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Q3 2023

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Is the Soft Landing a Fairy Tale?

From the outset of the Federal Reserve’s (Fed’s) rate-hike regime in March 2022, pundits didn’t like the central bank’s chances of taming inflation without crashing the economy. Skepticism about the potential for a Goldilocks-style soft landing grew as inflation climbed to 40-year highs and proved stickier than many expected. Recession worries reached a fever pitch as 2022 closed with sharp losses for stocks and bonds.

But something happened on the road to perdition. Some 18 months after the Fed’s first hike, economic growth remains positive, inflation is cooling, the labor market is strong and consumers continue to spend. Corporate earnings are weakening, but stocks across the globe are on pace for a solid year as of late September.

Is this the soft landing?

Not So Fast, Goldilocks

Even though the economy and the market have turned out to be resilient, we’re not out of the woods yet. Rates rose at an unprecedented pace, but Fed governors caution that there’s a “long and variable lag” for a rate hike’s full effect to hit the real economy.

Indeed, we estimate that only about 60% of the hikes have taken hold, with the effects of the entire campaign playing out into 2024. Considering this delayed impact, along with the inverted yield curve, weakening housing market and declining manufacturing activity, we still think a recession is the most likely economic outcome.

Investing with a Recession in Mind

In this issue of Investment Outlook, our chief investment officers discuss the risks and opportunities that come with an uncertain economic backdrop.

  • Inflation may be receding, but we don’t expect it to fall to the Fed’s target level any time soon. Therefore, we’re not counting on a quick policy pivot, and we’re still emphasizing quality and extending duration in our bond portfolios.

  • Security selection is paramount. Businesses aren’t equally prepared to handle a recession, so our teams are looking for companies that can fund their operations and sustain their profit growth through a downturn.

  • Artificial intelligence is grabbing headlines, but growth opportunities lie elsewhere. Other notable themes include the strong rebound in travel and mobility and the onshoring and nearshoring trends.

  • Inflation hasn’t been as stubborn in emerging economies as developed markets. Emerging markets central banks may have room to ease monetary policy to fuel economic growth heading into next year.

Though the economy and the markets have been resilient in 2023, we urge our clients to proceed cautiously. Given the uncertain outlook, we think the watchwords remain balance, diversification and risk management.

Thank you for entrusting us with your capital.

Victor Zhang
Victor Zhang

Chief Investment Officer

Senior Vice President

Q4 2023 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.