In collaboration with:

UOB Investment Insights

Market PowerBar MARCH 2024

TOPIC 1:

Have we missed the boat?

Recent data suggests that the United States (US) economy may be headed for a soft
landing scenario where economic growth slows but avoids a recession. As investors
become more optimistic that a recession can be avoided, stocks, especially those in
US markets, have recently reached record highs. Is it too late for investors to invest now?
→ The US economy has so far avoided a recession, → Since everything seems just right, the S&P500
with steady economic growth and employment. index has reached new peaks since the last
Meanwhile, inflation has come down from its peak. quarter of 2023. Is it too late to invest now?
Although inflation has not reached the Federal
→ However, US stock markets often make record
Reserve’s (Fed) target of 2%, it is heading in the
highs. There is no clear advantage, both in the
right direction.
short and long term, to invest at record highs
→ The Fed appears to have raised rates to control versus waiting for markets to fall (Figure 1).
inflation without hurting growth. As inflation has Moreover, positive earnings growth as well as
declined, investors are now expecting rates to be the possibility of central bank rate cuts when
lowered to a level where economic activity is there is no recession suggest another year
supported while inflation is restrained. of stock market gains.

Figure 1:

Average returns of investing at record high days Average returns of investing

at record high days
vs non record high days are not significantly different Average returns of investing
on non record high days
Average S&P 500 price returns across time periods, 1980 - present

(%)
25.0

20.0

15.0

10.0

5.0

0.0
3 months 6 months 12 months 24 months

Source: FactSet, Standard and Poor’s, J.P. Morgan Asset Management.

Speak to your UOB Advisor today to find out more.

TOPIC 2:

Is cash still king?

In a soft landing scenario, bond yields are likely to fall, implying higher price return.
This offers investors opportunities to move from cash to bonds.

→ Investors are closely watching incoming data for in most years, with the exception for 2018 and 2022
clues on Fed rate cuts. If inflation falls further, the when markets experienced broad downturns.
probability of rate cuts will increase, driving bonds
→ Looking back, holding even short duration bonds has
returns this year.
resulted in higher returns than holding cash (Figure 2).
→ In the near term, bond markets can be volatile from An investor holding cash also faces reinvestment risk,
overly optimistic rate cuts expectations. For example, where you may have to reinvest cash at lower rates
higher than expected inflation in January led to in future.
a bond sell-off in February.
→ While bonds typically have lower returns than stocks,
→ In the medium term, we expect rates to fall as the Fed lower volatility makes bonds attractive, especially in
gradually cuts interest rates. This means that bonds, a year likely filled with uncertainty.
including those with short maturity, can deliver higher
→ Therefore, bonds, especially high-quality ones like
returns than cash. While cash returns were over 5%
investment grade bonds, play an important part in
last year, other asset classes have outperformed cash
your investment portfolios.

Figure 2:

Long-term returns of cash vs bonds US AGG

US CASH
Growth of a USD 100 investment
Based on inflation-adjusted monthly return from 31 December 1991

USD (in billion)

300

250

200

150

100

50
‘93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17 ‘19 ‘21 ‘23

Source: Bloomberg, J.P. Morgan Asset Management. US Agg: US Aggregate bonds is based on Bloomberg US aggregate Index, US Cash: US short term Treasuries based on
Bloomberg Short-term Treasury Total Return Index.

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TOPIC 3:

Will inflation make a comeback?

Our main scenario is that the economy will slow down gradually without crashing.
One of the main challenges to this scenario is inflation. Look out for these three
potential risks.

→ The first risk is related to wage costs, probably the → The third risk could come from a commodity shock
result of a strong US labour market. If companies pass from geopolitical tensions. Not only could this push
high wage costs onto their products instead of energy prices up, as we have seen with events in the
absorbing them, prices of goods will go up. Middle East, a commodity shock can also disrupt
shipping and cause new problems for supply chains.
→ The second risk comes from sticky shelter costs.
Looking at a breakdown of the drivers of inflation, a → Considering these risks, the last mile for inflation to
big component is made up of shelter costs. These fall to 2% is not a smooth one, and reminds us of the
should drop in the coming months as they are lagging importance of portfolio diversification. A diversified
indicators (Figure 3a). For core services prices portfolio can capture opportunities across different
(excluding shelter costs) to fall, wage growth also market cycles and deliver consistent returns over time
needs to come down (Figure 3b). with lower volatility.

Figure 3A: Figure 3B:

Shelter is a large part of Strong wage growth keeps

US inflation core services inflation high
(%)
10
9
8
7
6
5
4
3
2
1
0
-1
-2
Jan May Sep Jan May Sep Jan ‘90 ‘95 ‘00 ‘05 ‘10 ‘15 ‘20 ‘24
‘22 ‘22 ‘22 ‘23 ‘23 ‘23 ‘24

Energy Shelter Core goods Average hourly earnings in the US

Core services inflation in the US
Food Core services ex-shelter

Source: FactSet, US Departement of Labor Statistics, J.P. Morgan Asset Management.

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