Investment Outlook 2024: Focus on Quality As a Mild Recession Looms
November 10, 2023
By Richard L. Sega, Global Chief Investment Strategist
Forecasting often seems like a painful and unrewarding exercise. The economic environment and sentiment can be upended at any time in any number of ways by unanticipated events. But as Louis Pasteur remarked, “Chance favors the prepared mind.”
Risk mitigation is critical for insurers’ operations and their portfolio management. Insurance industry portfolios are as varied as the lines of business they support, but they all rely on the benefits of a strong underlying economy. From the demand for insurance that fuels their growth and prosperity to the markets in which they invest, the economic outlook, the path forward for equities, and the level and direction of interest rates are pivotal to insurance companies’ successful risk mitigation.
What can we surmise about the future – and which strategies might help insurers navigate it?
A Recession in 2024?Through the third quarter of 2023, the U.S. economy proved quite resilient, helped by the consumer. There are signs that the U.S. consumer might be pulling back (see Figure 1) and that higher rates are beginning to affect at least the lower tier of income earners. We believe that sometime in the first half of 2024, the rolling recession finally will hit consumers more broadly.
To date though, it has been a Goldilocks economy with everything just about right - not too hot, not too cold - in labor markets, manufacturing, and housing. Stock market returns propped up by steady corporate earnings have supported surplus levels at many insurers. While total returns in bond markets have been nothing short of frightening, the higher interest rates available for newly issued bonds have allowed portfolio yields to rise and portfolio durations to extend to meet their liability targets.
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