Keep Your Eye on Internationals

Last Updated: February 21, 2024

Key Takeaways

The timing of the first Federal Reserve (Fed) rate cut is in doubt as the domestic inflation outlook remains cloudy.
Investors with a domestic bias were rewarded as European business activity faltered while the U.S. economy boomed, but conditions may be changing this year.
Markets may have to reset global growth expectations with the latest Nowcasting results.

Rate Cut Expectations Affect Market Volatility

Markets are increasingly nervous that sticky inflation will derail expectations of the Fed cutting rates early this year. Despite uncertainty about near-term inflation, we don’t think the hot January consumer price report changes the narrative that inflation will decelerate throughout this year. As we often say, the path to lower inflation is likely not a straight line, but it should slope downward. But domestic inflation seems to be currently stickier than international prices.

The key investment takeaway from the global inflation story is that the European Central Bank (ECB) may pivot sooner than the Fed. Historically, the ECB plays “follow the leader” and waits for the Fed to move first, whether the Fed is raising rates, cutting rates, or pausing. During the last several business cycles, the Fed was the first to move, as illustrated in the chart below.

ECB Plays "Follow the Leader" with Fed

Federal Reserve is Often the First to Change Course

Source: LPL Research, European Central Bank, Federal Reserve Board, 02/21/24

Call to Action

If inflation is convincingly decelerating faster in Europe than in the U.S., capital markets will likely experience a novelty — that is, the ECB leading the way in altering monetary policy. This could have ramifications on the dollar, global yields, and equity markets.

This year may be the year to seek out investment opportunities outside the U.S as well. The Strategic and Tactical Asset Allocation Committee (STAAC) favors U.S. equities over developed international due to a relatively stronger domestic economic growth outlook and superior earnings power, though the Committee still finds Japanese equities attractive. However, if the ECB adjusts policy sooner than markets expect and the Fed adjusts later than expected, then investors could experience a relative allocation opportunity. In markets like these, allocators often benefit with active managers able to manage variance among global markets. In short, investors should keep a watchful eye on internationals.

European Inflation Improving Faster than U.S.

Global Central Banks Find it Hard to be in Sync

Source: LPL Research, Bureau of Labor Statistics, Statistical Office of the European Communities, 02/21/24

Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

For Public Use – Tracking: #544339

Dr. Jeffrey Roach

Jeffrey Roach guides the overall view of the economy for LPL Financial Research and has over 20 years of experience in investing and economics.