US Treasuries continue to move lower as hopes for a pivot in Fed policy are eroding. From the start of the year, the yield on the 10-year has climbed from 3.9% to above 4.3% to reach their highest levels since November. In total, it has retraced nearly half of the rally that began in October of last year.
Over this period, the number of rate cuts expected in 2024 has declined from 6 to 3 as has the timing. Primarily, this is due to the economy remaining strong as evidenced by the labor market and inflation that has proven to be more entrenched than expected. All in all, the narrative has certainly changed as some now believe the Fed may actually hike rates further especially as there are indications that the steady decline in inflation has ended.
Minutes from the last FOMC meeting also showed that committee members are concerned about the risk of inflation re-igniting if it begins to cut too soon. Overall, it remains ‘data-dependent’. However, all the recent data has undermined the case for immediate or aggressive cuts. According to Rich Familetti, CIO of US fixed income at SLC Management, the current Fed stance "is going to make it very hard for rates to fall much further from here… The pain trade is at higher rates and we will likely experience that."
Finsum: Treasuries continued their losing streak as higher interest rates have weighed on the entire fixed income complex. The market is now expecting 3 cuts in 2024 down from 6 at the start of the year.
2023 was a unique year as nearly every asset rallied due to positive news on inflation, an economy that remained resilient, and expectations that the Fed is ready to pivot on monetary policy. Looking ahead, 2024 is certainly going to be more challenging for equities and fixed income.
JPMorgan believes that investors should have exposure to private market as they offer steady returns and can increase diversification. The bank notes that private equity has outperformed public markets over multi-year periods regardless of economic conditions. The asset class has recently faced headwinds due to interest rates increasing the cost of capital. It recommends focusing on private equity funds that less leveraged and focused on higher-quality companies with durable growth characteristics.
While the monetary environment poses some challenges, it also creates opportunities for investors to lock in attractive yields in private credit. Commensurately, many banks have pulled back from lending, following the regional banking crisis, while public market debt issuance has also been constrained. Private credit has stepped into the vacuum to provide capital for these borrowers while also structuring loans to provide more protection in the event of a default. The bank notes attractive opportunities in commercial real estate, floating rate debt, and leveraged loans.
Finsum: JPMorgan anticipates more volatility and a more challenging environment in 2024 than last year. It sees upside in alternative investments to boost returns and diversification.
Bank of America CEO Brian Moynihan is looking to increase the profitability of the bank’s wealth management unit. He wants to achieve this by increasing scale, hiring more advisors, promoting more cross-selling of products, and investing in technology.
In Q4, Bank of America had a net gain of 175 brokers with most of the growth coming from graduates of its training program. It ended the year with 18,916 advisors across all units which was a 2% decline from the end of 2023. The bank has also sought to stem the tide of defections over the past few years by upping compensation to match its competitors.
Moynihan wants to expand headcount and increase the bank’s presence in underserved markets. A key aspect of this is its revamped broker training which was integrated with Merril in 2021 and has increased retention rates of new advisors.
Another element of the growth plan is to increase use of Bank of America financial products across its ecosystem. This means getting wealth management clients to use Bank of America financial products such as home loans or bank accounts, or private banking customers should be using Merrill for wealth management rather than an outside firm. He sees this as an opportunity to increase sales with minimal expense compared to other channels.
Finsum: Bank of America CEO Brian Moynihan was positive on the wealth management unit’s performance. He sees future growth coming from adding advisors, investing in technology, and increasing cross-selling of products.
A major trend in wealth management is personalization. Due to new technology, financial advisors are now able to offer customized products and solutions without sacrificing scalability. It can help clients reach their financial goals while also creating a stronger relationship between advisors and clients.
A survey conducted of high net worth investors by PwC showed that 66% are interested in more personalization, while 46% are looking to change or add new advisors within the next couple of years. For advisors, offering personalized solutions will be increasingly important in terms of recruiting and retaining clients.
Personalization is also impacting model portfolios. Until recently, most model portfolios were built around the traditional portfolio, combining stocks and bonds, which limited customization. Now, there are more options to customize model portfolios including by factors, themes, and values.
According to research from MSCI, wealth managers can allocate to these strategies without worry that it would have an adverse impact on a portfolio in terms of returns or diversification. Further, these model portfolios are customized but still retain their core benefits. For advisors, this means spending less time on investment management and more time on client service, financial planning, and growing the business.
Finsum: Personalization is a major trend in wealth management. Now, model portfolios can be customized which is bringing a variety of benefits for advisors and clients without an adverse impact on returns or diversification.
In 2023, municipal bonds showed a recovery after a tough 2022, largely due to late-year rallies and shifts in Federal Reserve policy. However, the market has not fully rebounded, indicating ongoing opportunities in 2024.
First, strong credit fundamentals are expected to persist, supported by substantial federal spending post-pandemic, leading to record tax receipts and rainy-day balances.
Next, strategically positioning across the yield curve offers chances to secure historically high yields, particularly in the long end, where steepening curves and higher yields prevail compared to U.S. Treasuries. Anticipated recovery in demand may see mutual fund inflows resume, especially for long-term funds and ETFs. Separately managed accounts (SMAs) are likely to remain popular among investors seeking customization and tax efficiency.
Finally, despite recent tactical investor decisions, municipal bonds continue to offer tax-free income, solid credit quality, and promising long-term returns, making them a strategic allocation option. Given current market conditions, entering the municipal bond market now may prove compelling for investors.
Finsum: Muni’s are leaving lots of options for investors on the table to tactically deploy in 2024.