April 2024
Market Pulse
Leveraging the expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.
AUTHORS
Benoit Anne
Managing Director
Investment Solutions Group
Jonathan Hubbard, CFA
Managing Director
Investment Solutions Group
Brad Rutan, CFA
Managing Director
Investment Solutions Group
KEY TAKEAWAYS
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Economy & Markets
Economy & Markets
| GLOBAL GROWTH
Fears of a Global Recession Have Receded MFS PERSPECTIVE
- We are now observing a recovery in the growth outlook in many places, including the UK, the eurozone, Asia, and Brazil, among others.
- A stronger global growth outlook tends to be supportive of risky assets, especially in non-dollar markets.
| ELECTIONS
Election Years Do Not Dictate Fed Policy MFS PERSPECTIVE
- While there has been much commentary on whether the political landscape will influence future Fed policy, history shows the Fed acts independently.
- The Fed has both eased and tightened during election years, and the change was often part of a multi-year effort driven by the economic backdrop.
| CONSUMER HEALTH
The US Consumer is a Key Driver of Robust Growth MFS PERSPECTIVE
- The persisting resilience of the US consumer has helped solidify the case for a soft landing.
- Overall net worth levels, the strong labor market, and residual excess savings from the Covid windfall have all been contributing factors to the strong health of the consumer.
| STATE FINANCES
State Finances Appear Healthy MFS PERSPECTIVE
- In aggregate, state general and rainy-day funds have grown significantly since 2019 as income growth has led to higher tax receipts.
- Many states have pandemic related funds that are yet to be earmarked or paid out.
- This is a healthy sign for the economy and creates an appealing backdrop for municipal bond investors.
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Asset Allocation
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
A more favorable economic backdrop suggests a move closer to a neutral portfolio positioning, with a slight bias toward fixed income due to the risk adjusted appeal.
MFS PERSPECTIVE
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The overall macro landscape continues to be favorable, with the case for a soft landing getting stronger, inflation decelerating, and some policy easing expected in the second half of the year, all of which is generally positive for both stocks and bonds.
US equities remain dominant year to date, but several of the largest European equities have seen a significant rally. Emerging Market equities remain a distant third, but are still in positive territory.
Fixed income continues to offer meaningful yields across the risk spectrum, but credit spread compression is unlikely to be a significant contributor to return. However, the all-in yields supported by the underlying rates component means the income is back in fixed income.
High-beta stocks drove the rally to date, but we remain convinced that greater breadth and greater attention to individual company fundamentals will provide our investors with the opportunity to add alpha across our investment platform.
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
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Equity
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
- Equity performance has begun to broaden with the S&P 500 equal-weighted index closely tracking the S&P 500 cap-weighted index over the last month.
- Around 80% of S&P 500 constituents are now trading above their 200-day moving average compared to a 10-year average of around 63%.
- Index concentration remains high, although there has been significant divergence at the top.
MFS CONSIDERATIONS LARGE CAP - To date, only four of the Magnificent Seven have outperformed the S&P 500 compared to 2023 when all seven outperformed. Under the surface, significant rotations are underway.
SMALL/MID CAP - US small caps have done little year to date and remain far behind large-cap counterparts, particularly growth. Recession risks continue to recede, which could be a tailwind for more economically sensitive parts of the market.
- Mid caps are better positioned than small caps, with cheaper valuations and lower funding needs in a higher rate environment.
GROWTH - The Russell 1000® Growth Index has risen unabated since the lows in October 2023, bringing its forward PE to nearly 28x relative to its 10-year average of under 23x.
- Exposure to lower beta and growth-at-reasonable-prices strategies appear prudent in the current market environment.
VALUE - A near-term, broad-based economic slowdown appears unlikely, easing some concerns around cyclical value companies. We see opportunity in high-quality financial services and industrial companies.
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DEVELOPED INTERNATIONAL EQUITY 
- Developed international equities have begun to show momentum with 11 European stocks leading the way.
- Dubbed the “GRANOLAS” by Goldman Sachs, they are drawing comparisons to the Magnificent 7 in the US.
M F S C O N S I D E R A T I O N S - The GRANOLAs mentioned above include luxury goods makers as well as pharmaceutical manufacturers, which are benefiting from the growth in GLP-1 drugs.
