Bonds: Total Market
The last 40 years have been defined by lower inflation, creating a generous tailwind for fixed income. Now, AllianceBernstein believes that we are in the midst of a transition to a new regime that will feature lower growth and higher inflation. In this environment, the firm believes that fixed income investors need to make appropriate adjustments.
It believes that inflation will be structurally higher in the coming decades due to deglobalization and demographics. Deglobalization means that supply chains will be reshored, undoing some of the deflationary trends of the last 40 years, and it will result in higher inflation due to greater manufacturing costs and wages. With an aging population, there is a smaller pool of available workers, which will also contribute to inflationary pressures. Both deglobalization and demographic trends will weigh on economic growth as well.
Due to these factors, AllianceBernstein forecasts that 2% inflation is now the lower bound rather than a target. It believes that frequent spikes in inflation, as experienced from 2021 to 2022, will also become commonplace. This is a consequence of governments with large amounts of debt and future liabilities. Policymakers will be incentivized to ‘inflate’ away the debt rather than make painful cuts to spending. Additionally, lower rates will help contain financing costs.
Finsum: The last 40 years were great for fixed income due to inflation trending lower along with interest rates. AllianceBernstein believes this era is over, and we are moving into a new period defined by lower growth and higher inflation.
In today's interest rate climate, holding a significant cash reserve is a prudent strategy. While long-term investors may benefit from stock investments, individuals requiring immediate access to funds or building emergency savings find value in holding cash. With high-yield savings accounts offering rates of 5% or more, real returns on cash savings are attractive. However, for those seeking to optimize returns while maintaining liquidity, there are two fixed income ETFs that offer advantages.
Two ETFs, iShares 0-3 Month Treasury Bond ETF (SGOV) and JPMorgan Ultra-Short Municipal Income ETF (JMST), offer different tax strategies to potentially enhance after-tax returns without significant additional risk.
Short-term Treasury bonds provide state tax exemption on interest earnings, making them appealing for residents of high-tax states, while municipal bonds offer federal tax exemption and may also be exempt from state and local taxes. Investors should assess the trade-offs between tax advantages and lower yields to determine the best fit for their financial situation.
Finsum; When accounting for tax advantages, fixed income ETFs could provide a more secure and efficient outlet for mitigating risk.
Investors grappling with market uncertainty are exploring ways to manage risk effectively while staying invested; utilizing buffer strategies, which employ options to provide targeted downside protection, offers a solution by mitigating losses during market downturns while limiting upside potential.
Accessing buffer strategies through ETFs simplifies the process, avoiding the complexities of managing options directly or the expense of structured notes. Buffer ETFs, managed by experienced professionals and offering intraday liquidity at a low expense ratio, present an accessible option for investors.
Designed for long-term strategic allocation, these ETFs can be utilized by investors looking to reduce equity drawdown risk, seeking moderate growth, or exploring outcome-oriented strategies within their portfolios, thereby providing a flexible approach to risk management in uncertain markets.
Finsum: Buffer strategies seem to make the most sense when there is overall upside but potential for volatility, similar to our current macro landscape.
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Commonwealth Financial Network has forged a strategic alliance with Succession Link, a specialized fintech platform focusing on M&A and succession planning, to revolutionize practice management. Through the integration of Succession Link's bespoke solution, advisors can now seamlessly identify compatible continuity and succession partners.
The imperative for advisor succession planning is underscored by Cerulli Associates, forecasting the retirement of 100,000 advisors overseeing $10 trillion in client assets within the next decade.
Commonwealth's consolidated platform not only streamlines access to practices for sale but also furnishes advisors with valuation tools, fostering succession planning activity. Succession Link's suite of features, including compatibility scoring and advanced messaging functionalities, aligns with the overarching goal of empowering financial professionals to navigate succession challenges adeptly.
Finsum: Technology tools will be changing the game in advisor recruiting as demographic shifts begin to hit the industry.
Bonds and stocks were higher following the Federal Reserve’s decision to hold interest rates steady. The rally was a result of Fed Chair Powell reaffirming that rate cuts were still on track for later this year. He also added that the ‘policy rate is likely at its peak’.
The dot-plot also showed that FOMC members are forecasting 3 rate cuts by the end of the year, which is in line with the market’s consensus and a reduction from their previous forecast of 4 rate cuts. Committee members also upped their forecast for GDP growth to 2.1% from 1.4%, while modestly lowering their forecast for the unemployment rate to below 4%.
According to Fed futures, there is a 75% chance that the first rate cut will be at the June meeting. However, the larger message from Powell is that the Fed can afford to be patient given that the economy remains in a healthy place despite restrictive monetary conditions.
Another catalyst for equities and fixed income was Powell’s comments on the balance sheet runoff. So far, the Fed has reduced its balance sheet by about $1.4 trillion since June 2022 by letting proceeds from maturing Treasuries and mortgage-backed securities roll off the balance sheet instead of being reinvested. Powell indicated that this round of quantitative tightening was nearing an end and that discussions were ongoing about when it would be ‘appropriate to slow the pace of the runoff fairly soon’.
Finsum: Stocks and bonds were higher following the Fed’s decision to hold rates steady. Two particular catalysts were Chair Powell’s affirmation that the Fed’s next move would be to cut rates and comments about slowing the pace of quantitative tightening.
Apollo Global Management Inc. has launched a new private credit fund, initially offering no fees for the first year and halving fees for the subsequent year, with investments coming from Mubadala Investment Co. and other institutional investors.
Structured as a business development company, it diverges from the norm by providing fee breaks, unlike many similar vehicles catering to retail and high net worth investors. Contributions from Mubadala and Apollo's affiliate amount to over $290 million, while the fund's assets total over $790 million, predominantly acquired through leverage.
Named Middle Market Apollo Institutional Private Lending, the fund is an extension of the collaboration between Apollo and Mubadala, established in 2020, focusing on investments in US middle market companies, with a target allocation of 70% to 80% in loans. The fund's filing also stipulates a provision where Apollo would redistribute cash from sales or loan repayments to investors if it fails to double its investment commitments to $900 million within five years.
Finsum: Private credit could provide an uncorrelated return as macro uncertainty permeates markets.