahead, a short and mild recession will be hard to avoid in coming quarters, as will disappointments in corporate earnings. 

Still, an approaching end to the Fed’s rate hiking cycle now suggests that a more normal recession will be avoided and has given us reason to begin peeking over walls of worry. 


Chart 1: Recession Probability

Sources: Bloomberg, CNR Research, Blue Chip Economic Forecasts as of September 2023. Information is subject to change and is not a guarantee of future results.


Yields might overshoot in the near term, and rise above 5%, particularly given the outsized supply of Treasuries coming to market. But as economic growth decelerates, inflation moderates and the Federal Reserve steps to the sidelines, interested rates are expected to peak and over time gradually moderate, reducing pressure on equity valuations.

While on the surface valuations are still not cheap relative to current bond yields, with the recent pullback in stock prices many segments of the equity market are already now trading at what we believe are more compelling levels. This is allowing us to start looking over an expected mild recessionary valley ahead to a recovery of corporate profit growth in the second half of 2024. In fixed income, the recent sell-off in bonds is also creating a buying opportunity. Three years of negative bond returns would be unprecedented, but the upside of this historic decline is that with yields now at very attractive levels, the larger income component can better offset price decreases to produce overall higher total returns going forward.

As uncertainties subside, we believe that we have a disciplined game plan in place to take advantage of these opportunities and increase equity exposure. For now though, it appears premature to give the all-clear sign. Given the risks of a short and shallow recession, falling corporate earnings, and a correction of a narrow and expensive stock market, we continue to think our mildly defensive portfolio positioning is a smart way to stay fully invested until clearer signs of the economy’s direction develop. Our fundamentally driven investment process has navigated several market cycles over the last 30 years, and today it is calling for continued patience, while our focus on holding high-quality and income-producing U.S. stocks and bonds can help provide client portfolios with relative stability as the investment environment grows more challenging.

Chart 2: S&P 500 EPS Growth 2024 Estimates

Sources: FactSet, CNR Research, as of October 6, 2023

Indices are unmanaged, and one cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.


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