The last 12 months marked a year during which most prognosticators were far off the mark with their forecasts for macro variables, yet still made money given the price gains experienced by pretty much everything financial, except for grain, base metal and energy commodities. The year started with broad agreement that 2022’s soaring interest rates could cause recessions in much of the world, inflation would abate (the question was to what degree), and that at 17.6X forward earnings, the S&P 500 was not cheap.
There’s little question that last month was a clean sweep for markets (and a notable positive month for our funds as well!) as the price of both stocks and bonds gapped higher as most investors shifted their expectations to rate cuts occurring during the first half of 2024. The U.S. dollar was weaker, credit spreads narrowed to new tights, speculative stocks outperformed high-quality stocks and the VIX Index tumbled to near year-to-date lows.
The tug of war between bulls and bears continued during the month of October. Fueled by a still strong jobs market and resilient consumer spending, the U.S. economy sustained its leadership position in global growth. This reality caused markets to increasingly price in the Fed’s ‘higher-for-longer mantra’, although there’s little question that Washington’s relentless bill and coupon issuance has played a significant role in pressing longer term yields higher; another fact not helpful for stocks last month.
Clearly equity prices have finally begun to be impacted by the inevitable and now relentless climb in interest rates. The current questions are whether stocks and bonds are fairly priced and how long before interest rates decline from their two-decade highs. This note will include thoughts on these issues, but first let’s discuss the performance of our funds and the attribution across the broader markets.