Author: Rachel Shulman

Executive Summary

Recent banking troubles have introduced a new challenge for the Federal Reserve, which now must address the soundness of the financial system alongside its mandates to maximize employment and maintain price stability. On March 12th, the Fed launched the Bank Term Funding Program (BTFP) to bolster American businesses and households by providing additional funding to eligible banks, ensuring they can meet depositor needs. Additionally, the U.S. and other nations have established currency swap lines to enhance global dollar availability. These measures, though underpublicized, are crucial for maintaining liquidity and restoring financial system confidence.

Despite the challenging market environment, the real economy—focusing on goods and services—offers notable investment opportunities, especially as banks are expected to tighten lending standards, potentially dampening U.S. consumer spending. Investors should shift their focus to sectors where recent legislation is driving government and corporate spending, which is expected to sustain demand and production throughout the decade. As highlighted in our January 12th Outlook, the current economic landscape is shaped by significant shifts: cost-of-living increases, a global geopolitical realignment, and the reindustrialization of the global economy. These changes have profound implications for investment strategy, contributing to the unique economic environment that confounds many investors.

We continue to favor those companies supporting the clean energy transition, improving productivity, lowering healthcare costs, and ensuring national security. Our team has identified high-quality companies with strong balance sheets and solid dividend growth benefitting from the current economic outlook.  We have been underweight in financial and consumer-oriented stocks, businesses with weak balance sheets (especially those with elevated levels of short-term debt), and those whose unsustainable demand has begun to have a negative impact on their outlooks for earnings and cash flow.

Outlook Highlights

Banking System Challenges

Recent turmoil in the banking sector has prompted the Federal Reserve to address three critical issues: maximizing employment, maintaining price stability, and ensuring the financial system’s soundness. These challenges have added complex layers to the Fed’s decision-making and future policy actions.

Legislative Impact on Economic Dynamics

Significant legislative measures such as the Inflation Reduction Act, CHIPS and Science Act, and National Defense Authorization Act are reshaping the economic landscape, driving demand and production that will influence the decade’s investment opportunities.

Shifts in Consumer and Corporate Spending

With tightening credit conditions, we anticipate a shift from traditional consumer-driven growth to increased spending by federal, state, and local governments, and corporations. This shift is supported by recent legislation which is set to reshape economic priorities and spending patterns.

Geopolitical Realignment and Economic Reindustrialization

Critical, multi-year transitions identified include the realignment of the global geopolitical order and the reindustrialization of the global economy. These transitions are reshaping investment strategies, creating unique challenges and opportunities in the current economic climate.

Our Perspective

In an environment marked by rapid changes and significant economic policy adjustments, we maintain a cautious approach towards sectors highly sensitive to economic fluctuations and remain conservative with financial and consumer-oriented stocks. Our approach aims to capitalize on the opportunities presented by legislative and geopolitical shifts, ensuring our clients are positioned to navigate these transformations effectively.

Disclaimer

The information provided in this report is for informational purposes only and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. This report is provided on the condition that it does not form a primary basis for any investment decisions. The opinions and analyses included in this report are based on current market conditions and are subject to change. ARS Investment Partners, LLC will not be responsible for any investment decisions based on this report. Please consult with a qualified financial advisor before making any investment decisions.

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Executive Summary

Currently, the world faces a historic inflection point with significant economic, geopolitical, and social implications, highlighted by a sharper-than-expected global economic slowdown and unprecedented inflation levels. This backdrop is shaped by critical global challenges including national security threats, food and energy crises, and climate change.

We identify three pivotal shifts impacting investment strategies: rising cost of living, a shifting global geopolitical landscape, and the reindustrialization of the global economy. The rapid and significant nature of these changes has led to a reassessment of asset valuations over the past year. Investors must now prepare for a less stable geopolitical climate, higher living costs, and the potential for a global recession, alongside a fundamental shift in manufacturing and production due to reoriented global supply chains and advancements in digital process automation. This reconfiguration presents a major opportunity for the United States and is likely to redefine market leadership, continuing to drive innovation across all sectors.

Outlook Highlights

Cost-of-Living Increase

With inflation remaining high, the economic environment is adjusting to increased living costs driven by pandemic-related imbalances, higher energy prices, and broader price pressures. This situation is intensifying the Federal Reserve’s focus on achieving and potentially re-evaluating its 2% inflation target.

