Stocks were lower, while Treasuries caught a bid following the latest FOMC meeting which was deemed hawkish despite the Fed holding rates as expected. In essence, Chair Powell’s remarks during the press conference made it clear that the central bank is not willing to cut yet.

In response, markets were in a risk-off mood. Fed futures showed that the odds of a rate cut at the next meeting declined from 40% to 36%, while the odds of the first cut happening in May increased to 59% from 54%. 

Overall, the policy statement and Powell’s press conference underscored that the Fed is moving in a more dovish direction, just not as fast as the market’s desired pace. The policy statement expressed that there is a better balance in terms of employment and inflation goals. However, before cutting rates, it wants to see even more progress on the inflation front. In essence, the resilient economy and labor market mean that the Fed has more latitude to continue its battle against inflation before pivoting to support the economy and risk re-igniting inflationary pressures.

Rather than hawkish or dovish, its current stance can be characterized as ‘data-dependent’. Some of the important releases, prior to the March FOMC meeting, will be the January and February employment data and consumer price indexes. 

Finsum: The Fed held rates steady but came out slightly more hawkish than expected. This led to the odds of a rate cut in March slightly dropping, but the bigger takeaway is that the Fed sees inflation and employment risks as being balanced and remains data dependent. 

FINRA and SEC regulators have increased enforcement and oversight of Regulation Best Interest (Reg BI). Recent focus has been on increasing compliance within the sales process. There have been several FINRA actions to punish firms for improper supervision to ensure the fiduciary standard is being followed.

The pace of these actions and enforcement has gradually picked up since the moratorium on enforcement ended. Further, regulators have also made public comments emphasizing the need for more aggressive action. 

In 2023, there were FINRA enforcements following only 8 in 2022. The agency has also started to impose personal fines for sales violations or requiring advisors to pay back a portion of losses. Prior, regulatory agencies would see compensation and damages from the firm rather than individuals. This change in strategy is a reflection that they are trying to deter violations of the fiduciary standard at the individual and firm level.

Looking ahead, comments from SEC and FINRA officials reveal that this is only the beginning. According to FINRA’s acting head of enforcement, Chris Kelly, ‘more and more’ cases involving all four pillars of Reg BI which includes disclosure, care, conflict of interest, and compliance are likely to be filed. 

Finsum: FINRA and SEC regulators are increasing Reg BI enforcement. They are targeting firms for improper sales supervision and punishing brokers for violations.

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.

Cohen & Steers believes that 2024 will mark a turnaround in private real estate following years of being plagued by issues like a drop in office occupancies and high interest rates. The firm emphasizes that real estate remains a cyclical business with many indications that we are near a trough in the cycle. It acknowledges that some pain is still coming as large amounts of debt will mature in the next couple of years and require refinancing, likely leading to more defaults and distressed assets. 

However, this will present an attractive opportunity for investors according to Cohen & Steers. The firm sees private real estate following the same trajectory as public REITs, lower prices in the interim before a gradual recovery as the Fed shifts to cutting rates later in the year. 

The firm favors newer properties in the sunbelt over older properties in coastal markets. It sees migration out of high-cost cities and into the suburbs continuing, facilitated by technology and remote work opportunities. 

In terms of various segments, it sees less opportunity in Industrial properties due to high prices and indications of a supply glut and lower occupancy levels. It sees office properties as continuing to struggle given unfavorable secular trends. Specifically, it recommends staying away from older office properties which were built for a different time and workforce.

Finsum: Cohen & Steers believes that private real estate is near the bottom, and that buyers at these levels will be rewarded in the long-term. 

With a strong recovery in fixed income over the past couple of months, fixed income fund managers are looking to generate inflows from the nearly $6 trillion that is sitting in money market funds. Some portions will certainly move into fixed income especially if interest rates start to move lower, and investors look to move further out on the curve to take advantage of still attractive yields.

Due to this, active fixed income funds delivered their biggest monthly returns in decades, leading to a surge of inflows. Recent economic data and chatter from FOMC officials have also been supportive of the asset class.

The challenge for managers is the explosion in active fixed income funds over the last few years, leading to price wars for market share and consolidation. Many are from the largest asset managers like Vanguard, State Street, and Blackrock, which have very low costs. Funds that aren’t able to sufficiently attract inflows over this period will only face more difficulties in the future in remaining viable. 

According to Rich Kushel, the head of Blackrock’s portfolio management group, “We are in a winner-takes-a-lot moment. If you’re truly adding real alpha, there will always be a place for you in this industry. For the folks who haven’t, you might as well buy [the benchmark].”

Finsum: There is nearly $6 trillion on the sidelines. Some of this will move into fixed income especially if rates start dropping. There will be intense competition among active funds to be a recipient of these inflows.