Investment Insights

We are now over halfway through 2024, and so far, it has been a positive year in the markets. Although market expectations for the timing and magnitude of interest rate cuts have changed, the direction of travel has not changed: the next Fed move will be down. With this in mind, bonds have found their footing and equities have lifted off.

For 2Q24, the S&P 500 rose by 4.5%, following on an over 10% rise in the first quarter. Global equities also rose, with the MSCI World returning 3.2% in the first quarter after rising 9.0% in the first quarter. Returns for fixed income were mixed, as yields rose on the benchmark 10-year US Treasury rate (UST10) from 4.31% to 4.40% (up 9 bps) while shorter-term and high yield bonds returns were positive. Looking at other indicators for 1Q24, the US dollar index (DXY) (+1%) rose modestly while WTI oil ($81.54, -3%) fell slightly.

U.S. equity markets were driven by outperformance in the “Magnificent Seven” for the quarter. As we have noted, the index-level performance for the S&P 500 is increasingly concentrated in only a few stocks. Importantly, Nvidia alone was up 149% in the first half of 2024. Yes, Nvidia more than doubled in six months time. While we are excited by the potential of AI technology and we have no doubt that Nvidia should remain a leader in this space, we note that pace of revenue and earnings growth for the company is already slowing down. The extreme concentration in just a handful of the biggest market cap companies means that the index itself is a more active bet than it has been before— via the heavy allocation to technology stocks. We continue to view the pace of growth among these equities as unsustainable over the longer term. As of early July, we are already seeing evidence of a “broadening out” trend in equities, with stronger performance from small and mid cap names while mega-cap tech takes a breather.

Looking at fixed income, the Fed has maintained rates at the same level for over a year, even as inflation has cooled significantly. Chair Powell has indicated the Fed is positioned to cut rates soon, although its forecast now shows only one -25 bps cut in 2024, compared to three as of the prior Summary of Economic Projections. Recent macro data has shown a slowdown in growth, and it remains possible the U.S. economy achieves a “soft landing” scenario, after the sharp rebound from the pandemic drove higher inflation. We also believe the U.S. presidential election in November has important implications for U.S. fiscal policy and, by extension, interest rates. Recent Congressional Budget Office forecasts are for the U.S. debt held by the public to increase to 122% of GDP by 2034 (vs. 99% now), and we are watching closely to see if the ongoing deficit spending impacts bond markets.  Elsewhere in the world, global equities were mixed, with positive returns in EM, lower returns in Japan, and flattish performance in Europe.

Amerant Investments’ partnership with the global investment management firm BNY Mellon has continued, and we continue to benefit from discussions with their investment team. As noted, Amerant Investments’ investment committee continues to have final decision-making authority over the advisory program, and we expect to implement a slight shift in the AAPs allocation as of August 1. While the S&P remains highly concentrated in a few large mega-cap tech stocks, we believe that a more diversified, balance allocation across funds is the most appropriate long-term investment approach. Therefore, we have shifted the Growth & Income and Growth portfolios slightly as a result of this view. We trimmed exposure to international equities, while increasing exposure to U.S. value. In our opinion, the better long-term growth rate of the U.S., along with the historic discount of value compared to growth, argues for tilting slightly to value allocations. We expect the broadening trend for equities to continue over the intermediate term, and look to benefit from this expectation in our equity allocations.

Maintaining Dynamic at Neutral
In the table below, we update our Amerant Market Views, which represent our investment team’s strategic views based on investment valuations and macro trends. As a reminder, these are not client-specific recommendations, and clients should consider their financial goals and long-term objectives when determining their asset allocations. We have maintained the majority of our views across both equities and fixed income. One change we made was a switching to a maximum underweight on cash, given our view that the returns on cash are likely to adjust downward in the short term (within the next 3 months). We also revised our overweight on investment grade bonds to neutral. Although we still like fixed income broadly, we have more concerns about adding duration given the worsening debt picture for the U.S. We maintain our slight overweight in emerging markets fixed income and neutral high yield positioning.

This information is being provided for informational and educational purposes only to support our general market commentary. It should NOT be interpreted as investment advice regarding any specific security or investment strategy. See the disclosures at the end of this presentation for additional important information.

This quarter, we maintain the dynamic portfolios in the Income & Growth positioning, as recent data has supported our “no recession” view. As always, we continually review our positioning and will communicate any changes in our views going forward.

Second Half Could Get Choppy

As we look to the second half of 2024, we note that August and September have historically been among the most volatile months for equities. In the fall, we expect the focus to shift to the U.S. election, and potential impacts depending the outcome of both who becomes the next president, as well as which party takes majority composition of the two houses of Congress. Despite this backdrop, we believe that the U.S. economy remains on firm footing, with advance 2Q24 GDP showing 2.8% growth. We continue to see value among U.S. equities apart from unsustainable valuations in certain names, and fixed income is in a position to once again produce income for investors.

Notes: Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (EMB ETF), Emerging Markets Sovereign (LCL) (LEMB ETF), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond). Source: Morningstar. (1) Strategy returns net of mutual fund expenses and Amerant Investments standard management fees.

On this table, you can see the returns for the first two quarters of this year, as well those for the year-to-date.

The second quarter of 2024 experienced positive returns across equities, while fixed income returns were mixed. For the year-to-date, index returns were broadly positive across equities. Fixed income performance showed a positive total return from high yield and a negative total return from longer duration assets.

 The positive performance for the year-to-date was a result of continued optimism in mega-cap tech names, and we note index level concentrations remain stretched. We have maintained our dynamic positioning in the neutral position, which we shifted to in early 2024 as we removed our base case for a recession. Current macro indicators definitely put the soft-landing thesis into closer view as growth slows and labor markets remain healthy. As always, we continually review our positioning and will communicate any changes in our views going forward.

⁽¹⁾ Strategy returns based on the total return of the underlying mutual funds, including reinvestment of dividends and change in NAV. Net of mutual fund expenses and Amerant Investments standard management fees. Returns may vary. Past returns are no indication of future performance.

⁽²⁾ Monthly returns before February 2010 are those of the offshore corresponding strategies. For the Dynamic portfolio, monthly returns before November 2009 are those of the Income & Growth portfolio, which is the neutral positioning of the Dynamic portfolio. Dynamic portfolio started in November 2009.

During 2Q24, the Income Portfolio returned -0.1%, the Income & Growth Portfolio returned 0.1%, the Growth Portfolio returned 0.8%. The Dynamic Portfolio, positioned in Income & Growth, returned 0.1% during the quarter. Performance for the income-based portfolios was impacted by the increase in interest rates. That said, we note that year-to-date and one-year performance is positive across all of our strategies.

As always, we take the trust you have placed in us very seriously. In our day-to-day operations, we continue to follow current events and the reactions of the markets closely, and we stand ready to adjust your portfolios accordingly.

To obtain more detailed information on our market views or the performance of your advisory portfolio, please contact your investment consultant at Amerant Investments by calling (305) 460-8599.

Sincerely,

Amerant Investments, Inc.

https://www.amerantbank.com/