In Short

• Many 2023 winners, including U.S. large-cap growth, continued their streak in January while emerging-market equities and commodities largely lagged
• Signs of better-than-expected economic growth continue to appear (including strong 4Q GDP and unemployment data) and support the belief that the Federal Reserve (Fed) will not be forced to cut rates aggressively to support a contracting U.S. economy
• This is an election year for countries making up over 50% of global GDP, which may result in uncertainty and volatility
• As U.S markets generally tend to be positive during election years, potential periods of volatility may be opportunities to deploy excess cash, where applicable
• We continue to believe that quality companies and active management are well-suited for this potentially uncertain environment

Strong Start: New Year, Same Winners

The new year marked an all-time high for the S&P 500 Index, its first fresh record in just over 500 days of trading and the sixth-longest streak between new highs in history. By the end of January, the S&P 500 Index closed up 1.7% and reached 4,845. So far, the winners of 2023 have continued their dominance in 2024, as U.S. large-cap growth has led the way while emerging-market equities and commodities have lagged, despite oil posting its first monthly gain since September due to rising tensions in the Middle East. While the bond markets are still pricing in five rate cuts in 2024,¹ this expectation is balanced by a resilient labor market and other metrics resulting in optimism for U.S. economic strength.

As an example, the first release of 4Q GDP came in much hotter than expected at +3.3%, driven largely by strong consumer spending. Consumer-confidence metrics have increased for three consecutive months to their highest level since December 2021, and this optimism has been evident in positive signals from credit-card companies including Mastercard and Visa, both of which reported earnings beats tied to the strong holiday shopping season. Overall, solid economic data appear to be driving the belief that the Fed will not be forced to cut rates aggressively to support a contracting U.S. economy (more on this topic below).

As of the end of January, 4Q earnings were generally underwhelming, with the S&P 500 Index on track to post a blended earnings growth rate of +0.1% quarter-over-quarter. This is lower than expected and down from the previous quarter. However, several of the most influential big-tech names that make up a large concentration of the index—including Meta, Amazon, Microsoft, Alphabet and Apple—posted strong results. Meta’s results were noteworthy, in our view, with artificial intelligence acting as a tailwind for automation that should also serve as a positive indicator for the sector as a whole. Continued strength in 4Q earnings for tech companies should help prop up quarter-over-quarter growth for the index, as only 42% of companies have posted results through the end of January, with some significant tech and retail names yet to come.

Signs of better-than-expected economic growth continue to appear. Toward the end of the month, the International Monetary Fund (IMF) upgraded its global growth forecast—specifically citing U.S. resilience as a main driver—to 3.1% in 2024 (up 0.2%), the same pace as 2023. For the U.S. economy in 2024, the IMF projects growth of 2.1%, up from its previous expectation of 1.5%. The IMF also forecasted a broader “soft landing,” with global inflation expected to fall to 5.8% this year and 4.4% in 2025, down from 6.8% in 2023.

While U.S. inflation continues to show signs of cooling, the Federal Open Market Committee (FOMC) held interest rates steady, as expected, at its January meeting. The FOMC said that it does not expect to cut rates until it has gained greater confidence that inflation is moving sustainably toward its 2% target. At the end of December, markets priced in a 90% chance of a rate cut in March, which decreased to 35% following the meeting. Just days later, nonfarm payrolls for January blew past expectations with the U.S. economy adding 353,000 jobs compared to the consensus for a 185,000 gain. As a result, the probability of a March cut dropped further, to 18%. While investors are adjusting to the potential for a lower number of rate cuts this year than were initially priced in, the resilience of the U.S. labor market and a continued push to hire workers could act as a counterbalance to the depletion of excess savings and the pressure of higher-cost consumer debt.

Cumulative Number of 25bps Rate Cuts Priced Into Market by Fed Meeting

Source: Bloomberg, as of February 2, 2024. Chart shows quarterly Fed meetings only.

