Weekly Investment Update (11/10/2023)

This Week’s Views and Positioning

Bond yields experienced volatility this week, impacted by the market’s perception of the future path of monetary policy. During a speech in Washington, D.C., this week, Fed Chair Jerome Powell said that he was “not confident” that monetary policy was sufficiently tight to reach the Fed’s 2% inflation objective. It is important to view Powell’s comments and subsequent market reactions in context of the nuances of Fed rhetoric historically. There is generally little incentive for the Fed to signal anything other than a steadfast commitment to keeping interest rates “higher for longer” this late in its battle against inflation. Additionally, we note that Powell changes his rhetoric and his overall framework for describing the economy frequently, so we do not read much into his comments

We believe monetary policy will be reactive to incoming data, and the probability of rate cuts or hikes in 2024 will have little to do with current Fed rhetoric. In our view, evidence will begin to accumulate that signals a further reduction in the pace of economic growth. This, rather than Fed commentary, will ultimately give investors comfort that the last rate hike is behind us. Therefore, we are maintaining our overweight to equities as the end of the Fed hiking cycle is likely to support equities in the absence of a material deterioration in economic conditions, which we do not perceive as imminent. Below, we discuss other dynamics that impact portfolio positioning, including a slowdown in international economic growth relative to the U.S. and the price of oil hitting multi-month lows.

Economic Growth Challenged Outside the U.S.

What is happening: While economic growth has surprised to the upside in the U.S., it has been much weaker internationally. Although more recent U.S. economic data has shown signs of slowing, with payrolls and ISM Services and Manufacturing PMIs coming in below consensus expectations, domestic growth has overall surprised to the upside year-to-date, particularly in the third quarter. In the eurozone, however, growth has been consistently sluggish since the European Central Bank (ECB) began raising interest rates in July 2022. In fact, eurozone GDP contracted in the third quarter. Moreover, eurozone Manufacturing PMIs have been in contraction since July 2022. Meanwhile, the economic recovery in China strengthened in the third quarter after a weak second quarter; still, China’s growth outlook remains challenged due to property sector headwinds and subdued consumption as Chinese consumers remain cautious in an uncertain economic environment.

Why it matters: Higher interest rates in the eurozone permeated the economy faster than in the U.S. in part because of the larger share of floating rate debt for both consumers and businesses. The Chinese economy is faced with increasingly difficult demographic trends, a weak economic reopening, and insufficient stimulus to spur robust consumption. International weakness has been highlighted this earnings season; according to data from FactSet, companies that generate more than 50% of sales within the U.S. reported stronger earnings growth than companies with over 50% of sales outside the U.S.

In part due to a challenging global backdrop, Bessemer portfolios maintain an overweight to the U.S., where the economy has been more resilient to interest rate hikes relative to other countries. Additionally, we note a larger share of high-quality companies reside in the U.S. Bessemer portfolios are underweight China and Europe relative to their benchmarks.

Fall in Oil Prices Comes as Welcome Relief for Central Bankers

What is happening: Oil prices fell to their lowest levels in three months, reversing the gains witnessed since Hamas attacked Israel on October 7. Brent crude, the international oil benchmark, fell below $80, and the U.S. benchmark, West Texas Intermediate (WTI) fell to $75, their lowest levels since July. The retracement in prices comes after an initial spike following the attacks by Hamas and Israel’s subsequent declaration of war. As the terrible events in Gaza and Israel continue, attention has shifted back to fundamentals, where supply remains robust and demand is weakening as the effects of elevated rates permeate the global economy.

Why it matters: The fall in oil prices will come as welcome relief for central banks around the world as they continue their inflation fight. In the summer, oil prices had risen due to production cuts from some key OPEC+ members, and the current situation in the Middle East added further upward pressure, potentially complicating the job of central bankers. However, supply and demand dynamics recently have improved, which will take upward pressure off oil prices.

On the supply side, U.S. oil production reached its highest ever output in the first week of November, touching 13.2 million barrels per day (bpd) as energy companies extracted more oil from each well. OPEC+ crude exports are up approximately one million bpd from their August low. On the demand side, recent data has shown a weakening. The Energy Information Administration now expects total petroleum consumption in the U.S. to fall by 300,000 bpd this year, reversing its earlier forecast for a 100,000 bpd increase. The fall in demand to a 20-year low on a per-capita basis is, in part, due to reduced commuting, increased usage of electric vehicles, greater fuel efficiency, and a slowing economy. In addition, China, which accounts for more than half of global oil demand, has recently seen an uptick in stockpiles of oil as demand has not recovered as much as expected. Bessemer portfolios increased exposure to energy and commodity-related companies in 2022 and have maintained energy exposure that is roughly in line with the benchmark weight this year.