Celebrating 17 Years of Service

March Newsletter

Mar 27, 2024

ECONOMIC OUTLOOK: Navigating Through Stubborn  Inflation and Policy Expectations

In recent months we’ve discussed our views of inflation and despite its downward trend in 2023, we remained skeptical it could ultimately reach the Federal Reserve’s stated 2% target. According to the latest inflation data, including the recent CPI report, the anticipated path back to 2% inflation is not materializing as many had expected (see chart right). Inflationary pressures remain persistent, with  little indication of a near-term decline to the Fed’s target. Underlying inflation has continued to stabilize near 4%,  aligning with our previous commentary that it would remain stickier than anticipated.

As we entered 2024, markets widely predicted significant rate cuts by the Federal Reserve this year. Arguments were made that inflation would continue to recede and return to its 2% target, GDP growth would weaken, and rate cuts would be needed to continue the economic expansion. There were expectations of up to six rates cuts throughout the year! However, in contrast, inflation has remained persistent, GDP growth has been revised upward, and calls for rate cuts have also been recalibrated, with expectations now tempered to two or three cuts, potentially in June or July. The anticipation of rate cuts caused monetary conditions to ease as bond yields declined further supporting the current economic expansion.

Given the outlook for inflation, interest rates and stronger than expected economic growth, we think that bond yields could again move higher. For this reason, we remain cautious extending maturities of bond positions and continue to favor the shorter end of the yield curve. We have also increased exposure to selected non-U.S. equity markets due to more favorable valuations and accelerating global economic activity. Higher than expected bond-yields could be a headwind for US equities in the future, but for now they are supported by better than expected growth. We continue to navigate this environment with a strategic mix of caution and opportunism.


Key Points:

· Persistent Inflation: Contrary to widespread expectations, underlying inflation in the U.S. remains elevated at around 4%, challenging the Federal Reserve’s glide path to its 2% target.

· Monetary Policy Stance: The Fed’s narrative that current monetary conditions are restrictive and necessitate lower rates to support economic expansion is juxtaposed against the reality of above-potential economic growth.

· Global Economic Momentum: Signs of acceleration in global economic activity, particularly in trade and manufacturing, suggest a forthcoming period of stronger global growth, contrasting with the predominant focus on U.S. economic indicators.


In its latest FOMC meeting, the Federal Reserve held the policy rate steady, signaling a continued dovish stance despite acknowledging higher inflation forecasts and a significantly stronger GDP growth outlook. This decision reflects the Fed’s delicate balancing act between supporting economic growth and managing inflation expectations.

The recent strong inflation reports have slightly tempered the Fed’s dovish outlook, leading to a minor adjustment in the expected policy rate for the upcoming years. This adjustment suggests a cautious recognition of persistent inflation pressures alongside economic resilience.

As noted above, the market’s anticipation of rate cuts has moderated from an initial expectation of six cuts to three, influenced by solid economic data and the Fed’s assurances. This shift has not adversely affected risk assets like equities and reflects the investor confidence in continued economic strength and Fed support.

However, there is growing concern the Fed may cut rates despite the strength in the recent data and that these potentially unmerited rate cuts could create future inflationary pressures. There is also concern that the Fed could abandon its 2% target altogether and instead adopt a higher long-run policy rate. This could have a major  impact on long-term bond yields and risk asset valuations. Both scenarios merit monitoring.

The Federal Reserve’s current dovish stance, alongside its openness to rate cuts, walks a fine line amidst solid economic growth and lingering inflation concerns. While the near term may continue to benefit from a “Goldilocks” scenario of robust growth and manageable inflation, the long-term outlook suggests potential recalibrations in policy expectations. We remain vigilant as the evolving economic landscape may necessitate a reevaluation of risk and return assumptions across asset classes.


The U.S. fourth-quarter earnings reporting season has concluded, showcasing results that not only surpassed expectations but also signified a positive trend in earnings growth for the second consecutive quarter. This performance underscores a cautiously optimistic outlook for the economy and markets. Year-over-year earnings for the S&P 500 grew by 10% in Q4, marking an improvement from 7.5% in the prior quarter.

From a sector perspective, technology and industrial sectors led with the most companies beating estimates, whereas the real estate, utilities, and communication services sectors saw a higher share of misses.

As we look ahead to 2024, initial forecasts suggest a moderation in earnings growth to around 5% in Q1 2024, with an anticipated rebound in subsequent quarters. This projection is based on a stable economic expansion in the U.S. and gradual improvements in global economic activity.

We expect earnings growth to broaden across several sectors this year as global manufacturing and trade conditions improve, and economic growth continues to be positive.


Tax talk will be front and center in 2025 and 2026 due to the impending expiration of much of the tax legislation enacted in 2017. This legislation, which encompasses a range of provisions affecting individuals and estates, is slated to sunset after 2025. Key features of this law include reduced tax rates, increased child credits, enhanced standard deductions, and expanded lifetime exemptions for estate and gift taxes. In the absence of legislative action to extend these changes, tax regulations will revert to their 2017 status.

The challenge of extending these tax breaks is considerable, given lawmakers’ reluctance to increase the federal debt, which has escalated to over $34 trillion due to persistent deficit spending. It is anticipated that Congress will explore measures to finance the continuation of some or all of these tax cuts, potentially leveraging the tax reform debate as an opportunity to reduce the national debt. The direction of these efforts will heavily depend on the political landscape, specifically which parties control Congress and the presidency.

Here’s a list of the top five tax expenditures for the year 2024:

1. Tax advantages for pensions, retirement plans, and accounts, including tax-deferred contributions to 401(k)s, deductible contributions to traditional IRAs, and deferral of account earnings.

2. Reduced tax rates on qualified dividends and long-term capital gains, which are substantially lower than the top rate on ordinary income.

3. Exemptions from taxation for employer-provided health insurance, where employer-paid premiums are not considered taxable income for the employee.

4. The child credit of $2,000 per child and a $500 credit for other dependents.

5. The health premium tax credit for individuals purchasing insurance through an exchange without access to affordable employer coverage.


In closing, the landscape of our economy and the policies that shape it are ever-evolving, marked by persistent challenges such as inflation and pivotal moments like the upcoming tax law changes. These developments have profound implications for our investment strategies and financial planning. We are vigilant, responsive, and always committed to your financial well-being. The path ahead may hold uncertainties, but with informed decision-making and strategic foresight, we can turn challenges into opportunities.