Perspective :

March 2024 Capital Markets Perspective

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Owners over lenders

Equity markets heated up as a risk-on mentality was evident everywhere you looked during February, while fixed income markets struggled as the yield on the 10-year increased by 26 basis points (bps). Pushing yields higher across the curve was the CPI Consumer Price Index (CPI) print, which came in at 3.1% YOY, higher than expected, but below December’s 3.3% reading. Core CPI was also higher than anticipated thanks to the shelter component as measured by owners-equivalent-rent.

As a result, the probability of a May cut has dropped to about 24%, according to the CME Groups’ FedWatch Tool. The market is now pricing in three cuts this year, which is finally in line with what the Fed had been projecting. But not everyone is convinced. Apollo Global’s Torsten Slok raised eyebrows this week claiming that there will be no rate cuts this year. A non-consensus call to be sure, but maybe not one to dismiss too quickly. Perhaps supporting that call is the fact that economists keep boosting their Q1 GDP estimates, which are now about in line with the Atlanta Fed’s GDPNow forecast of 2.1%. Initial jobless claims also remain near the lows of the past decade, reflecting a tight labor market.

But despite a steady stream of solid economic data, small businesses aren’t feeling great about the future. The National Federation of Independent Businesses recently reported that their survey readings for future sales, job openings, hiring plans, and compensation plans all moved lower. The disparate views of small businesses as compared to the largest companies in the country may be traced to a combination of politics and interest rate exposure. I’ll gloss over the former; the latter simply suggests that smaller businesses are feeling the effects of higher rates far more than large companies that have locked in lower rates for an extended period. Higher for longer will mean more pain for leveraged companies and individuals.

What happened in the markets in February?


And they did. China’s so called “national team” of major state-backed financial services companies has purchased over $57 billion of exchange traded funds so far this year in an effort to shore up their flagging markets, according to UBS estimates, and as reported by The Financial Times. In February, those efforts paid off, with the MSCI China Index advancing by 8.4%, which helped the broader emerging markets index to advance by 4.8%. Emerging Market Equity still came in a bit short of the S&P 500®, which gained another 5.3%, but it was a solid month, with perhaps more to come, as statements by China’s sovereign wealth fund and the China Securities Regulatory Commission made it clear that they are prioritizing market stability and foreign investment.

Here in the U.S. all eleven S&P 500 sectors posted gains for the month and market breadth improved. S&P Global stated that 351 constituent companies were up for the month, compared with only 224 in January. And while the Magnificent 7 continued to advance, Nvidia was the clear winner, gaining about 29% and accounting for 20% of the Index’s February gain.

Small caps also fared well, but there was a noticeable disconnect between the lower quality Russell 2000, which returned 5.7% and the higher quality S&P 600 gain of 3.3%. Many non-earners in the Russell 2000 posted strong gains, suggesting that the market believes the financing window will remain open for the time being.

In other developed markets, large caps gained about 3% in local currency terms, but ended up with a less impressive return of 1.8% in U.S. dollars. And international small caps advanced by only 0.4%, as value stocks fell for the month.


With the yield curve shifting upward, duration was penalized, and long-term Treasuries sold off by 2.3%. 5-year breakeven rates moved up by 16 bps and TIPS fell by just over 1%. The yield curve inversion steepened, measured by the 10-year minus the 2-year, but the reverse was true for the 10-year minus the 3-month, which became slightly less inverted, and the bond market as a whole was down 1.4%.

While investment grade credit also struggled, losing 1.6% due to its interest rate sensitivity, below investment grade paper held up. Bank loans gained a healthy 0.9% and high yield advanced by 0.3%. Overall, bankruptcies are falling, and the credit markets are wide open with huge amounts being raised for investment grade and high yield borrowers. The pace of investment grade bond issuance in the first two months was the highest in at least a dozen years (source: Bloomberg). And at the same time, the composition of the high yield market is changing for the worse. But as we’ve been aware, the high yield market has exhibited unusually high quality recently, so the shift in composition isn’t surprising, nor particularly concerning.


As a group, commodities were off by 1.5%, and all four major subgroups were in the red. Agriculture was down the most, losing 4.4%, while energy (-0.4%), industrial metals (-0.6%), and precious metals (-0.6%) struggled to a lesser degree. WTI crude did manage a gain of almost 3%, but natural gas’ woes continued with another 10.8% plunge on increased production and above average inventories. Natural gas futures contracts have now posted a -28.3% annualized loss over the past 15 years. Great for energy bills, not so much for producers or speculators.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize about allocation changes across our Core, ETF, Specialty, Tax-Managed, 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 February, the biggest moves in our asset allocation models were increases to floating rate loans within our more conservative strategies. On the upper end of the risk spectrum, there were modest increases to emerging markets, funded by reductions across developed equities.

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, and T-bills are likewise high relative to history. U.S. large caps remain near their 20-year lows, as do REITs and commodities, and leveraged loan return expectations while still attractive, have moved lower from a year ago.


Overweights to emerging markets and managed futures helped both relative and absolute performance for the month, as did our exposure to floating rate loans. Avoiding commodities was likewise additive, and our underweights to REITS were generally beneficial. Our underweight to U.S. large caps was the biggest negative contributor, followed by the remaining long-term Treasury exposure that we carry in certain strategies.

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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.
U.S. Small Cap Equity S&P 600 Covers roughly the small-cap range of American stocks, using a capitalization-weighted index.
Chinese Equity MSCI China Captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).
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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