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As we enter the final quarter of 2024, it has been a positive year in the markets as both equities and fixed income have rallied. The Fed delivered a jumbo-sized rate cut of -50 bps in September to kick off the monetary easing cycle, but market expectations for the timing and magnitude of additional cuts continues to shift. Even so, the economic backdrop continues to play out favorably with solid real GDP growth trends along with declining interest rates.
For 3Q24, the S&P 500 rose by 5.6%, following on a 15% rise in the first half. Global equities also rose, with the MSCI World returning 6.2% in the third quarter. Returns for fixed income were also positive, as yields declined across the curve. The benchmark 10-year US Treasury rate (UST10) fell 3.78% from 4.40% (down -78 bps) while shorter-term and high yield bonds returns were also positive on lower rates. Looking at other indicators for 3Q24, both the US dollar index (DXY) (-5%) and WTI oil ($68.17, -18%) fell materially.
We note that the performance of U.S. equity markets broadened out substantially in the third quarter, which we view as a positive signal as we finally see some shift away from concentrated leadership of the “Magnificent Seven.” We note that the equal-weighted S&P 500 (SPW) was up by 10% in the third quarter, outpacing its market-cap weighted cousin. As we highlighted Nvidia’s amazing performance through the first half in our last quarterly letter, we note that its trajectory is indeed slowing, with a small (-2%) decline in the third quarter. We have highlighted for some time our discomfort with the levels of tech concentration in the S&P, encouraging clients to consider rotating into a more value-sensitive posture with a focus on cyclical, defensive, and small/mid-cap names. We stick to our view that the leadership of the tech sector remains vulnerable given lofty valuations, and we maintain a more balanced, diversified approach to managing portfolios. Elsewhere in the world, global equities were also higher with positive returns in EM, Japan, and Europe.
A conviction call in fixed income remains challenging, given the difficulty we think the Fed will have to execute a soft landing. The Fed has indicated that the balance of risks in its “dual mandate” for stable prices and full employment are relatively equal. The FOMC’s Summary of Economic Projections includes an expectation for another -50 bps of rate cuts in 4Q24, and -100 bps in 2025. On the other hand, the most current GDPNow estimate for 3Q24 is 3.4% above the top end of the consensus range. Given the totality of current macro data, our base case is for the U.S. economy to achieve a “soft landing” scenario with slower, but still positive GDP growth, lower interest rates, and stable unemployment. We increasingly see a “no landing” scenario as another possibility, in which case we could see that rate cuts are not as aggressive as currently priced into markets. So we remain broadly neutral for fixed income positioning, with a focus on carry (coupon income) rather than total return.
We also believe that the upcoming U.S. presidential election has important implications for U.S. fiscal policy and, by extension, interest rates. There appears to be a “race to the bottom” by the candidates to outdo each other in the amount of tax cuts and government support mechanisms pitched on the campaign trail with little regard to long-term financial impacts. We remain optimistic that divided government could curtail some of the most partisan budget outcomes, but note that the even without additional changes, the latest Congressional Budget Office forecasts are for U.S. debt to climb to 122% of GDP (vs. 99% now) by 2034.
Program Update: Retiring Dynamic Strategy
We have continued our partnership with global investment management firm, BNY Mellon, for consulting services on the advisory portfolios. Last quarter, we implemented a small shift to increase U.S. Value equities. In our opinion, the better long-term growth rate of the U.S., along with the historic discount of value compared to growth, argues for tilting slightly to value allocations. For this quarter, we plan to implement a slight increase to emerging markets debt, reflecting our tactical asset allocation below, while reducing developed markets bonds excluding U.S. We continue to monitor the portfolios on an ongoing basis and expect to implement further rebalancing actions in the coming months.
In addition to the above changes in tactical allocations, the Investment Committee has decided to sunset the Dynamic portfolio strategy. The Dynamic strategy had been introduced as a complement to the static asset allocation programs, for those investors that preferred to take a more dynamic approach to asset allocation, as the name implies. That said, the Dynamic portfolio was most often kept in the a “neutral” Income & Growth position, with only occasional shifts to either Income or Growth occurring in the most extreme market conditions. Having discussed the program in depth, the committee concluded the Dynamic program as configured was not tactical enough to be truly considered Dynamic. Further, our view is that the majority of clients should benefit from a long-term approach to asset allocation fitting their own personal circumstances and risk appetite, rather than embracing the tactical shifts that the Dynamic program implied.
For these reasons, the Dynamic program will be terminated and all clients that remain in the Dynamic program will be migrated to portfolio strategy position of their choice over time. Please note that clients who wish to remain in the Income & Growth strategy will not see any changes in the existing portfolios, as the Dynamic program has already been in the neutral Income & Growth position for over a year.
Summary Market Views In the table below, we update our Amerant Market Views, which represent our investment team’s strategic views based on investment valuations and macro trends. As a reminder, these are not client-specific recommendations, and clients should consider their financial goals and long-term objectives when determining their asset allocations.
