Investment Policy Committee Update - June 2024

As we enter the summer months, our existing bullish stance remains intact. For the most part, the underlying economic facts of our Great Nation haven’t changed since our last rebalance. We are keeping our foot on the gas, leaning into earnings strength and fading the fashionable ‘no rate cut’ narrative. We continue to bias stocks over bonds, US over International, mega-cap over small-cap and growth over value. 

As we increase even further, our tilt into growth companies in our June rebalance, we are seeking to amplify exposure to companies who are focused on beating earnings; across both the US and Developed non-US markets. Stocks have continued to blossom in the face of adversity - interest rate volatility, hawkish Fed talk, election uncertainty and an escalating conflict in the Middle East – all of which have been no match for the earnings prowess of the mega cap tech and growth-cohort juggernauts, who continue to defy even the most elevated analyst expectations. Growth stocks are beating their value counterparts by more than 9% so far this year, large-caps are beating small-caps by about 12%. And since our rebalance in March, both portfolio overweight’s have only extended their leads. We expect the impact of the AI renaissance on capex spending and economic productivity to be a long-term structural tailwind for the US economy, further fortifying its position as the economic growth engine of the world. 

Shifting to a more forward-looking macro picture, the question du jour for economists and portfolio managers is when, by how much, or even if the Fed will cut interest rates in 2024. It wasn’t that long ago at the start of the year when the market was pricing in expectations for as many as six to seven rate cuts this year. If you recall during our January rebalance, we were expecting a more reasonable base case in line with the Fed’s own projections of 2-3 cuts instead. Fast forward to June and consensus has changed quite a bit, with market expectations (gauged by futures market-implied probabilities as of June 3rd) now suggesting only an 11% probability of 3 rate cuts, a whopping 40% probability of just one cut, and even a 16% probability that the Fed pushes any cuts out past the end of 2024. 

Why the dramatic shift in expectations? It has become obvious to us that inflation has risen back to prominence as the top data release for gauging potential Fed policy actions, and it would be fair to say inflation has shown signs of stubbornness over the 1st half of the year. This stubbornness has led to more hawkish Fed talk than previously anticipated which in turn has driven what we believe may be an overreaction with respect to rate cut expectations. The linked dynamic between market expectations for inflation and potential Fed policy response has experienced quite a bit of volatility over the first five months of the year, and just like markets were overly aggressive with their projections at the start of the year, we think this has perhaps swung too far in the other direction today. 

Switching to the fixed income side, with our June rebalance, we are making small adjustments to align more closely with how we want portfolios to be positioned in this strong macro environment. With high starting yields, low defaults and interest coverage coming down, there remains some attractive carry within credit. However, the tight spreads mean less compensation for taking on this risk, and therefore we see selectivity as being key and moving more towards quality within credit exposure. 

At the start of June, Investment Grade spreads are currently sitting at 86 basis points, and High Yield spreads just over 300 basis points. Therefore, our positioning reflects a strong continued preference for active managers, both in subsectors and within investment grade. While many companies have successfully mitigated the impact of higher rates, strategies that can effectively screen for higher quality and avoid the riskiest borrowers still make sense to us, at least while rates remain in restrictive territory. 

We will continue to provide these ongoing updates on our views and investment positioning through posts like this, and as we meet with you. If you have questions about our strategy, please let us know and we can review details at our next meeting. While we don’t recommend fixating on short-term market fluctuations, if you would like to check specific investment performance across all your accounts, our online Orion Portal is available 24/7. 

Thank you for your continued trust and allowing us to coordinate your asset management as part of our Family CFO services!