Perspective :

December 2023 Capital Markets Perspective

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A cruel October was followed by an ebullient November; the prior month’s losses were fully recouped and then some. Again, it was movement in the 10-year Treasury that was the primary driver of the everything rally. The yield on the 10-year went from 4.88% to 4.37%, and as I write (December 11), sits at 4.11%. Related, the Goldman Sachs U.S. Financial Conditions Index, which considers rates, credit spreads, the trade-weighted dollar, and equity prices, eased by 90 basis points (bps) in November, which was the largest monthly decline on record dating back to 1982.

Currently, the futures markets are pricing in a 60% chance for easing in March, which, based on comments from various Federal Reserve bankers, seems a bit pollyannish. Particularly given the stream of positive economic news. Revised third-quarter Gross Domestic Product (GDP) came in at 5.2%, even higher than the initial estimate of 4.9%. Real consumer spending held up in October, advancing by 0.2% versus expectations for 0.1% growth, and estimates for Black Friday and Cyber Monday sales of $9.8 billion and $12 billion, respectively, are both records. Further, economists are increasingly confident about the growth outlook for 2024; the Bloomberg consensus estimate continues to creep upward and is now at 1.2%, up from a low of 0.6% in September. Lastly, initial jobless claims at 218k remain near the lows in recent years and well below the average of about 380k over the past decade, according to the Labor Department.

But while easing in the next few months appears overly optimistic, inflation data continues to solidify the view that the Fed’s hiking campaign is over. In some areas, outright deflation is now evident. Prices for long-lasting items, known as durable goods, have fallen on a year-over-year basis for five straight months. In October, they were down 2.6% from their peak in September 2022, as reported by the Commerce Department. So, the idea that the hikes could be finished before they’ve had a materially negative impact on the consumer is indeed encouraging. Specifically, rate increases haven’t yet had much impact on household debt service as a percentage of disposable income in either the U.S. or Europe. In the U.S., this number is just shy of 10, which is well below the average over the past 50 years. The improbable – a soft landing – is looking increasingly likely.

What happened in the markets in November?


While all major equity indices and sectors (except Energy) were firmly in positive territory, it was high-beta stocks that led the way. S&P reports that High Beta factor stocks were up 14.0% for the month, while Low Vol produced a respectable but distant 5.3% return. Breadth significantly improved, with 441 issues advancing with an average gain of 10.9%, compared with October’s 148 gainers, which returned 3.7% on average (S&P Global). Looking across the market cap and growth/value spectrum, overseas, smaller, and growthier were better, with international small growth stocks gaining 11.5% and international large growth equities advancing by 10.7%. The decline in the U.S. dollar also helped, adding about 360 bps to the return of international developed equities. In the U.S., things were a bit different, with larger and more value-oriented stocks leading the way (based on S&P indices). Large value returned 9.6%, and small value generated a 9.0% return.

With about 98% of S&P companies reporting third-quarter earnings thus far, approximately 80% beat on earnings and 62% beat on sales. Operating earnings are expected to decrease by 4.5% over the prior quarter but be up 4.1% over the same quarter last year. Margins remain quite high at 11.2%, and the consensus is for all S&P sectors to experience positive earnings growth in 2024.

The extended run that U.S. stocks have had over the rest of the world has been remarkable, and according to SocGen, U.S. stocks now make up a larger percentage of total global market cap than ever before. When measured alongside developed markets, the U.S. stock market’s share eclipses 70%, and when measured against all markets, that number is approaching 65%. While we have no expectation that will change anytime soon, it’s worth remembering that the Japanese stock market once made up about 44% of global developed equities, but today accounts for only 6% of the total. Things can and do change. Expanding on the market share of various segments of the equity market, the Center for Research in Securities Prices now estimates that small caps make up just 4% of the U.S. stock market. To add context to that, there are now two companies – Apple and Microsoft – with valuations greater than the entire Russell 2000.