In addition to the depletion of savings in a higher-for-longer environment, certain points are worth considering, such as a recent slew of layoff announcements from prominent firms including UPS, PayPal, Microsoft, Google and Salesforce. Per Bloomberg, news-story counts related to employee downsizing reached their highest level since February 2023. Though it could be argued that resilient labor market data may be lagging, this trend is more likely due to seasonality and/or a general rebalancing of a still-strong labor market amid heightened corporate pressure to protect profit margins.

Kicking Off the Election Year

The year’s elections began in January with Taiwan, and globally, there will be 10 major elections held throughout the year, potentially adding another layer to an already complex geopolitical environment. The next general elections will be held in Indonesia in February, with the “crescendo” occurring on November 5 with the U.S. presidential contest.

From an economic and market perspective, the year has started off on the right foot, but the election calendar requires some caution, given its breadth (over 50% of the world as measured by GDP) and the typical uncertainty that emerges when countries choose their leaders and favored policies—which, in turn, can affect the economic and market climate. A general rule of thumb in investing is that uncertainty may result in market instability—the more uncertain an outcome, the more assets struggle to price themselves appropriately.

Nine months out, it is too early to reliably predict the outcome of the U.S. presidential election, but we can look to history for clues as to how this year might unfold for the markets. On average, the S&P 500 Index has returned about 7.5% during election years compared to the roughly 7.9% annual average since 1928. August is typically the month with the strongest returns during election years, at 3.1%, while May tends to be the worst, at -1.1%.

S&P 500 Index Average Performance in U.S. Presidential Election Years Since 1928

Source: Bloomberg, as of January 31, 2024.

Over the course of an election year, the typical trend has been to see early volatility, a rally over the summer as candidates are formally selected (less uncertainty), and further turbulence as anxiety spikes heading into election day. After the election, there has typically been a rally to close the year. Given that markets generally tend to be positive during election years, the potential periods of volatility may be opportunities to deploy excess cash, where applicable.

Although it is early in the 2024 presidential election cycle, the nominees from both the Democratic and Republican parties appear to be known. Incumbent President Joe Biden won early symbolic victories in Iowa and New Hampshire while former President Donald Trump won in both states. All but one of Trump’s major Republican primary challengers have now dropped out of the race and endorsed his candidacy. In our view, this knowledge strips away some of the potential uncertainty that could have been faced leading into the summer months.

As we look further into 2024, we continue to monitor the impact of previous rate hikes that have the potential to restrict capital expenditures and growth given the higher burden of borrowing costs. These may have already begun to materialize in 4Q earnings. In addition, as outsized savings are expended, consumers may continue spending at similar levels despite higher credit-card and auto-loan interest rates (that may be higher for longer) than those afforded before the pandemic.

We believe that quality companies can be well-suited for an uncertain environment thanks to their moderate leverage (and lower exposure to higher rates) and higher profitability (a welcome cushion in a potential downturn). Simply said, quality continues to matter, in our view.

Portfolio Implications

Equities closed the month broadly higher, though domestic small caps and emerging-market equities struggled. We maintain an overall neutral view across equities, while upgrading small caps, a laggard that has priced in a hard-landing scenario. Given ongoing economic uncertainty, clients should adhere to long-term strategic asset allocations. Within equities, we still favor lower-beta, higher-quality names, with a neutral view on value versus growth. In this more challenging environment, we also favor employing active management to select companies with high earnings visibility.

Fixed income closed generally lower due to a more recent climb in yields. We continue to favor credit markets, maintaining an overweight view on investment-grade securities. With short-term rates set to decline substantially, we favor moving away from overweight cash positions and locking in incrementally longer-term bond yields. We maintain a neutral view on high-yield debt to balance risk in portfolios as well as in view of recent spread-tightening that has reduced the risk-adjusted return potential of the asset class. We are neutral on emerging-markets debt due to overall global growth fears, particularly in China.

Within private markets, in a challenged fundraising, exit and financing environment, significant opportunities exist for firms and strategies that may act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. This backdrop, along with Neuberger Berman’s deep relationships and unique position within the private-equity ecosystem, has translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit and capital solutions.

Index Returns

Source: Bloomberg, total returns as of January 31, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg ExEnergy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.