The crisis in commercial real estate (CRE) is starting to have knock-on effects on banks according to Federal Reserve Chair Jerome Powell. In an interview with 60 Minutes, he remarked, “It feels like a problem we’ll be working on for years… it’s a sizable problem.” He added that most of the negative impact would be concentrated on smaller or regional banks who have greater exposure to CRE.

Already, the Fed stepped in following the collapse of Silicon Valley Bank in June of last year to prevent further damage that could impact the broader economy. In addition to this stress, banks are dealing with an inverted yield curve which has made lending less profitable, and it has led to the uncomfortable position of paying out high rates on deposits while holding loans made at much lower rates in the past. 

Ultimately, the crux of the problem is that demand for office space has declined due to more companies adopting remote work or hybrid arrangements. According to estimates, there could be 1 billion square feet of unused office space by the next decade. Another cause for concern is that over the next few years, loans will mature and need to be refinanced in a much more difficult environment. Given these bleak fundamentals, it’s inevitable that lenders will take losses.

Finsum: In a 60 Minutes interview, Fed Chair Jerome Powell warned that weakness in commercial real estate was starting to impact the banking sector. Already, the Fed intervened last year to prevent contagion following the collapse of Silicon Valley Bank. 

Lower prices for crude oil and natural gas will lead to a more than 30% decline in earnings for the energy sector in Q4. In contrast, the S&P 500 is expected to see a 1.4% drop in earnings. However, these numbers are somewhat skewed by the 7 largest, mega cap tech stocks which have seen a 53.7% increase in earnings. Subtracting these stocks from the S&P 500 reveals earnings decline of 10.5% for the index.

Overall, energy will see the biggest decline in earnings among all sectors. The weakness was recently highlighted by top-line misses for Exxon Mobil and Chevron. The biggest losses are expected in Oil & Gas Refining and Marketing with a 63% contraction in earnings, followed by Integrated Oil & Gas at -34%, and Oil & Gas Exploration & Production with a 20% drop. On the other side, Oil & Gas Equipment & Services and Oil & gas Storage & Transportation, both saw earnings growth.

Many producers are dealing with a bearish outlook for oil and gas prices due to weaker demand from Europe and China despite elevated geopolitical risks. At the same time, these producers are dealing with higher costs due to inflation, creating incentives to increase revenue by adding production. 

Finsum: As Q4 earnings season enters its later stages, it’s clear that the energy sector will see the biggest decline in earnings. Here are some of the major factors behind the drop. 

Interest in alternative assets continues to grow. For many, it’s become a core part of their portfolio along with equities and bonds based on the theory that it can increase diversification, reduce risk, and deliver higher returns in high inflation scenarios. 

In response, asset managers are introducing new products at a fevered pace. Examples include bitcoin ETFs, private credit, and infrastructure funds. Advisors have the task of figuring out which of these products will help their clients and become a part of their allocations. 

Some important considerations are properly explained to clients that many alternative investments mean sacrificing liquidity for a multiyear period and are only justified if investors are willing to hold for the long term. Further, focusing on returns is not the right metric, instead these products are more about dampening portfolio volatility and providing a source of non-correlated returns. 

Therefore, the biggest impediment for more adoption of alternatives is education. Many might not have a deep understanding of these strategies and have varying risk tolerances. Advisors should consider allocations to alternatives on a case-by-case basis and also gradually increase exposure levels to gauge comfort levels. 

Finsum: There is an explosion of alternative investment options available to advisors. Here are some tips on how to navigate this expanding landscape.

Assets under management, tied to model portfolios, are forecast to exceed $10 trillion by 2025. Some reasons for the category’s growth include increasing awareness and comfort among clients, a wider range of options that are enabling customization, and the advantages for financial advisors.

Currently, 70% of model portfolios are asset allocation models. Some advisors choose a hybrid approach with some of the portfolio allocated according to models with some portion remaining discretionary. Another important choice is whether there is an open or closed architecture. With an open architecture, advisors can allocate to a variety of funds, while closed architecture means that funds are from an individual asset manager. 

A growing segment is outcome-oriented models which can help clients achieve a precise goal such as generating income, reducing risk, or minimizing taxes. This is another way that model portfolios can achieve greater customization while still retaining the core benefits for advisors. 

Overall, model portfolios are rapidly gaining traction due to their ability to provide sophisticated solutions for advisors and clients. For advisors, it frees up more time and resources to spend on growing and managing the business while also deepening the relationship with clients. 

Finsum: Model portfolios are forecast to exceed $10 trillion in assets in 2025. Here are some of the reasons the category is growing so fast. 

AllianceBernstein believes that the rally in fixed income will continue due to central banks cutting rates. Thus, investors should take advantage of the opportunity to lock in yields at these levels. 

The firm sees the Fed as remaining on hold until the second-half of the year. It sees the current environment as opportune given that rates will decline over the intermediate-term, while yields remain historically attractive in the interim. 

Despite expectations of slowing economic growth in the second-half of the year, AllianceBernstein isn’t concerned of a major downturn in the credit cycle as earnings remain robust, while household finances remain in strong shape despite some stress in recent months. 

Overall, the firm recommends that investors consider getting fully invested into fixed income especially given that many investors are in cash or short-duration bonds. This strategy made sense over the last couple of years but no longer does given where we are in the cycle. 

Instead, investors need to increase duration given its base case expectation of slowing economic growth and materially lower rates over the next 12 to 18 months. It also recommends corporate credit and securitized debt given attractive yields and solid fundamentals.

Finsum: AllianceBernstein is bullish on fixed income in 2024 due to its expectations that the Fed will cut and the economy will slow. It recommends taking advantage of yields while they remain high and extending duration.