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May 2024 Capital Markets Perspective

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Most markets fell during the month, as investors digested a steady stream of inflation, wage growth, and employment data that once again dashed hopes for near term rate cuts. While the unemployment rate did tick up to 3.9% in April and is well above the 3.4% rate from April of last year, it remains at the low end of its 50-year range. And while stronger data in those areas weighed on markets, so did the weakness in the first Q1 Gross Domestic Product (GDP) print, which came in at 1.6% versus an expectation of 2.4%. Slowing growth and stubborn inflation tend to get investors worrying about the dreaded “stagflation” scenario, but that seems a far cry from where we are today, which Chairman Powell commented on specifically coming out of the latest Fed meeting, stating:

“I was around for stagflation. It was brutal. Ten percent unemployment. High single-digit inflation. And very slow growth. Right now, we have 3% growth. Which is pretty solid growth, I would say, by any measure. And we have inflation running under 3%. So, I don’t really understand where concerns about stagflation are coming from.”

The inflation number that he was referring to is the Personal Consumption Expenditures (PCE), which came in at 2.7% year-over-year for March, slightly higher than expected, but well below the more commonly cited Consumer Price Index (CPI) level that was up 3.5% over the same period. The biggest difference between the two is that shelter costs make up about one third of the CPI but only about 15% of the PCE. And on that note, home prices increased more than expected in February, based on the S&P CoreLogic Case-Shiller index that tracks 20 of the nation’s large metropolitan areas. That index advanced by 7.3% year-over-year, ahead of the consensus estimate of 6.6%, according to Bloomberg.

Post month-end, we’ve gotten a few more data points suggesting that the Fed’s work is having an impact. First, the employment report from the Labor Department showed that the economy added 175,000 jobs in April, down significantly from 315,000 in March, which the markets cheered. In addition, there was a continued deceleration in wage growth in April, as average hourly earnings rose 3.9% from a year earlier, down from 4.1% in March and 4.3% in February. Also, good news.

What happened in the markets in April?


Souring sentiment over the interest rate environment swamped what was generally good news from corporate executives during the month. With about 80% of S&P 500® constituents reporting, about 76% beat earnings estimates, topping the 72% average over the last decade. Margins are also looking solid at 11.7%, far above the 8.4% average going back to 1993. And on a full trailing twelve-month basis, operating earnings were up almost 8% compared to the twelve months ending in March of 2023.

In addition to the constructive earnings environment, data from Dealogic and Goldman Sachs shows that M&A activity has picked up dramatically from last year. Among a number of announced megadeals were Home Depot buying SRS Distribution for $18bn, Capital One acquiring Discover Financial for $35bn, and chip design toolmaker Synopsys taking over Ansys for $35bn.

But all the good news coming from board rooms failed to lift equities. The S&P 500 was down 4.1%, the S&P 600 fell by 5.6%, and the FTSE NAREIT Equity REIT index plummeted by just over 7%. Among major industry groups across the market cap spectrum, only utilities were able to advance, thanks no doubt to the focus on the skyrocketing energy demands of the A.I. revolution. And a clean narrative on growth and value was not to be had, as growth stocks edged value in the large cap and quality small cap space but lost out to value in the broader small cap market.

The bright spot in equities came from overseas, where thanks to China, emerging market stocks were able to post a gain of about 0.5%. International developed stocks held up relatively well in local currency terms, losing less than a percentage point, but the U.S. dollar’s surge reduced that return to -2.6%.


As market participants continue to adjust to our rate reality, yields along the curve from 2 years to 30 years increased from between 45 and 51 basis points (bps). And as the short end stayed put, the yield curve became less inverted.

Spreads on investment grade corporate debt narrowed by 3 bps, while the reverse was true for high yield, where spreads widened from 315 to 318. Data from JPMorgan shows that while high yield spreads are in the 3rd percentile of tightness relative to history and have almost no room to narrow, history suggests that they could remain here for a while until we are much later in the cycle and a recession actually appears.

Overall, April was not kind to fixed income. Duration was shunned and long-term Treasuries fell by almost 6%. The bond market as a whole faired better, but was off by 2.4%, while TIPS lost 1.5% and high yield shed 1%. Leveraged loans were the sole winners, advancing by 0.6%

As of mid-month, on a 52-week rolling basis, the correlation between stocks and bonds hit the highest it’s been since the late 90’s, which is part of the reason for our managed futures exposure, as mentioned further below.


After some wild swings in pockets of the greater commodity market during the first quarter, commodity futures settled down a bit and generally benefited from economic growth and the inflationary environment, gaining 2.7% as a group. As always, results varied widely, with industrial metals gaining almost 14% on the acceleration of investment in green technologies, while energy was roughly flat, and agricultural futures were off by a percent.

Of note, natural gas finally caught a bid, advancing by 2.4% and gold continued its upward trend, in part on sustained buying from the Chinese government as it tries to diversify its reserve funds, reducing its dependence on the U.S. dollar.

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 May, our asset allocation models shifted slightly away from cash/short term bonds in favor of high-quality bonds.

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.


On a relative basis, our positioning was beneficial in multiple areas. While our underweight to commodities was a drag, it was more than made up for by the strong performance of the managed futures funds that we utilize across our strategies. Those funds gained between 1.3% and 4% for the month, which was quite helpful given the positive correlations between stocks and bonds. Our more conservative strategies also got a boost from their floating rate note exposure, and generally our shorter duration positioning relative to benchmarks and peers was additive. Overweights to emerging markets added to our performance edge, as did our underweights to REITs, while small caps were clearly a detractor. Overall, it was a strong month of relative performance for Frontier’s strategies.

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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 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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