One of the biggest surprises of 2023 has been the incredible strength of equities with the S&P 500 up 18% YTD, and many stocks and sectors actually making new all-time highs despite numerous headwinds such as high inflation, a hawkish Fed, and middling economic growth. 

Yet, this rally has seen the bulk of outperformance from the technology sector, while cyclical parts of the market such as energy have lagged. However, there are signs that this could be changing especially following the energy sector’s strong performance over the last month as evidenced by XLE’s 8% gain. 

The larger impetus for cyclical stocks has been growing recognition that the US will likely avoid a recession in 2023. Energy stocks have also had other catalysts such as strong earnings reports from behemoths like Chevron and Exxon Mobil. Additional catalysts could be supply cuts from OPEC+ and the US refilling its strategic petroleum reserve (SPR).

 The sector also remains attractive from a valuation perspective. Currently, XLE has a price-to-earnings ratio of 8 and a dividend yield of 3.7%. Compare this to the S&P 500’s price to earnings ratio of 25.8 and yield of 1.5%. 

Finsum: The energy sector has enjoyed strong performance over the last month due to a spate of strong earnings reports and increasing signs that the US will avoid a recession.

In 2022, active ETFs accounted for 15% of total global inflows into ETFs. In 2023, active ETFs now account for 25% of total inflows. 

Is this a temporary blip due to the current environment of economic uncertainty and high rates and inflation? Or, is this a new trend that we should expect to continue for the foreseeable future.

In a recent report, State Street supports the latter argument. The asset manager sees recent regulatory reform as a major catalyst for growth in the active sector. Rule 6c-11 modernized the process to launch ETF, shortening the runway from many years to 60 days. This has resulted in an explosion of ETF offerings. In the last 3 years, 750 active ETFs have been created, while only 325 were created in the 11 years prior to Rule 6c-11. 

Another regulatory change is that ETF providers are able to be slightly less transparent with their holdings. This has led many managers to launch their own ETFs who were previously concerned about giving their best ideas for free. And, it’s also led many mutual funds to also offer active ETFs with similar strategies. 

It’s particularly bullish on active fixed income ETFs as it sees more room for innovation in the space. And, it notes that many advisors and institutions are just becoming familiar with the asset class.

Finsum: Active fixed income and equity ETFs are seeing incredible growth over the last couple of years due to a combination of regulatory changes and innovation. 

There are many ways for investors to buy Treasuries, but the increasingly popular option is through the iShares 20 Plus Year Treasury Bond ETF (TLT) which is a blend of 10-year and 30-year Treasuries. Currently, this fixed income ETF offers a yield of 3% and is down 2% YTD.

The ETF has been hammered in recent sessions due to Fitch’s downgrade of US debt, larger than expected budget deficits, and rates that are likely to stay elevated at least into Q1 of next year. Another potential reason for TLT’s poor performance in recent sessions is that Pershing Square Capital Management founder Bill Ackman unveiled a bet against TLT and long-duration Treasuries. 

Ackman shared his reasoning on Twitter. He believes that ‘structural’ changes in the world such as the re-shoring of supply chains, an increase in defense spending, electrification of the energy sector, aging demographics, and a tight labor market are indicators that inflation is going to remain high for a meaningfully long period of time. 

Based on this, he believes that long-term Treasuries will need to offer higher yields to lure investors, while they remain currently priced as if inflation is transitory given the 30-year’s current yield of 4.2% inflation. He believes that it should be yielding between 5.5% and 6% given his expectations of inflation, implying losses between 31% and 43%. 

Finsum: Bill Ackman is one of the most successful investors of his generation. Recently, he unveiled a short position against long Treasuries and TLT, one of the most popular fixed income ETFs.

In the Wall Street Journal, Konrad Putzier and Will Parker cover why the next few years for multifamily real estate are likely to be challenging following a strong bull market over the past decade. However, the trends that underpinned this bull market are slowing or reverting in some cases.

These include rising rents, a wide gap between supply and demand, and high rates which is complicating efforts to refinance. Of course these challenges are compounded by the fact that many owners and operators of apartment buildings took on too much debt with the belief that rising rents and property values would overcome any issues of leverage.

However, they didn’t account for the highest rates in decades especially as rates don’t seem likely to come down anytime soon given continued resilience for the economy and labor market. YTD, apartment building values are down 14%, undoing much of last year’s 25% gain. 

Already, some apartment owners have defaulted, and many fear that more defaults are imminent. While high rates are the precipitating factor, the woes have also highlighted that many owners had too much leverage. Many borrowed up to 80% of the property’s value using short-term, floating-rate debt. Additionally, credit markets might be tougher to access given the ongoing struggles of regional banks. 

Finsum: Typically, apartment buildings are seen as one of the safest parts of the real estate market. This is not currently true given that many owners have too much leverage and are seeing rents moderate while costs continue to climb.

2023 was supposed to be the year of fixed income. 

Coming into the year, the consensus was that fixed income would rally as the economy plunged into a recession, forcing the Fed to terminate its rate hike cycle and even begin cutting before the year was over. The bond bulls got another catalyst following the regional bank crisis which many believed would impair credit markets and also force the Fed’s hand.

Yet, these prognostications have proven to be false. Instead, the US economy continues to grow and add jobs every month. In fact, there are more signs that the economy could be re-accelerating rather than contracting. As a result, the Fed continues to hike, and bonds have given up all their gains on the year. 

Despite consensus predictions proving wrong, most Wall Street analysts remain bullish on fixed income. They continue to believe that yields are at or near their ‘cycle highs’ and that a trifecta of factors like cooling inflation, mild economic growth, and geopolitical risks mean that investors should continue adding exposure especially given that equities are unattractive from a valuation perspective at the moment. 

Finsum: 2023 was supposed to be a big comeback for fixed income given expectations of a recession in the second-half of the year. Yet, this has proven not to be the case.