Diversifying for income in today’s markets

The US economy has shown robust performance with a GDP growth of 2.8% in Q3 2024, driven by strong consumer spending. However, the labor market has experienced volatility, with job creation slowing in the latter half of the year, which could impact inflation dynamics. Inflation is nearing the Fed's target, leading to rate cuts from 5.5% to 4.75%, supporting economic resilience.

Market expectations indicate a shift in interest-rate normalization, with anticipated rate cuts of about 100 basis points by the end of 2025. This shift is influenced by economic resilience and election cycle policies, which have affected short-term interest rate expectations. Monitoring economic data and market sentiment remains crucial.

The rise in the 10-year US Treasury yield to above 4.3% provides a favorable environment for income-generating investments, though credit spreads are tight, offering minimal compensation for credit risk. Agency mortgage-backed securities present opportunities due to stable spreads, despite potential prepayment risks.

US equity markets have seen significant growth, with the S&P 500 up 26% year-to-date, and market breadth has improved since mid-2024. Despite high valuation levels, expected earnings growth of nearly 15% in 2025 suggests potential opportunities, though selectivity is advised when adding equities.

To navigate market volatility, a nimble approach is essential, focusing on income opportunities and maintaining diversification in both fixed income and equities. This strategy aims to balance growth with risk management in a dynamic economic environment.