We have maintained our views across both equities and fixed income. We maintain our maximum underweight on cash, as we have already seen that returns on cash (and T-bills) have fallen dramatically since the last newsletter in July. We maintain our neutral position on investment grade and high yield, while we favor a slight overweight in emerging markets fixed income (in U.S. dollars). For equities, we maintain our view that the valuation gap between value and growth should narrow, while also maintaining overweight on small and mid caps. Our international equities view remains neutral.
This information is being provided for informational and educational purposes only to support our general market commentary. It should NOT be interpreted as investment advice regarding any specific security or investment strategy. See the disclosures at the end of this presentation for additional important information.
A Good Year So Far, With Only A Few Months Left
As we look to the final months of 2024, we have a relatively sanguine view.
While there could be a fair amount of headline noise, we reiterate that the U.S. economy remains on firm footing. We continue to see value among U.S. equities, apart from unsustainable valuations in certain names, and fixed income is in a position to once again produce steady income for investors.
Notes: Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (EMB ETF), Emerging Markets Sovereign (LCL) (LEMB ETF), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond). Source: Morningstar. (1) Strategy returns net of mutual fund expenses and Amerant Investments standard management fees.
On this table, you can see the returns for the first three quarters of this year, and the year-to-date.
The third quarter of 2024 experienced positive returns across equities and fixed income. For the year-to-date, index returns were also positive across equities and fixed income.
The positive performance for the year-to-date included a welcome broadening out in the 3Q24, with participation across market caps and geographies, and less extreme concentration than was characterized by the first half of 2024. As noted above, we have sunset our dynamic strategy. In any case, we emphasize the Dynamic portfolios will be retired in the neutral position of Income & Growth. As always, we continually review our positioning and will communicate any changes in our views going forward.
(1)Returns may vary. Past returns are no indication of future performance. Returns up to February 2020 are based on A shares, which were used on the portfolios up to that month, net of the then standard AMTI 1% management fee. Returns from March 2020 to June 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1.25% management fee. Returns starting July 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1% management fee.
(2)Monthly returns before February 2010 are those of the offshore corresponding strategies. For the Dynamic portfolio, monthly returns before November 2009 are those of the Income & Growth portfolio, which is the neutral positioning of the Dynamic portfolio. Dynamic portfolio started in November 2009.
During 3Q24, the Income Portfolio returned 5.7%, the Income & Growth Portfolio returned 5.7%, the Growth Portfolio returned 5.2%. The Dynamic Portfolio, positioned in Income & Growth, returned 5.7% during the quarter. The year-to-date and one-year performance is positive across all of our strategies.
As always, we take the trust you have placed in us very seriously. In our day-to-day operations, we continue to follow current events and the reactions of the markets closely, and we stand ready to adjust your portfolios accordingly.
To obtain more detailed information on our market views or the performance of your advisory portfolio, please contact your investment consultant at Amerant Investments by calling (305) 460-8599.
Sincerely,
Amerant Investments, Inc.
https://www.amerantbank.com/
1 Returns may vary. Past returns are no indication of future performance. Returns up to February 2020 are based on A shares, which were used on the portfolios up to that month, net of the then standard AMTI 1% management fee. Returns from March 2020 to June 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1.25% management fee. Returns starting July 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1% management fee.
2 Monthly returns before February 2010 are those of the offshore corresponding strategies. For the Dynamic portfolio, monthly returns before November 2009 are those of the Income & Growth portfolio, which is the neutral positioning of the Dynamic portfolio. Dynamic portfolio started in November 2009.
This content is being published by Amerant Investments, Inc (“Amerant Investments” or “AMTI”) a dually registered broker-dealer and investment adviser registered with the Securities and Exchange Commission and member of FINRA/SIPC. Registration does not imply a certain level of skill, endorsement, or approval. Amerant Investments is an affiliate of Amerant Bank.
The model portfolios offered by Amerant Investments and described herein invest solely in mutual funds. Before investing, you must consider carefully the investment objectives, risks, charges, and expenses of the underlying funds of your selected portfolio. Please contact Amerant Investments to request the prospectus of the funds containing this and other important information. Please read the prospectus carefully before investing. Past performance is no guarantee of future returns. The value of the investments varies, and therefore, the amount received at the time of sale might be higher or lower than what was originally invested. Actual returns might be better or worse than the ones shown in this informative material.
This release is for informational purposes only. Past performance is no guarantee of future results. While the information contained above is believed to be from reliable sources, no claim as to their accuracy is made. Amerant Investments, Inc. provides no advice nor recommendation, or endorsement with respect to any company or securities. Nothing herein shall be deemed to constitute an offer to sell or a solicitation of an offer to buy securities. Member FINRA/SIPC, Registered Investment Adviser. Amerant Investments does not provide legal or tax advice. Consult with your lawyer or tax adviser regarding your particular situation.
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Insured By Governmental Agencies | Member FINRA/SIPC, Registered Investment Advisor
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