November 2024 Capital Markets Perspective

The S&P was on track to post a gain for the month, but Halloween spirits interceded on October 31st to push the market into the red. And while a “Carrie” like blood bath might be a bit hyperbole, it was an ugly month across the board for stocks, bonds, commodities, and currencies (with the notable exception of the U.S. dollar). But the month aside, investors have been feeling pretty good. Survey data from the Conference Board indicated that a record high percentage of consumers expect that stock prices will be higher one year from now. And the University of Michigan reported that after over a decade of bouncing between $100k and $150k, the median value of U.S. households’ stock portfolios has surged to about $250k. Certainly those kinds of data points could be contrarian indicators, but we’ll enjoy them for now.

Economic data released during the month continued to show strength, with the 3Q GDP (Gross Domestic Product) print indicating 2.8% growth. A bit below expectations for 3.1%, but still solid. And there was a modestly positive turn for the better in wage growth, as nominal wages advanced by 4% YOY versus expectations for 3.8% (on a real basis wages grew by 1.5%). Consumers are also feeling better about the inflation environment, with the University of Michigan finding that 1-year inflation expectations came in at 2.7% vs. an estimate of 2.9%. Good news for the Fed, as expectations shape actions.

We are now entering what is expected to be a very different economic environment given the stated intentions of the Trump administration. Early signs are that equity investors are eager for less regulation and lower corporate taxes (or at least taking the expiration of tax cuts off the table), while bond investors are fearful of potentially inflationary policies. Across the board tariffs could certainly cause upheaval in supply chains and cost structures, but it’s premature to speculate on the impact before specifics are known. So, as always, we’ll continue to diversify our strategies broadly by asset class and geography, entrusting client capital with what we believe to be some of the most skilled investment management teams across the industry, giving us the best chance of weathering whatever comes our way.

What happened in the markets during the month?

EQUITIES: SOLID EARNINGS, POOR PERFORMANCE

With about 80% of S&P 500® companies reporting 3Q earnings thus far, operating earnings were modestly higher than in the prior quarter and about 14% higher than in 2Q23. And on a trailing 12-month basis, 3Q24 operating earnings advanced by almost 8% over the period ending in 3Q23. Trailing 12-month GAAP earnings are looking to come in even higher at around 10% and operating margins remain more than healthy, coming in at just under 12%. But despite ample good news on the earnings front, and plenty of positive comments on the economy from top financial executives on quarterly earnings calls, the equity market suffered losses during the month. Part of the problem was that earnings from the biggest tech companies failed to impress and general uncertainty in the face of the then upcoming election kept investors from embracing risk.

The S&P 500 ended down 0.9%, pulled lower by Apple, Tesla, and Microsoft. Thanks to a surge in the U.S. dollar, all things foreign were down more in dollar terms than in local currencies. U.S. investors in international large caps were robbed of about 3.9% during the month. Small caps struggled both here and abroad, losing 2.6% in the U.S. and 6.3% overseas, but again that number was largely impacted by currency. According to data from Kenneth French, small caps have performed worse in this bull market than in any other since 1949, in yet another sign of how enamored investors are in the largest companies despite unfavorable valuations.

BONDS: BIG MOVE IN RATES

As investors began to anticipate the outcome of the election and the likely ensuing economic policies, bond investors ran for cover. The yield on the 10-year Treasury, which bottomed out in mid-September at 3.6% increased throughout the month to end at 4.3%. At the same time, the 1-to-3-month section of the curve came down with expectations for another cut in the Fed Funds Rate, which was delivered by Chairman Powell in the early days of November. Those moves led to an overall decline of 2.5% for the bond market, with long-term Treasuries getting hit to the tune of 5.2%. However, with the specter of even higher rates looming, investors took comfort in leveraged loans, which carry essentially no duration risk and performed quite well in this environment, gaining 0.9%. High yield was also a bit of a bright spot, relatively speaking, losing only 0.6%, supported by a favorable credit environment. According to research from Goldman Sachs, the number of fallen angels (i.e. investment grade credits that fall into the land of junk) has declined to the lowest level in decades, as companies are having no problem raising capital. Further, the total U.S. corporate interest burden is as low as it’s been in decades since many/most major companies were able to push out maturities when rates were low.

COMMODITIES: MORE OF THE SAME

Precious metals were the only bright spot within the commodity complex, as investors continued to view global central bank activity, geopolitical tensions, and the potential for unanticipated inflation as reasons to cheer on silver (+4.7), gold (+3.8) and platinum (+1.3). Overall, commodities were down 1.9%, with industrial metals, agricultural goods, and energy falling by 3.7%, 4.2%, and 4.4%, respectively. Although, the energy sector’s performance was a bit misleading as it was taken down by natural gas, which plummeted by 19% due to an unseasonably warm fall that reduced demand at a time of high production. Aside from that, energy futures fared well, with heating oil, petroleum, Brent crude, and WTI all moved higher.

How are Frontier strategies positioned?

ALLOCATION CHANGES

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 November, our asset allocation models shifted exposure from cash and short-term bonds into high-quality bonds, as the interest rate environment continued to evolve, with short rates falling and intermediate to long-term rates increasing.

Return expectations for all asset classes increased month-over-month, given improved valuations thanks to broad-based declines in October. U.S. large cap return expectations continue to hover near their 20-year lows, with all other equity classes offering substantially higher real return potential; international small caps top the list. In fixed income, high yield bonds have the highest expected returns, but they are on the low end of their 20-year range, given how tight spreads have become, while TIPS and long-term government bonds are closer to their highs over the last two decades.

PERFORMANCE ATTRIBUTION

October was a difficult month. Every asset class utilized in Frontier strategies ended in the red, with the exception of floating rate notes. Our overweight exposure to floating rate notes within our more conservative models was additive as a result; it was the largest contributor to both relative and absolute returns. But beyond that our positioning was challenged, as U.S. large caps were by far the least worst performers among equity asset classes. While our preferred hedging tool at the moment – managed futures – did perform better on average than long-term Treasuries (which we often use to offset equity risk), they too suffered meaningful losses, so it was an unsatisfying “win”. Finally, slight overweights in certain strategies to TIPS was beneficial relative to core bonds, but high yield, which we are underweight at the asset class level led all fixed income categories, and was thus a headwind to relative performance.