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Letter to Clients

Q1 2024

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It’s Time to Prepare for a Less Forgiving Environment

Financial markets have changed dramatically since the 2008 Global Financial Crisis (GFC). Interest rates and inflation fell to historical lows while governments and central banks worldwide injected nearly $30 trillion into the economy. The tide turned in 2021 when inflation and interest rates began climbing, and central banks started tightening liquidity.

The post-GFC “new normal” that propelled markets for over a decade is giving way to a more normal environment of higher inflation and interest rates. Investors must ask what adjustments they should make if such conditions hold for the long term.

In hindsight, we can look at the period from the end of the GFC to the Federal Reserve’s (Fed’s) initial rate hike in 2022 and see that the odds were stacked in favor of risk-taking. There was so much money coursing through the capital markets due to low interest rates and easy access to capital that investors had little incentive to diversify. All that liquidity pushed asset prices higher and provided enough support to soften the blow of low economic growth and poor capital allocation decisions.

Today, credit is tight, interest rates are high, and the consequences of slower economic growth and capital allocation mistakes may be more severe. These changes represent a notable departure from the new normal investment landscape, and we think they may be lasting.

Navigating 2024: Rethinking Risk and Embracing Diversification

It’s time for a new mindset. First, we must come to grips with the idea that the risk-taking that worked so well for many of us after the GFC may not be as successful in this environment. Second, we must embrace broader portfolio diversification to deal with greater uncertainty.

There’s nothing new about diversifying, but in 2024 and beyond, it may mean changing our approach to asset classes that have served us well over the last 13 years. For example, you may have had no choice but to accept greater risk in your portfolio because cash and traditional fixed-income investments couldn’t generate adequate income when interest rates were nearly zero.

That’s hardly the case today. Indeed, increasing your allocation to cash and bonds may be appropriate. With moderating inflation and a potential pause in the Fed’s rate-hiking, bonds may serve as a more effective hedge against stock market volatility.

We expect the U.S. economy to slow further in the coming year. Higher-risk assets could experience greater volatility in that scenario, so investors may need to build more buffers into their portfolios. You should assess your portfolio’s balance between lower-risk assets, such as cash and investment-grade bonds, versus riskier assets, such as high-yield bonds and equities.

Our 2024 Outlook: Recession Is Possible

Despite the Fed's dovish pivot, we think a recession is still a likely economic outcome in 2024. Though many observers are now calling for an economic soft landing, we think high interest rates and tight credit conditions will continue to wear down consumers and businesses, slowing economic growth and weakening the job market.

In this edition of our Investment Outlook, our chief investment officers share their views on investing in this challenging environment.

  • Bonds are attractive.

    Historically, bond returns have been positive during recessions due to declining interest rates and investors’ preference for less volatile investments.

  • Earnings still matter.

    Sustaining the equity market’s positive performance into the new year will hinge on investors emphasizing corporate earnings more than macroeconomic worries.

  • Rate-cutting is positive for emerging markets.

    Central banks in some economies have already begun easing, potentially creating a tailwind for emerging markets in 2024.

The late Dr. Harry Markowitz received the Nobel Prize for creating modern portfolio theory. The central thesis is that anyone can effectively manage risk through portfolio diversification. So much so, Markowitz once said diversification is the only form of free lunch he found in life.

Considering all the current economic and market conditions, we believe revisiting the benefits of diversification is now warranted.

Thank you for entrusting us with your capital.

Victor Zhang
Victor Zhang

Chief Investment Officer

Senior Vice President

Managing Money, Making an Impact

Let’s invest to make a difference in your life and the lives of others. Together, we can become a powerful force for good.

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.