Perspective :

June 2024 Capital Markets Perspective

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The First Cuts

The European Central Bank (ECB) beat the U.S. Federal Reserve to the punch, lowering the benchmark deposit rate from 4% to 3.75% just after month end. Throughout the month, the Eurozone experienced a string of positive economic data points, including the moderation of the Consumer Price Index (CPI) in April to 2.4%, allowing for the ECB’s move. According to Citibank, the European economic surprise index has been surpassing that of the U.S. recently, with the Eurozone pulling out of recession in the first quarter. Importantly, all individual country Gross Domestic Product (GDP) reports surprised to the upside. Even so, their unemployment rate remains far above that in the U.S. at 6.4%, but that is the lowest in 20 years, so a positive, nonetheless. The Bank of Canada also recently cut rates, following in the footsteps of central banks in Switzerland and Sweden, indicating that the global inflation fight appears to be winding down.

Here in the U.S., if the San Francisco Fed is correct, the mountains of excess savings from the COVID-19 era have now been exhausted and disposable income growth continues to slow, which likely means that consumer spending will fall. But the May employment report from the Labor Department showed that companies added 272,000 jobs, eclipsing the gain in April and coming in well above the consensus estimate of 190k, according to the Wall Street Journal. It was the 41st straight month of 100k+ job gains, which is quite a long stretch, far surpassing the 34 months ending in the early 2000s. And that jobs report helped push the Atlanta Fed’s GDPNow forecast for the second quarter back up to 3.1%. Average hourly earnings also came in above forecasts, rising 4.1% from a year earlier. But not everything in the jobs report was positive, as unemployment ticked higher to 4%.

The Fed would love some clarity on the direction and persistence of inflationary pressures, but they continue to receive mixed messages. April’s Producer Price Index (PPI) came in above expectations (0.5% vs. 0.3%), however there was a sharp downward revision for March, and categories that feed into the Personal Consumption Expenditure Index (PCE) were more muted. And the CPI came in a bit below expectations, which was well received by the market in May. Year-over-year (YoY) core CPI (ex-food and gas) was 3.6%, continuing a downward trend. But Bloomberg reports that the U.S. 2024 Core PCE YoY Consensus moved from 2.4% to 2.8% during the month, a trend that is incompatible with the Fed lowering like their European peers anytime soon.

What happened in the markets in May?


The CBOE VIX Index has been hovering around the lows last seen pre-pandemic and the BofA Indicator of U.S. Financial Stress remains near all-time lows, indicating just how calm equity markets have been, even with the selloff in April. Strategists have been bumping up their earnings estimates for the coming quarters, and investors have been paying up for quality factors, while valuation, size, and dividend yield continue to languish.

Growth stocks again took the lead during the month, with the S&P 500 Growth Index advancing by 6.6%. The S&P 500 semiconductor industry group rocketed higher by over 17%, taking the greater S&P 1500 information tech group up by about 10%, and the utilities sector advanced by almost 9% on the hype around A.I.’s energy needs. Related, infrastructure stocks in general enjoyed a strong month. But perhaps somewhat counterintuitively, the one sector that was in the red was Energy, which fell by 39 basis points (bps).

Overseas, small cap growth did quite well, gaining 4.9%, and international developed large caps returned 3.9% in dollar terms, benefiting from a decline in the U.S. dollar. The MSCI EAFE Index was held back by subdued performance in Japan, while European equities about matched those here in the U.S. Emerging market equities were only slightly positive.


Businesses continue to rush to tap lenders in the corporate bond market, taking advantage of low spreads and a strong appetite for credit. In fact, high yield spreads continued to fall around the globe during the month. This despite the fact that S&P Global Ratings reported the highest monthly tally of corporate defaults since October 2020, with 41% of the defaults coming from tech companies. And for the first time since the financial crisis, a AAA-rated tranche of a commercial mortgage backed security experienced a credit loss, according to Deutsche Bank, in what may be a sign of things to come for the troubled office space sector.

Regardless, fixed income generally enjoyed a solid month, with the bond market advancing by 1.7%. TIPs performed in line with the greater market, while investment grade corporates outperformed by 16 bps, and long-term Treasuries rallied by 2.9% as yields fell along the curve from 6-months out to 30-years. But as the short end was anchored, the curve ended slightly more inverted than at the start of the month.


The global race to secure copper supplies slowed a bit, at least based on futures pricing, which took a breather, moving up by only 1.3% after what has been a strong 3-month rally for the metal. And in what has to bring joy to the makers of Tang (that still exists, right?), orange juice futures have gone parabolic, rising by almost 7x their level in early 2022. At the group level, things were a bit more staid, but returns were attractive for precious metals (+4.6%), agriculture (+3.7%), and industrial metals (+1.8%). The energy complex was the sole loser, retreating by 1.4% on declines in Brent Crude, WTI, and heating oil.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, ETF, Multi-Asset Income, 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. 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 June, our asset allocation models barely budged, with no material changes to note.

Return expectations for emerging market equities and international small caps remain near the tops of their respective 20-year ranges. Expectations for TIPS, managed futures, and T-bills are likewise high relative to history, and leveraged loans continue to offer the highest expected returns within the fixed income space. Expectations for U.S. large caps remain near their 20-year lows, as is the case for REITs and commodities.


Major reversals across all capital markets in May were largely beneficial on an absolute return basis, as every asset class that we utilize was in the black, except municipal bonds, which suffered minor losses. But as is often the case when markets are whipsawed, managed futures funds had a tough go of it, losing between 0.3% and 2.8%, and were the biggest detractor to both absolute and relative performance for the month. Emerging market equities were also a headwind on a relative basis, as they posted a modest return in what was otherwise a productive environment. But our overweights to global small caps was a meaningfully positive contributor, as our preferred quality small caps in the U.S. outperformed large caps by a hair, and overseas, small caps outperformed their large cap peers by 46 bps. Our fixed income positioning was a bit mixed. Our remaining allocations to long-term Treasuries, small as they may be, were certainly beneficial, while our duration positioning was likely slightly detrimental, depending on the particular strategy.


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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 Growth S&P 500 Growth Measures the performance of the large-capitalization growth stocks in the U.S. equity market.
U.S. Small Cap Growth S&P 600 Growth Covers roughly the small-cap growth range of American stocks, using a capitalization-weighted index.
U.S. Infrastructure S&P Global Infrastructure A stock market index that tracks the performance of 75 of the biggest publicly listed companies in the global infrastructure industry.
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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