With the year nearing its halfway point, Viewpoints decided to check in with some of Fidelity’s leading strategists and managers to hear their latest views on markets and the economy—plus what may lie on the horizon over the rest of the year.
Viewpoints Market Sense anchor Heather Hegedus sat down this week for a conversation with Cait Dourney, CFA, who leads business cycle research on Fidelity’s Asset Allocation Team; Jurrien Timmer, Fidelity’s director of global macro; and Naveen Malwal, CFA, institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of Fidelity’s managed accounts.
Here are excerpts from their conversation about why the markets might be stronger than investors realize, what surprises could throw a wrench into the outlook, and their top investing ideas for the rest of the year. (Watch their full discussion in the video player below.)
Viewpoints: We’ve been watching and waiting for 2 years for a recession that hasn’t happened. Can we finally put those fears to rest?
Cait Dourney: What we’re seeing in the US is a resilient expansion. We’re not seeing really any immediate or near-term recession risk.
Now, there are different flavors of expansion. Over the last couple of years, we’ve been in more of a late-cycle expansion. And typically, in history, late cycles then decelerate into the recessionary phase. But something different has happened this time, and instead in the last year we’ve seen more mid-cycle dynamics emerge. These are things like corporate profitability stabilizing and even expanding in some sectors. We’re seeing earnings start to turn around again and start to grow. So this has been very different from history.
Viewpoints: We’re in the middle of a bull market right now, but a lot of investors are wondering how much steam it has left. Is there still room to run?
Jurrien Timmer: I believe there is. By all accounts, the bull market started in October 2022 after about a 28% decline. Since then we’re up around 50%. That’s been a really good outcome. We also look at what we call “secular trends,” or super cycles. Since the 2008 to 2009 financial crisis, we’ve been in a super cycle of above-average returns. My sense is that we’re in the seventh inning of a cyclical bull market and also the seventh inning of a secular bull market. So even though 7 sounds close to 9, I think time is still on our side here.
We’re also in the fourth year of a presidential cycle, which historically has been a strong year for markets. So far, we’re tracking this fourth-year pattern very closely. That would suggest that the rest of this year could actually stay positive as well.
Viewpoints: Let’s talk about what this all means for investors. Naveen, how has your team been managing client portfolios through this period?
Naveen Malwal: As Cait and Jurrien described, the backdrop is pretty positive. In spite of the fact that it’s late cycle, or the seventh inning, there’s still likely to be growth ahead.
With that in mind, we’re managing client accounts in a way where it’s close to targeted allocations, but we’re leaning a bit more toward stocks and a bit away from bonds. That’s because historically, as long as there is an expansion, stocks tend to outperform bonds and short-term investments. Within stocks, we’re favoring areas like US stocks and emerging-market stocks. And to add some diversification, we’re also investing in high-yield bonds, in commodities, and alternative funds. These are parts of the market that have the potential to add some extra performance or help manage risk.
Viewpoints: One of the biggest topics this year has been inflation. Cait, when does your team think inflation might get back down to a more palatable level?
Cait Dourney: Unfortunately, we do see inflation staying around the 3% level where it’s recently been for some time. That’s because there are 2 major contributors that are holding up the overall inflation rate. The first is the job market. The strong job market has been keeping a floor under wages and pushing up services prices, which is what most of us spend a lot of our money on. The second is housing. There still isn’t enough housing supply in the US, which puts pressure on home prices and rent prices in some areas.
I do have 2 pieces of good news. The first is that while inflation is still with us, wages are now growing faster than inflation. So our buying power is in a better place and is rising. The second is that those days of 9% inflation are behind us. That inflation level was related to the pandemic-related disruptions, which we wouldn’t expect to come back.
Viewpoints: Hand-in-hand with the inflation discussion is the Fed. Given that inflation outlook, Jurrien, are rates cuts really on the table?
Jurrien Timmer: I think we can all agree that at the current fed funds rate, the Fed is restrictive. If inflation is coming down on a rate-of-change basis and the economy is still expanding, but maybe at a slower rate, it makes sense that the Fed could give back a few of those rate hikes. We call that an “easing bias.”
Right now, the market’s expecting a couple of rate cuts this year into next year. And the Fed seems to be on board with that, but it is rightfully waiting to give us those rate cuts. I think the Fed is saying, “We’d rather give it to you later than give it to you prematurely, then have to take it back.” So I do believe it will deliver on those rate cuts, but it may do so slowly. I think that’s prudent.
Viewpoints: What do higher rates and stickier inflation mean for positioning a portfolio?
Naveen Malwal: Yields have risen on bonds. If you’re a bond investor, you may get higher income from your existing or new investments in the bond space. And if the Fed is looking at rate cuts it could lead bonds to gain in value. So far, this year has not been happy for bond investors, but the outlook may be getting more optimistic.
Regarding inflation, 3% inflation might sound high compared with the last 20 years. But if you go back longer term—over the last 70 or 100 years—inflation has often been around 3% or more over the long run. And guess what? Over that time stocks have done great, bonds have done well, and the economy has grown. So I don’t believe this environment requires a whole new way of investing.