- Strength in Japan equities have been the biggest driver to gains. Japan remains the largest country weight in the MSCI EAFE index at more than 23%. In March, Japan abandoned its negative interest rate policy as growth and inflation picked up, the potential start of a new economic regime.
BLANK
EMERGING MARKET EQUITY 
- Emerging market equities continue to trade sideways, although there are significant pockets of opportunity for security selection across countries.
- Despite a bounce off its January lows, Chinese equities continue to be a drag on the overall EM market.
M F S C O N S I D E R A T I O N S - India’s economy, as well as its stock market, have been on a steady growth trajectory over the past three years as it benefits from changing global trade flows and a growing domestic consumer base.
- Other pockets of Asia including Taiwan have benefited from increased demand for semiconductor supply chain components as AI-related demand remains robust.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
UST/DURATION 
- The macro-fundamentals, including the disinflation story and the prospects for future rate cuts, are supportive of long duration, especially after the Fed’s recent dovish signals.
M F S C O N S I D E R A T I O N S - The yield curve is likely to steepen in the period ahead, which will help support the relative attractiveness of the long end.
- TIPS are less attractive than nominal bonds given inflation dynamics.
MUNICIPALS 
- Municipals’ fundamentals, including state finances, remain robust and may provide some protection in the event of a growth shock.
- The expected decline in cash rates may be supportive of inflows back into the asset class this year.
M F S C O N S I D E R A T I O N S - The longer duration of munis is likely to be more supportive for expected returns going forward, given the coming rate cuts. Long term, one of the key features of munis is their attractive risk-adjusted returns.
SECURITIZED (MBS)
- Prospects for agency MBS appear robust in view of the strong fundamentals and the potential recovery of the housing sector.
- The expected decline in rate volatility is also likely to be supportive in the period ahead.
M F S C O N S I D E R A T I O N S - Agency MBS offer diversification and defensive benefits as well as attractive spreads over treasuries.
BLANK
US INV-GRADE CORP 
- The US macro backdrop remains supportive, but fundamentals continue to weaken somewhat, especially cash flows.
- While total yields remain fairly attractive, support from rate cuts is needed for future returns to be above average, especially given the spread valuation.
M F S C O N S I D E R A T I O N S - We have turned more cautious toward US IG in the near term, reflecting the eroding fundamentals and the more challenging spread valuation backdrop.
US HIGH YIELD 
- US HY fundamentals continue to be resilient, mainly helped by low levels of leverage by historical standards and strong earnings.
- Other positive factors include low default rate projections, healthy breakeven yields, and an upgraded macro outlook.
M F S C O N S I D E R A T I O N S - The risk-reward is fairly attractive for US HY investors with a high-risk tolerance who may consider deploying credit risk exposure.
- While we’re not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
EMERGING MARKET DEBT
- EMD fundamentals continue to improve, mainly reflecting stronger EM growth prospects.
- The likely weakening of the US dollar may also act as a supportive driver.
- EMD valuation remains attractive, although mainly driven by weaker credits.
M F S C O N S I D E R A T I O N S - EMD presents one of the biggest opportunities in fixed income in the period ahead, but robust sovereign credit selection is paramount.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s® ” and S&P “S&P® ” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
- The macro-fundamentals, including the disinflation story and the prospects for future rate cuts, are supportive of long duration, especially after the Fed’s recent dovish signals.
Economy & Markets
| GLOBAL GROWTH
| Fears of a Global Recession Have Receded |
MFS PERSPECTIVE
|
| ELECTIONS
| Election Years Do Not Dictate Fed Policy |
MFS PERSPECTIVE
|
| CONSUMER HEALTH
| The US Consumer is a Key Driver of Robust Growth |
MFS PERSPECTIVE
|
| STATE FINANCES
| State Finances Appear Healthy |
MFS PERSPECTIVE
|
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
A more favorable economic backdrop suggests a move closer to a neutral portfolio positioning, with a slight bias toward fixed income due to the risk adjusted appeal.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
The overall macro landscape continues to be favorable, with the case for a soft landing getting stronger, inflation decelerating, and some policy easing expected in the second half of the year, all of which is generally positive for both stocks and bonds. |
US equities remain dominant year to date, but several of the largest European equities have seen a significant rally. Emerging Market equities remain a distant third, but are still in positive territory. |
Fixed income continues to offer meaningful yields across the risk spectrum, but credit spread compression is unlikely to be a significant contributor to return. However, the all-in yields supported by the underlying rates component means the income is back in fixed income. |
High-beta stocks drove the rally to date, but we remain convinced that greater breadth and greater attention to individual company fundamentals will provide our investors with the opportunity to add alpha across our investment platform. |
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
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| SMALL/MID CAP |
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| GROWTH |
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| VALUE |
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BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DEVELOPED INTERNATIONAL EQUITY |
- Developed international equities have begun to show momentum with 11 European stocks leading the way.
