Understanding the New Economic Trend: ‘Lower, Slower’ Instead of ‘Higher for Longer’

Understanding the New Economic Trend: ‘Lower, Slower’ Instead of ‘Higher for Longer’

What’s Happening in the Economy and Markets

By Andy Brooks 22/01/2024

Happy New Year!

Last year was ‘higher for longer’ and other buzz phrases, but in January there has been a change in how people think about the economy and interest rates. Before, everyone expected high interest rates to last a long time. But now, the idea is changing to ‘lower and slower’. This means that interest rates might start to go down, but it will happen later and more slowly than people thought before.

Changes in Interest Rates

Interest rates are really important for the economy. In the past week, the markets have been up and down, like they were last year. This is because it looks like interest rates won’t go down quickly. In the US, the economy is doing better than expected, so there’s less reason to cut rates soon.

What’s Happening with Bonds and Stocks

When people thought rates would be cut soon, bond prices went up. But now, bond prices are going down again, especially in the US. Big companies in the US are doing well, but overall, stock prices are dropping a bit, especially for smaller companies. This is happening not just in the US, but in other countries too.

Companies Reporting Their Earnings

Big companies around the world are sharing how much money they made last year. So far, the news isn’t great but not terrible either. In the US, banks and some other types of companies have had mixed results. Overall, though, there’s still hope that US companies will do well because Americans are spending money.

What This Means for Investors

The way the markets are moving shows that people might have been too hopeful about how quickly interest rates would fall. But this doesn’t mean everyone is now pessimistic. It just means that people are being more realistic about how long it will take for things to get better. This could be a chance to make some good investments while the market is uncertain.

Looking at Government Spending in Europe and the US

The US is spending more than it earns!  In the US, the government is spending more money than it’s making. This started during the COVID-19 pandemic and has continued. Even though the government is making more money from taxes, it’s spending even more. Some people are worried this could hurt the US economy in 2024. But if the government cuts interest rates, it might help by making it cheaper to borrow money.

Politics and Money in the US….. As elections get closer in the US, people will talk a lot about how much the government is spending. Critics might use this to argue against President Biden, even though other leaders have also spent a lot of money.

Europe Being Careful with Money…. European countries are usually more careful with their money than the US. They have rules about how much debt they can have. Recently, they changed these rules to make them fit better for each country. But this means some big decisions are being put off for later.

Challenges for Europe…. European countries need to be careful with their spending. Some big countries like France, Spain, Italy, and Belgium will have to make tough choices about their budgets. This is happening at a time when many people in these countries are unhappy with the government. These challenges could lead to big changes in how these countries feel about being part of Europe.

Final Thoughts

The big takeaway is that the economic outlook is changing. Interest rates might start to fall, but not as quickly as people hoped. Understanding how the US and European countries are managing their money is important for knowing what might happen next in the economy. Keeping an eye on these changes can help people make smart choices about their money.

We as a company are favouring active management over the medium term as the changing landscape offers opportunity for the active managers to move between Equity and Bond weightings as the interest rate future changes. Further to this we should all expect a continuation of some volatility across 2024 which will bring some pain I am sure, but also a good chunk of opportunity. So active management it is for now.

In our opinion, seeking a good level of oversight and control from good investment management firms is likely to outweigh the cheaper passive only investment which will just track an index. So, our money for 2024 is definitely in the active manager segment which of course is where the WLI portfolios sits.

As always, we are only a phone call away so if you want a chat or you need anything please just reach out.

 

Take care everyone.

 

Regards Andy