Viewpoints: Another big theme for the rest of this year will be the election. From your point of view, Cait, what’s at stake?
Cait Dourney: We see really 2 main impacts regardless of who wins the election. The first is upward pressure on inflation. Both parties have plans for government spending and investment and are expected to run larger fiscal deficits than what we’ve experienced in recent decades. All of that spending tends to put upward pressure on inflation. And we’re likely to get some form of trade restrictions like tariffs, which raise the cost of imported goods.
The second impact is some upward pressure on interest rates—and that’s for a lot of the same reasons. Higher inflation tends to put upward pressure on interest rates, and more borrowing to fund those deficits tends to put upward pressure on interest rates.
Viewpoints: Let’s shift gears now and talk about potential opportunities. Jurrien, where are you seeing some of the most interesting opportunities?
Jurrien Timmer: Until this year, when the market finally broadened out to some degree, we had a very bifurcated, narrow bull market. From late 2022 throughout 2023, the market rally was really just in the hands of a handful of very large-cap stocks—called the “Magnificent 7.” Part of the reason for that was the Fed. If you’re a smaller company and you have more debt or you have a weaker balance sheet, the cost of capital matters. If you’re one of these big, big, Mag-7 stocks, you have so much cash you may not need to borrow money.
So there are parts of the market that have been left behind, such as small caps, value stocks, and non-US stocks. Those parts of the market have been a lot cheaper than the headline index. And if the Fed is finally able to lower rates, and if inflation sort of finds a new floor, then maybe the rest of the market can finally breathe again, and might get a chance here.
Viewpoints: How about you, Naveen? What does your team consider to be the top opportunities right now?
Naveen Malwal: We see a lot of opportunities, but I’ll focus on international—and emerging markets in particular. They have lagged developed markets and US stocks in recent years. There is an environment right now where the headlines maybe don’t feel so good for some of those regions. What we’ve seen, though, is a lot of governments have taken actions to help overcome some of their challenges. And we’ve seen the outlook improving for economic growth and earnings growth in some parts of Asia and Latin America, and that might be a good opportunity going ahead.
So even though those stocks have lagged, counterintuitively, there might be an opportunity there for long-term investors.
Viewpoints: No discussion would be complete without also talking about risks. What do you each see as risks to your outlook for the rest of the year?
Cait Dourney: Inflation. It’s not our base case, it’s not what we expect, but if inflation were to reaccelerate, that’s a risk because it might mean the Fed’s not done raising rates, and that can be very disruptive for financial markets.
Jurrien Timmer: I would echo what Cait said. If inflation stays high or goes higher, the cost of capital goes up. And that affects the bond market, it affects the stock market, it affects basically everything. I think the risk is not that the market collapses, but that the run rate goes down because the cost of capital goes up.
Naveen Malwal: There’s also a risk that—just like last year—we’re all going to worry about these things, and the markets might still rise. Last year I heard from a number of folks telling me, “Naveen, I missed it. I missed the rally. I was so worried.” I think one of the biggest risks this year is that none of the doomsday scenarios come to pass, earnings are rising, the economy is growing, stocks do well, and a lot of people miss it because they’re so worried.
Viewpoints: Let’s go to our lightning round now. If you could pick just one highest-conviction idea, what would it be?
Cait Dourney: Owning stocks in addition to just short-term investments or bonds. Stocks have historically gone up over time, and they tend to be more resilient in the face of things like inflation. So don’t jump ship—stay along for the ride.
Jurrien Timmer: Have a plan and stick with the plan. Don’t second-guess it the second something goes wrong.
Naveen Malwal: Diversification. Don’t just chase the winners.
Viewpoints: If you could choose one metaphor to explain what is going on with the economy and markets, what would it be?
Cait Dourney: The US economy is the foundation of a house that the markets sit on top of, and that foundation is quite strong. There may need to be repairs done every now and then, but the foundation is solid.
Jurrien Timmer: The market has seasons, just like nature. We talk about late cycle, mid cycle, early cycle, down cycle—but it’s inherent of nature to grow, and the markets reflect that.
Naveen Malwal: There are a lot of indicators out there. It reminds me of maybe an airline pilot and their dashboard and all those dials and buttons. Just because a couple of those lights maybe aren’t where we want them to be, it’s not a reason to completely change course. Keep a wide point of view and don’t just stick to the negative news.
Viewpoints: The next time we gather it will be 2025. What will we be talking about then, and in the back half of this year?
Cait Dourney: I’ll be watching earnings. They’ve come through for a lot of the big companies, but are we seeing that improvement through the rest of the market and through the world?
Jurrien Timmer: The Fed doesn’t often stick the landing, but so far, it is doing that. By next year, we may know whether it did or not.
Naveen Malwal: I agree with both of those, and I’ll add—does the market continue to broaden? If the storyline stays positive, I can picture how more stocks in the market, both US and international, could take part in an ensuing rally.