Global Fragmentation and Geopolitical Shifts

The current geopolitical landscape is undergoing significant transformations, challenging the post-Cold War international order and escalating geopolitical competition. This is compelling nations to reconsider trade and security alignments, with countries like Japan and Germany reassessing their defense spending and strategies.

Reindustrialization of the Global Economy

The U.S. is poised to reclaim a leadership role in global manufacturing, driven by governmental incentives and shifts in global supply chains catalyzed by recent geopolitical tensions and pandemics. This shift back to domestic manufacturing is expected to significantly boost the U.S. economy.

Legislative Changes and Economic Impact

Recent U.S. legislative measures, including significant infrastructure investments and advancements in semiconductor technologies, are reshaping the industrial landscape. These changes are likely to drive substantial capital flows into the U.S., despite potential recessionary pressures.

Our Perspective

In this transformative era, our focus remains on identifying companies with strong balance sheets and growth potential that are positioned to navigate these changes effectively. We are particularly optimistic about sectors enhanced by legislative actions aimed at infrastructure, technology, and defense.

Furthermore, while global uncertainties persist, innovation continues to drive change across all sectors, creating new market leaders and investment opportunities. We believe that staying ahead of these trends and adjusting investment strategies accordingly will be crucial for achieving long-term success in this dynamic environment.

Disclaimer

The information provided in this report is for informational purposes only and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. This report is provided on the condition that it does not form a primary basis for any investment decisions. The opinions and analyses included in this report are based on current market conditions and are subject to change. ARS Investment Partners, LLC will not be responsible for any investment decisions based on this report. Please consult with a qualified financial advisor before making any investment decisions.

Want More of The Outlook?

Sign up to receive The Outlook — our timely newsletter featuring our investment and economic thinking — and highlights from our latest market insights will be emailed directly to your inbox.

Executive Summary

Valuations are undergoing the most meaningful re-adjustment process since the Great Financial Crisis to reflect current interest rates and inflation rates. Under present conditions, the global economy will likely experience a recession in the coming quarters with Europe and China among the greatest areas of financial stress. The U.S. remains the most attractive developed market economy and a magnet for capital flows from the rest of the world, but its economy will be challenged as well. The pandemic, its accompanying supply chain problems, and Russia’s attack on Ukraine continues to remake our world and accelerate the rate of change for so many aspects of society. It remains unclear just how much things will change as we still do not know how everything sorts out.

Nevertheless, what is clear is that the global economy is experiencing more persistent cost pressures and reduced economic activity while policymakers have less bandwidth to support their economies than they have had in the past. Therefore, the adjustment process will be painful for the most vulnerable governments, companies, and individuals.

Outlook Highlights

Return to Normalized Interest Rates

After years of negative to zero interest rates, the world and U.S. monetary regimes are shifting towards normalized interest rates, a transition driven by the need to control inflation and stabilize economic conditions.

Global Economic Recession

With the rapid adjustment of monetary policies, the global economy is poised to face recessionary pressures, with significant financial stress expected in Europe and China as they navigate these changes.

U.S. as a Capital Magnet

Despite global economic challenges, the U.S. continues to attract substantial capital flows, maintaining its status as the most attractive developed market economy. However, it faces challenges that may test its economic resilience.

Societal and Economic Transformations

The ongoing effects of the pandemic, coupled with Russia’s conflict in Ukraine, are accelerating changes across many aspects of society, influencing everything from supply chains to geopolitical relations, with uncertain outcomes.

Our Perspective

In this new economic era, market participants must adjust to an environment of heightened uncertainty and volatility. The end of ultra-easy money policies means investors need to be more discerning and disciplined. Despite current challenges, the recent pullback in global equity markets presents opportunities to acquire leading businesses at favorable valuations. Investors should focus on sectors and companies poised to benefit from the current economic conditions and legislative changes, adjusting their strategies to navigate the complexities of today’s global financial landscape.

Disclaimer

The information provided in this report is for informational purposes only and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. This report is provided on the condition that it does not form a primary basis for any investment decisions. The opinions and analyses included in this report are based on current market conditions and are subject to change. ARS Investment Partners, LLC will not be responsible for any investment decisions based on this report. Please consult with a qualified financial advisor before making any investment decisions.

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Sign up to receive The Outlook — our timely newsletter featuring our investment and economic thinking — and highlights from our latest market insights will be emailed directly to your inbox.