Investment Commentary – November 11, 2024

What Caught Our Attention Last Week?

Election sparks risk-on positioning. The Fed cut rates. China stimulus disappoints. The US stock market jumped for joy that the election results were definitive, thus averting a contested election. Stock investors also embraced anticipated policies promoting tax cuts and deregulation. Concerns about tariffs and bigger federal deficits haven't weighed on the stock market so far, though they seem to be weighing on the bond market. As the Investment Office separates the signal from the noise, we anticipate more growth, slightly higher inflation, a higher public sector borrowing requirement, and foreign investor capital traveling to the US markets.  We believe the portfolio implication is US relative strength over the rest of the world, where exposure to US equities across market capitalization levels is suitable. We expect the S&P 500 profit margin to remain stable and/or trend higher due in part to anticipated corporate tax cuts, deregulation, and continued productivity growth. These are all tailwinds that markets outside the US are largely not experiencing. When we evaluate the bond market, we believe the narrative that bond yields temporarily backed up was due to a pending deficit debacle or elevated inflationary pressures does not fit with the realities of the situation. We believe it’s a re-rating of growth more than a fear of rising inflation based on market inflation expectations and healthy recent Treasury auctions.

Equities

A resounding electoral victory for Donald Trump and the prospects of a Republican sweep of Congress drove the S&P 500 to return 4.7%, its 50^th all-time-high of the year and its best week of 2024. Midcaps and small caps did even better, returning 5.7% and 8.6%, respectively. All sectors in the S&P 500 posted positive returns, with consumer discretionary (+7.6%), energy (+6.2%), financials (+5.6%), and technology (+5.5%) leading. EAFE markets returned 0.1%, with Europe (-1.8%) dragging on returns. EM markets returned +1.2%, with China rising (+1.8%) as the government unleashed further stimulus. From a valuation perspective, most markets are within ±1 standard deviation based on historical forward P/E ratios, though the S&P 500 is at +2.4 and the NASDAQ is at +1.5. For the next 12 months, EPS growth for the S&P 500 is expected to be 7.8% (vs. 6.8% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 3.0% (vs. 12.2% annualized over the last 20 years). All major world indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), Russell 2000 (US Small Cap), MSCI EAFE (Non-US Developed Market Equities), and MSCI EM (EM Equities) trade at or above their 20-year averages based on forward P/E ratios.

Fixed Income

Investment grade fixed income sectors posted positive returns as rates fell at the long-end of the curve despite a sharp rise on Wednesday following the election and as spreads compressed. Municipals returned 0.4%, US AGG returned 0.8% and US IG returned 1.25%. HY bonds returned 0.8% while bank loans returned 0.3%. EM debt returned 1.3% as the US dollar rose 0.7% and spreads compressed. 

Rates

Rates were higher at shorter maturities, though they fell at the long end of the curve. The recession-watch 3M-10Y spread widened 9bps and closed the week at -24. The 2Y-10Y spread compressed 12bps to +5. Rates fell in other developed economies other than in Japan. In Germany, the collapse of the ruling coalition and call for snap elections had rates initially move higher.  The new government faces the daunting task of jumpstarting the sluggish economy, potentially by ending the constitutional “debt-break.” German bund yields have risen from 2.03% at the start of October to 2.33% currently, though they briefly touched 2.44% on Nov 7. The BTP-Bund spread is at 1.29%. 5-year breakeven inflation expectations rose 7 bps and now sit at 2.42% (peak on Nov 6 of 2.44% vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 2 bps and now sit at 2.36% (peak on Nov 6 of 2.40% vs recent low of 2.03% on Sept 10); and 2.36% respectively; the 10Y real yield fell 10bps to 1.95%. The market now expects the Fed to cut between once more in 2024 and two times in 2025 vs. the Fed’s guidance of four cuts in 2025. At year-end 2025, the market expects the Fed Funds rate to be 3.8% vs. the Fed’s guidance of 3.25%-3.5%.

Currencies/Commodities

The dollar rose 0.7%. The commodities complex rose 0.5% as energy prices rose 1.1% for the week. Brent prices rose to $74/bbl. US natural gas prices rose 0.2%, while European gas rose 7.2% as lower wind production increased reliance on gas-fired power plants.

Market monitors

Volatility fell for equities and for bonds (VIX = 15, MOVE = 100); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) rose slightly to 14 from 9 and remains bullish.     Disclosures Investment Commentary Sources: Bloomberg. Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any Investment decisions. The information contained herein was carefully compiled from sources believed to be reliable, but Robertson Stephens cannot guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Past performance does not guarantee future results. Forward-looking performance targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC's website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.