By Aoifinn Devitt, Chief Global Investment Strategist

Words matter. That part is clear. When the Federal reserve started to sprinkle the word “transitory” into its assessment of inflation from 2022 onwards they sent a clear signal. It was that this would pass and that the mounting evidence of inflation was not sufficiently concerning to merit a monetary policy response. They soon came to rue their use of the term, and they spent 16 months and undertook 11 unprecedented rate hikes in an attempt to restore their credibility.

Now, in early 2024 earnings season is once more upon us and as companies attempt to navigate the year, some intriguing terms have been thrown out. While some have spoken about “unpredictable headwinds”, consumer goods and travel companies suggested demand was “durable” while a financial services firm expects the year to be “transitional”.

This term captures so much – but so little  – at the same time. It expresses the impossibility of charting a course after the wild rides of 2021-2023, the uncertainty around what kind of landing (if any) the economy will experience, whether the consumer resilience will win out and whether cracks will appear. It is an admission that forecasting is futile and they are finding out as they go along, and begs the question as to what role corporate strategy has in such an environment? To be pedantic, a transition is usually from something to another state – e.g. the energy transition away from fossil fuels towards renewables. So what state is 2024 transitioning to – that part remains to be seen.

Part of the stock market shrugged off the transitional uncertainty, with record highs set in the past week in the Dow and the S&P. Positive employment data (a drop in unemployment claims) diluted the high conviction around the timing of rate cuts, and fixed income volatility raised its head again. The week in markets is set out below:

Source: Morningstar as of 1/22/24

The market patterns of 2023 don’t seem to have been transitory – or even transitional – at all – at least not yet. So far they seem to be repeating true to form in 2024: Year-to-date, the Magnificent 7 are up 1.8%, the S&P is up 0.3%, and the equal-weight S&P is down -2%. As we watch the big get bigger, and success beget success, it might be worth consulting the playbooks of previous market bubbles. Not that the Magnificent 7 represent one necessarily but the lack of breadth in the market remains concerning.

From Transitory to Transitional, another T word is former President Trump, whose landslide showing in the Iowa caucuses quickly saw the field of contenders for the Republican nomination narrow to two. As the 2024 election shapes up for a Biden v. Trump rematch there will be more reference to pattern recognition as the year unfolds. It will be fascinating to see if the same patterns lead to the same results against starkly different backdrops. Last time around – in 2020 – the world was just starting to hear about a novel Coronavirus, and the “transitions” since then have been too many to count. The field is not the same. We are not the same.

Today’s release which showed 4Q GDP figures, as a healthy 3.1% are likely to push rate rise expectations further into the future and latest inflation data is similarly heading in the right direction but would at least support no new hikes. As earnings continue to trickle in, we will be alert for more evidence that other firms are facing a “transitional” environment. The true challenge then will be discerning what comes next.



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