- Dubbed the “GRANOLAS” by Goldman Sachs, they are drawing comparisons to the Magnificent 7 in the US.
| M F S C O N S I D E R A T I O N S |
- The GRANOLAs mentioned above include luxury goods makers as well as pharmaceutical manufacturers, which are benefiting from the growth in GLP-1 drugs.
- Strength in Japan equities have been the biggest driver to gains. Japan remains the largest country weight in the MSCI EAFE index at more than 23%. In March, Japan abandoned its negative interest rate policy as growth and inflation picked up, the potential start of a new economic regime.
BLANK
| EMERGING MARKET EQUITY |
- Emerging market equities continue to trade sideways, although there are significant pockets of opportunity for security selection across countries.
- Despite a bounce off its January lows, Chinese equities continue to be a drag on the overall EM market.
| M F S C O N S I D E R A T I O N S |
- India’s economy, as well as its stock market, have been on a steady growth trajectory over the past three years as it benefits from changing global trade flows and a growing domestic consumer base.
- Other pockets of Asia including Taiwan have benefited from increased demand for semiconductor supply chain components as AI-related demand remains robust.
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| UST/DURATION |
- The macro-fundamentals, including the disinflation story and the prospects for future rate cuts, are supportive of long duration, especially after the Fed’s recent dovish signals.
| M F S C O N S I D E R A T I O N S |
- The yield curve is likely to steepen in the period ahead, which will help support the relative attractiveness of the long end.
- TIPS are less attractive than nominal bonds given inflation dynamics.
| MUNICIPALS |
- Municipals’ fundamentals, including state finances, remain robust and may provide some protection in the event of a growth shock.
- The expected decline in cash rates may be supportive of inflows back into the asset class this year.
| M F S C O N S I D E R A T I O N S |
- The longer duration of munis is likely to be more supportive for expected returns going forward, given the coming rate cuts. Long term, one of the key features of munis is their attractive risk-adjusted returns.
| SECURITIZED (MBS) |
- Prospects for agency MBS appear robust in view of the strong fundamentals and the potential recovery of the housing sector.
- The expected decline in rate volatility is also likely to be supportive in the period ahead.
| M F S C O N S I D E R A T I O N S |
- Agency MBS offer diversification and defensive benefits as well as attractive spreads over treasuries.
BLANK
| US INV-GRADE CORP |
- The US macro backdrop remains supportive, but fundamentals continue to weaken somewhat, especially cash flows.
- While total yields remain fairly attractive, support from rate cuts is needed for future returns to be above average, especially given the spread valuation.
| M F S C O N S I D E R A T I O N S |
- We have turned more cautious toward US IG in the near term, reflecting the eroding fundamentals and the more challenging spread valuation backdrop.
| US HIGH YIELD |
- US HY fundamentals continue to be resilient, mainly helped by low levels of leverage by historical standards and strong earnings.
- Other positive factors include low default rate projections, healthy breakeven yields, and an upgraded macro outlook.
| M F S C O N S I D E R A T I O N S |
- The risk-reward is fairly attractive for US HY investors with a high-risk tolerance who may consider deploying credit risk exposure.
- While we’re not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
| EMERGING MARKET DEBT |
- EMD fundamentals continue to improve, mainly reflecting stronger EM growth prospects.
- The likely weakening of the US dollar may also act as a supportive driver.
- EMD valuation remains attractive, although mainly driven by weaker credits.
| M F S C O N S I D E R A T I O N S |
- EMD presents one of the biggest opportunities in fixed income in the period ahead, but robust sovereign credit selection is paramount.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s® ” and S&P “S&P® ” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
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