Video: SEI Forward

Hi, I'm Jim Smigiel, SEI's Chief Investment Officer, with another edition of SEI Forward. As we enter the final quarter of 2024 and the Halloween season, it seems that the world's two largest economies are getting into the spirit by doling out sweets in the form of fresh stimulus that should provide a ballast to the global economy. 

Looking first at the US, Fed policymakers delivered a somewhat surprising 50 basis point interest rate cut in September, as shown by the recent dip in the green line on the chart. This cut is likely to be followed by an additional 50 basis points of easing by year end. As the yellow line shows, large reductions in the federal funds rate are typically accompanied by falling gross domestic product. 

Credit spreads, as shown by the blue line, also tend to rise. Credit spreads are important measures of the health of the capital markets as they show the yield premium required by corporate bond investors relative to like maturity treasuries. This recent pivot to lower rates, however, comes at a time when third quarter US GDP is tracking at roughly 3%. 

Stock markets are at all-time highs and credit spreads are near all-time lows. Therefore, while we are not overly concerned with a bit of monetary policy stance adjustment at this point in the cycle, the market's expectations for more than 200 basis points of additional cuts into 2025 seems, frankly, out of touch. 

Inflation remains well above target and employment is showing signs of slack, but only relative to the recently historically tight levels. We honestly see a policy mistake brewing that may provide a short-term sugar rush to risk assets, but could ultimately lead to higher long-term interest rates. We therefore expect the Fed to act sensibly and take away the candy bowl sooner than the markets would like. 

While the US Central Bank policy rate certainly deserves our attention, let's turn to the other interest rate shifts across the US yield curve. Treasury yields decreased across the board this quarter, but they didn't all move in parallel. Interestingly, while the two-year note followed the Fed funds rate lower after the rate cut, the 10-year treasury note actually rose, closing out the quarter at roughly 3.75%. 

This combination of lower short-term rates with higher long-term rates finally reversed the two-year-long inversion of the US yield curve, which you can see occurring in early September, where this line crosses into positive territory. We see this as the market perhaps beginning to question the effects of US monetary stimulus and recent fiscal excesses on longer-term yields. And frankly, we couldn't agree more. In fact, we continue to see upward pressure on long-term rates in the US, even with additional rate cuts from policymakers in 2024. 

Now, we'll shift to policymakers outside of the US and examine the so-called policy bazooka unleashed on the world's second largest economy. Interest rate cuts, direct cash transfers, loan extensions, and programs that directly affect equity markets were all included in the sweeping policies that China introduced right at quarter end. 

The market's reaction was swift. Chinese stocks sharply reversed course at the end of the quarter and finished the period as a top-performing asset class. Whether or not this short-term bounce has staying power remains to be seen. And we, for our part, remain very interested observers. 

Given these stimulus efforts and those of other central banks around the world, we do see lower recession probabilities and a favorable environment for risk assets in the fourth quarter. Broader participation by global equities is our key viewpoint, as performance should expand beyond a handful of names in a few sectors from one country. 

The rest of the world outperforming the US, emerging markets outperforming developed, small caps outperforming large, value stocks outperforming growth, and active management outperforming passive are all versions of the reflation theme we see potentially playing out for the remainder of 2024. 

And while we remain, as always, strategically diversified amongst profitable companies with strong earnings momentum at reasonable prices, we are particularly confident in global value and active management in the US large cap space. Value looks particularly attractive as the magnitude of the dispersion between cheap and expensive names has reached historically wide levels. 

Likewise, we favor active management in the US large cap sector given the unusually high amount of idiosyncratic risk in passive strategies from the increased concentration in the high-multiple, mega-tech names. As always, thanks for watching and for your continued support.