Insurance Insights Q1 2024: Policy rates to remain higher for longer

In February, major equity indexes in the US, Europe and Japan touched record highs. The catalyst for this global rally can be attributed in part to strong corporate earnings from the Magnificent Seven and AI-related technology companies. Valuations for the Magnificent Seven remain elevated compared to the broader US equity market, but their earnings growth is expected to be almost five times that of the remaining 493 stocks in the S&P 500 over the next year.¹

With the better-than-expected corporate earnings season in the US largely behind us, and rates steady, we think it may be a challenge for equity investors to capitalize on the next new catalyst in the coming months. Markets have started pricing in fewer rate cuts that are expected to begin later in the year and this has manifested in a variety of ways — the US dollar has shown strength, and US high yield bonds have outperformed US investment grade bonds.²

Overall US growth has been more resilient than anticipated since the start of the year – any pullback to US risk assets is unlikely to upset firming growth fundamentals. 

Even though we believe the US economy is squarely in a disinflationary environment, the path has proved to be uneven. The most recent January inflation print showed a reacceleration of inflation; wage growth, higher costs for services and housing have contributed to the “sticky” inflation print. This could stay the Fed’s hand from cutting rates anytime soon and there’s still a good chance that policy rates remain higher for longer.

Under this backdrop, investors may still want to consider allocating to higher-yielding areas of the market – such as private assets, which offer a good risk-adjusted return and diversification to the portfolio. More so, private assets reduce volatility and avoid public market noise, an important attribute in a fraught domestic election year.

I particularly think that private credit and private equity are attractive at these levels – these assets are known for their high return potential when compared to their public asset peers. I think the overall macro backdrop for this year is likely to be conducive for investors across the board to consider moving part of their balanced portfolio into private assets.