Investment Insights

Last year was full of surprises. The biggest one was that equity markets rose strongly despite our base case for a recession, on the heels of the most aggressive Fed tightening cycles in decades. For 4Q23, the S&P 500 rallied by +11.7%, and was up over 26% for the full-year. Global equities also rose, with the MSCI World returning over 8% in the fourth quarter and 24% for the full-year 2023. The positive equity returns were coupled with a fixed income rally to close the year. The fourth quarter return of 6.8% for the Bloomberg Agg was enough to drive a positive return for the year (+5.5%) as yields fell on the benchmark 10-year US Treasury rate (UST10) from 4.68% to 3.88% (down 80 bps). Looking at other indicators, for 4Q23, both the US dollar index (DXY) (-5%) and WTI oil (-19%) declined.

4Q23 Was Great

The key driver for the fourth quarter was the “Powell Pivot” as the Fed made it clear that this rate hiking cycle is over and rate cuts are likely in 2024. The Fed has been successful in bringing core inflation (core PCE YoY) down to below 3%, although services inflation remains somewhat sticky. The combination of lower inflation and slower, but not negative, GDP growth set off positive market sentiment as markets believe the chance of a “soft landing” has increased significantly. With interest rates in restrictive territory, the Fed communicated that it is expecting to cut rates in 2024. The Fed’s own forecast is for the Fed funds rate to decline by -75 bps in 2024, while markets are pricing in -125 bps of cuts. In our view, while the level and pace of rate cuts are unclear, the direction is most important: rates are coming down. We believe that it is not too late to add duration and lock in today’s interest rates for longer.

We also believe that a “soft landing” economic thesis should be supportive for equities. However, given the stretched valuations for mega-cap tech, we are looking for healthier market breadth in 2024. For all of 2023, the return on the equal-weight S&P 500 was 13.8%, compared to the market-cap weighted S&P 500 return of 26.3% over the same period. We note that our advisory portfolios consist of well diversified funds, and, therefore, we should expect returns to track the equal-weighted S&P more closely than its market-cap weighted cousin. As we look ahead, we introduce an overweight position in small and mid-cap equities given our views of a likely broadening in equity market performance.

Elsewhere in the world, European equities (+11.1%) also rose for 4Q23, as did Japanese (+8.2%) and emerging markets equities (+7.9%). As we enter the U.S. election year, there are still very visible geo-political risks present. Still, we note that markets have shrugged off these worries and ultimately, we expect that earnings should remain resilient as we call for the U.S. economy to slow without tipping into recession. In our previous quarterly letter, we stated our view that recession risk “is roughly even odds.” We still expect growth to slow down noticeably in the next few quarters, as the cumulative impact of higher rates continues to exert pressure on financial conditions. Indeed, 4Q23 advance GDP came in at 3.3%, representing a significant slowdown from 4.9% in the prior quarter. However, given that growth is firmly positive, we have moved our base case to a soft landing from recession. Accordingly, our investment thesis shifts to a more balanced view on fixed income and equities.

Moving Dynamic to Neutral

In the table below, we update our Amerant View, which represent our investment team’s tactical views for the next twelve months, 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 update our equity views to move overweight on U.S. small and mid-cap equities, while maintaining U.S. large cap growth at underweight.

We maintain cash at underweight, as we believe strongly that today’s rates are unlikely to persist over the intermediate term. Still, we adjust down our maximum overweight on Investment Grade corporates and move High Yield back to Neutral. We still like bonds here but feel the investment case is somewhat less compelling than it was at the time of our last newsletter in October give the strong move in yields. We continue to believe that clients consider locking in duration with the Fed likely to cut as its next move. Since we have removed our base case for a recession, we are also planning to move our dynamic portfolios back to the neutral positioning in Income & Growth in our upcoming rebalancing. As always, we continually review our positioning and will communicate any changes in our views going forward.

2023 Wrap-Up and Program Update

To summarize, we delivered solid returns across all strategies in the advisory portfolios, ranging from 7% to 15%. However, the portfolios did lag their benchmarks slightly, largely due to the concentration of returns in a handful of large equities, which was the key driver for broad index returns. Beginning in 3Q23, we conducted a comprehensive review of the asset allocation portfolios. As a result of that review, we are excited to announced that we have partnered with the global investment management firm BNY Mellon. BNY Mellon brings a deep research bench of investment professionals to add depth to the existing Amerant investment team to ensure we are utilizing best-in-class funds across all asset classes. All of the strategic asset allocations for all of the advisory programs are unchanged, and the Amerant team continues to have final decision-making authority over the program. As a result of our partnership, we have implemented several fund changes to the advisory portfolios and going forward, we expect that the program portfolios will be managed more dynamically, as we fully incorporate BNY Mellon’s expertise.

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 all four quarters of 2023 as well as the full-year.

The fourth quarter of 2023 saw strong positive returns across asset classes, with equities rising in all geographies. In fixed income, the various subsectors were all positive as rates declined. For the full year, index returns were positive across equities and fixed income, erasing some of the losses from the prior year.

The positive performance in the 4Q23 was a result of the Fed’s communication that it was likely done hiking rates, as we had expected in our last quarterly report. As a result, we plan to adjust our dynamic positioning back to the neutral position from the conservative stance which we had adopted in late 2022. Although we continue to believe that the global economy is on a path of slower growth, we have removed recession risk as our base case. As a result, we think the chances of a “soft landing” have risen and we adjust our dynamic positioning back to a neutral stance. As always, we continually review our positioning and will communicate any changes in our views going forward.
 

⁽¹⁾ Strategy returns based on the total return of the underlying mutual funds, including reinvestment of dividends and change in NAV. Net of mutual fund expenses and Amerant Investments standard management fees. Returns may vary. Past returns are no indication of future performance.

⁽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 4Q23, the Income Portfolio returned 6.8%, the Income & Growth Portfolio returned 9.2%, the Growth Portfolio returned 10.1%. The Dynamic Portfolio, positioned in Income, returned 6.8% during the quarter. For the full year, the Income Portfolio returned 7.2%, the Income & Growth Portfolio returned 10.9%, the Growth Portfolio returned 15.3%, and the Dynamic Portfolio returned 7.0%.

In late 2022, we had positioned portfolios more defensively to be better prepared to withstand an environment of increased volatility due to continued fears of recession and geopolitical risk. In hindsight, we were too cautious with this positioning as the U.S. economy stayed relatively healthy through last year. For the moment, we see economic and market conditions as balanced, and our “traffic light” indicators remain in the neutral positioning. As a result, we have decided to shift our dynamic positioning back to Income and Growth.

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/