Investment Outlook - Q3 2024
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Will a Labor Market in Motion Stay in Motion?
Four years after the pandemic, getting an accurate picture of the US economy remains surprisingly difficult. Recent data gives the impression of slowing economic growth, but few are willing to extrapolate this into a serious downturn. Many typical leading indicators, like the inversion of the Treasury curve, seem less useful post-pandemic. Consequently, investors rely on real-time or lagging measures of economic strength, such as the labor market. This makes judging any growth slowdown more challenging and may leave investors and the Fed behind the curve. From a labor market perspective, some may find it hard to believe that trouble could be brewing.
Additional highlights
- Pension Solutions Monitor: We estimate that pension funding ratios increased over the second quarter of 2024. Based on market movements, the average funding ratio is estimated to have increased from 108.2% to 109.9%.
- Fixed Income: Despite slowing momentum, the rates complex remained hostage to the higher for longer narrative in the second quarter. Specifically, easing expectations for 2024 continued to be pared back, although expectations have started to rebound early in third quarter.
- Equities: Closing out the second quarter of 2024, we saw the S&P 500 Index level form 5500, bringing its year-to-date return over 15%. Performance continues to outpace anxiety but only by a bit.
- NEW - MSCI Rebalance Predictions: We believe it is possible to capture outperformance resulting from index micro inefficiencies using a low active risk approach. One key opportunity we target is rebalance predictions, where we model widely followed methodologies to predict index additions and deletions. We are publishing our list of MSCI predictions for the upcoming index rebalance.
- NEW - Securitized Products: Plans recognize the ability of securitized products to balance out the competing interests of diversification, enhanced return and liquidity. The diversity of structures and ability to customize exposures points to securitized as an optimal strategic allocation for pension plans alike.
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Additional insights
Combatting Complexity with Enhanced Beta
Multi-asset
Enhanced indexing offers potential outperformance through low risk methods that traditional passive managers forego. Selectively utilizing derivative exposures for passive investments can also at times add value in markets where the investor receives a material funding spread. However, the magnitude of the opportunities, particularly in derivatives funding markets, will vary across assets and time.
Borrowing Brilliance – Advantages in Fixed Income Portable Alpha
Active Fixed Income
While we are generally supportive of portable alpha, clearly not all implementations are created equal. Partnering with a portable alpha manager who intimately understands the trade-offs inherent in the approach may afford distinct advantages for retaining as much outperformance as possible for the overall portfolio.
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