Signs point to end of ‘Goldilocks-like economic environment’

Financial markets look to be returning to a period of more normal growth after the unprecedented boom that followed the global financial crisis of 2008 and lasted through to Covid, says Jennifer Martin, vice president of T. Rowe Price Group and portfolio specialist for global equities.

“That Goldilocks era was just a wonderful time of secular stagnation. Rates going down and all asset prices going up,” she said. “So now, in some ways, we’re normalizing. The market is evolving with higher rates, higher inflation and more challenged growth.”

She said that new environment will likely last a while.

“Not sure if it’s a new regime exactly, but it’s something we’re balancing,” she said. “We have higher rates, higher inflation, higher taxes, near-shoring and onshoring. In the next three or five years, it does look tougher for corporate profit growth than it did the previous 10 years.”

While there is a bright spot on the horizon — the current excitement around artificial intelligence and the efficiencies it could unlock — the immediate winners will be a select list of tech giants, most notably the California-based companies Nvidia, Alphabet and Advanced Micro Devices, as well as Washington state-based Amazon.com and Microsoft.

“A.I. certainly will help, but it doesn’t mean that we’ll return to the Goldilocks-like environment,” she said. “We’re ready for some tougher economic sledding.”

Judging year-to-date returns, with corporate earnings faring better than expected in a time of interest-rate uncertainty, she believes markets have gotten “a little ahead of themselves.”

“Earlier this year the market was pricing in two to four cuts. Now they’re pricing in a raise in the back half of the year,” she said. “That’s a big change, to go from pricing in two cuts at the end of the year to raising rates. And the market is just taking that in stride.”

Globally, she said, Canada and Australia have been flat on the back of weak commodities, and Asia has been a laggard on the back of China’s troubled reopening.

“There are rumors that the [Chinese] government will stimulate, which would definitely help,” she said.

“If I think about where we’re constructive, we still have a very constructive outlook on emerging markets,” she said. “And really that focuses on Southeast Asia and India.”

As for names and sectors she likes, Martin pointed to opportunities in health care, which has been challenged this year. She particularly likes Indiana-based Eli Lilly and Company, Hamburg, Germany-based Evotec SE and Florida-based Roper Technologies.

She said U.S. financials have also been weighed down this year, following a regional banking crisis, and fears that a recession and higher rates would be negative for the sector. But she downplayed those concerns and suggested there is room for contrarian thinking. In the broader sector, she likes Wisconsin-based Fiserv, New Jersey-based Chubb Corp., New York-based companies AIG and JPMorgan Chase & Co.

“Well-run businesses remain very good investments,” she said. “Markets have been resilient in the face of a lot of uncertainty. Yes, there’s been headwinds of slower economies and higher rates. We still think, though, good quality growth equities are a great way to make money over the medium term.”

Martin said careful analysis will reveal fruitful areas for investors.

“I think the energizing statement is that periods of economic challenge create opportunity,” she said. “There is greater divergence between the winners and losers.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.