U.S. consumers continue to spend freely, despite having used most of the excess savings built up during the Covid years. As 70% of the economy, consumer spending was a large factor in the reasonably strong 3% growth in the GDP last quarter. That growth combined with the general excitement for artificial intelligence and the slow but sure erosion of the inflation rate have been the major contributors to strong equity market performance year to date.
The outlook is not entirely rosy as the labor market has softened, consumer confidence remains low, and the dollar has weakened. This has prompted the Federal Reserve to lower its overnight lending rate by one half of a percent (50 basis points). Anticipation of this action buoyed the bond market, with the Bloomberg aggregate bond index turning positive in July. While this is good for the values of existing bond holdings, yields on instruments such as T-Bills and CD’s are not quite as attractive as they were earlier this year for investors putting cash to work shorter term.
The Fed’s objective is to keep the economy from entering a recession despite the aforementioned weaknesses and rising consumer debt. HFM is generally optimistic about the economy and the markets although this week’s news of Middle Eastern conflict and the dockworker’s strike adds uncertainty to the forecast.
Favorability Scale
The sliding scales below are meant to represent HFM’s current assessment of favorability of the market landscape in various investment areas as of the most recent quarter end. Our investment committee is looking to communicate to you a complicated thought process as simply as possible. The favorability scale considers the following factors: Current Yield, Growth, Value, and Market Conditions.
The information contained here should not be construed as a recommendation to purchase or sell any particular security or an assurance that any particular security held in a portfolio will remain in the portfolio or that a previously held security will not be repurchased. Securities discussed may not represent a portfolio’s specific or entire holdings. It should not be assumed that any security transactions or holdings discussed have been or will prove to be profitable or that future investment decisions will be profitable or will equal or exceed the investment performance of the securities or portfolios discussed.
Equity Favorability
HFM Strategic Equity Positioning (Long Term)
L. Brundage: Further rallying dependent on continued U.S. consumer spending and the success of the Chinese economic stimulus. We remain more Favorable on Equities in general.
HFM Tactical Equity Positioning (Short Term)
Large Cap
E. Anderson: Q3 saw the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, and Nvidia) more muted, while the rest of the market performed quite well. The Fed rate cut on September 18 added 2% to the S&P 500’s QTD gain, for a total of 5.9% for the quarter. We remain more Favorable on large cap stocks.
Small Cap
L Brundage: Lower interest rates and attractive valuations compared to large caps led to outperformance this quarter. Continued strong growth depends on economic strength. We are cautious and optimistic but Neutral.
Cutting Edge
L. Brundage: High valuations and weakening performance lead to likely underperformance over the near term. We are Less than Neutral given the run-up of stocks over the last few years.
International
L. Brundage: The dollar weakened during Q3 helping push international equity returns. With global tension persisting, we remain Less than Neutral in this segment.
Hedged Equity
L. Brundage: In an era of increased uncertainty, this asset class continues to provide comfort. We remain More Favorable given the run-up in stocks.
Fixed Income/Bonds Favorability
HFM Strategic Fixed Income Positioning (Long Term)
L. Brundage: Bonds continue to look relatively attractive. Recent Fed moves have improved the outlook. Spreads remain tight so any economic deterioration would favor government bonds. We remain more Favorable on fixed income.
HFM Tactical Fixed Income Positioning (Short Term)
Investment Grade Bonds
C. Pierce: The Investment Grade sector remains attractive and will perform well in a soft landing and provides a buffer in the event of a hard landing (recession). We remain more Favorable on investment grade bonds despite pockets of weakening economic data.
High Yield
L. Brundage: High Yield Corporate sector yields remain attractive at near 7.0% levels. This sector will perform well in a soft landing economic scenario and likely underperform in a hard landing scenario. Expect to just “clip coupons” (obtain returns generated by income payments) unless the economy weakens. We remain Neutral.
Alternatives Favorability
HFM Strategic Alternatives Positioning (Long Term)
K. Quiros: With the stock and bond market doing well together, the alt performance has been muted as expected . We remain cautious and under weighted in this segment. Favorability remains Neutral.