Readers of last month’s commentary may remember that I entitled this section “Darkest Before the Dawn?”. And so, dawn it is. The Financial Times reports that November was the best month for bonds in 40 years. The U.S. bond market advanced by about 4.4%, with munis gaining 6.4% and long-term Treasuries jumping by over 9%. Investment-grade corporates returned about 6%, and high-yield bonds ended higher by 4.6%. Leveraged loans rounded out the category with a gain of 1.3%.

If the credit markets are at all worried about an economic downturn, troubles in the banking sector, or a credit crunch, they sure aren’t letting on. High yield credit spreads tightened by 58 bps during the month. And with tightness in the labor market beginning to ease, inflation receding, and the Fed likely calling it a day, the fixed income environment is looking much brighter than it’s been for quite some time. Just don’t expect another November-like performance anytime soon.


Following a tough October, Brent Crude futures fell 4.2% and WTI retreated by 5.2%. At month end, OPEC agreed to a production cut of about 900,000 barrels a day to help prop up prices, but the early reaction was one of skepticism by market participants who question whether it will be fully implemented. And as oil has fallen, gold has advanced for seven of the past eight weeks, reaching a new high on falling real yields that decrease the hurdle rate for an asset that doesn’t pay dividends or income. Overall, commodities were down 2.2%, with precious metals (+4.3%) and agricultural futures (+1.9%) in positive territory, industrial metals flat, and the energy complex down about 10%.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, Multi-Asset Income, ETF, and Faith-Based strategies, and the additional difficulties of properly conveying how those asset allocation changes flow through to trade level activity, we are instead directing clients to our monthly trade summaries, which describe in detail what trade activity occurred by strategy, and why.

Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we favor U.S. and international small caps, emerging market equities, managed futures, floating rate loans, and cash/short-term bonds. We are generally underweight U.S. and international large cap stocks, REITs, commodities, and both high-yield and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur. At the beginning of December, our asset allocation models modestly reduced equity and managed futures exposures in favor of fixed income and cash.

Return expectations for emerging market equities and international small caps continue to remain near the tops of their respective 20-year ranges. Expectations for TIPS, managed futures, floating rate loans, and T-bills are likewise high relative to history and are also above their year-ago levels. And in fact, TIPS are approaching their 20-year high as real yields have continued to increase. U.S. large caps remain near their 20-year lows.


Given our risk-first orientation, while all our strategies produced solid returns for the month, ranging from low to high single digits, as could be expected, we did not keep up with more aggressively positioned strategies. Our preference for global small caps certainly helped, as did our underweights to commodities, and our remaining exposure to long-term Treasuries. But our underweights to REITs, a lower duration focus in many strategies, and managed futures exposure that rarely does well in major short-term reversals hurt relative performance.

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Hypothetical expected returns have certain limitations, are discussed for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns referred to. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether back tested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results expected. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results is that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results expected. In addition, performance can and does, vary between individuals.

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Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

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U.S. Large Cap Equity S&P 500 Represents US large company stocks.
U.S. Small Cap Equity Russell 2000 A small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
International Small Cap Equity MSCI EAFE Small Cap An equity index which captures small cap representation across Developed Markets countries around the world, excluding the US and Canada
International Developed Equity MSCI EAFE An equity index which captures small-cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada.
Emerging Market Equity MSCI Emerging Markets Captures large and mid cap representation across 24 Emerging Markets (EM) countries.
Investment Grade Corporates Morningstar US Corporate Bond Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities over one year.
High Yield Bonds Morningstar U.S. High Yield Bonds Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted.
TIPS Morningstar US TIPS Represents inflation-protected securities issued by the U.S. Treasury.
Leveraged Loans S&P / LSTA U.S. Leveraged Loan 100 Designed to reflect the performance of the largest facilities in the leveraged loan market.
Long-Term Treasuries Morningstar US 10+ Yr Treasury Bond Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years.
REITS FTSE NAREIT Equity REIT A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
Commodities Bloomberg Commodity Broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.



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