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3Q 2024 Market Insights

This video is a recording of a live webinar held October 23 by Marquette’s research team analyzing the third quarter of 2024 across the economy and various asset classes and themes we’ll be monitoring over the remainder of the year.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Michael Carlton, Research Analyst
Hayley McCollum, Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

Are You Ready for Some Fixed Income?

As the leaves change to autumn and the authors cheer on their Fighting Leathernecks, fall is the perfect time for investors to reassess their fixed income portfolios. Fixed income is a hybrid security that offers both offensive and defensive properties. Much like a good football team, a fixed income portfolio needs to combine a strong offense with a solid defense.

Some strategies provide more offensive characteristics while others are more defensive. Portfolios with too much offense act like the Greatest Show on Turf. They do well when the economy is strong, but falter in down markets. Conversely, a fixed income portfolio that is overly reliant on defensive strategies will do well in a risk-off environment but will struggle in a strong economy like the Super Bowl Shufflin’ ’85 Bears.

While those were great teams, they were not a dynasty that stood up to the test of time. To build an all-weather fixed income portfolio that will perform in multiple market environments, an investor needs to balance offense and defense.
Fixed income has three primary objectives: income, diversification, and liquidity. Income, or yield, is what an investor is paid for loaning money to another entity. Fixed income helps to diversify portfolios primarily through duration. When risk assets are selling off, interest rates are generally falling. Duration is what drives fixed income prices higher in such scenarios. Finally, fixed income assets can be a source of liquidity. The weight of these qualities is dependent on if the strategy is more offensive- or defensive-minded.

This white paper outlines offensive and defensive fixed income characteristics and strategies and considerations for investors when building a “gameplan” for their fixed income allocation.

Keep Your Eye on the Ball

When it comes to baseball, successful hitters have little trouble hitting the ball when they know what pitch is coming. But when pitchers can vary the speed as well as the spin and curve of the ball, hitting becomes exponentially more difficult. An effective curveball can make even the most accomplished hitter look feeble.

As we look at the second half of 2024, we are reminding our clients to “keep their eye on the ball.” Indeed, the first half of the year has been pretty “hittable” as far as returns are concerned, with the majority of asset classes positive through June 30. However, curveballs such as Fed policy, equity index concentration, exchange rates, and a capricious election could quickly flip the script and send investors back to the dugout shaking their heads.

With that said, here is our scouting report for the second half of the year, organized by asset class. We share not only “down the middle” themes but also the curveballs that could flummox performance. A well-prepared investor is no different than a well-prepared baseball player: Insight and realistic expectations provide the foundation for a successful season!

2024 Halftime Market Insights

This video is a recording of a live webinar held July 23 by Marquette’s research team analyzing the first half of 2024 across the economy and various asset classes and themes we’ll be monitoring over the remainder of the year.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Hayley McCollum, Research Analyst
Chad Sheaffer, CFA, CAIA, Senior Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

What Does Elevated Index Concentration Mean for Active U.S. Equity Managers?

Indexing has risen in popularity over the last decade, particularly for U.S. equity investors. The fees are lower and indexing is perceived as less risky, with investors primarily seeking beta exposure to the market. However, these indices have evolved against an ever-changing economic and financial market backdrop. As a result, several unintended structural issues have emerged, particularly related to concentration risk. Understanding this evolution and how it could alter the overall exposures within a broader portfolio is critical, as these indices are not static. Notably, the composition of some indices alongside the increase in passive capital has created headwinds for active managers and helps to explain recent performance challenges.

This newsletter examines the progression of passive management, how and why U.S. equity index concentration has increased in recent years, and the effects and risks investors need be aware of across the market capitalization spectrum.

The Growing Popularity of Continuation Funds

Historically, the private equity secondary market has been used by limited partners (“LPs”) to sell exposures at the end of their lives and as such contained only tail-end exposures. Selling these lingering exposures to private equity funds allowed LPs to clean up their balance sheets and fueled the growth of secondary private equity funds within the broader private equity space. As the market evolved, however, higher-quality assets began transacting as investors started to use secondary markets as a useful portfolio management tool. More recently, general partners (“GPs”) have come to occupy an increasing percentage of the overall market. In 2023, about $110 billion in volume traded in private equity secondaries, with about 50% of the total transaction activity represented by GP-led transactions.

In this newsletter, we provide an overview of continuation funds, including their growth, structure, transaction requirements, and considerations for investors.

Mind the Gap

Any ride on the London Tube reminds riders to mind the gap: Beware the space between train car and platform as you board and depart the train. A recent trip to London brought this phrase back to me and it seemed like a perfect description of how to look at financial markets this year, with the “gap” serving as the difference between expectations and reality, most particularly in terms of interest rate cuts.

In our market preview, we identified the Fed pivot as a primary driver of financial markets this year, most especially how expectations of cuts would line up with actual Fed policy. Going into the year, the market had priced in at least five cuts, which helped fuel a furious fourth quarter rally and investor optimism for 2024. One quarter in, however, those expectations have been turned on their head. Hotter than expected inflation and jobs reports in March have created a “higher for longer” narrative with the market expecting no more than two cuts during the second half of the year. Some economists have taken an even more bearish stance, suggesting there will not be any cuts. Overall, rates rose across the curve during the quarter as current U.S. debt levels sustained the long end of the curve while the short end was relatively unmoved.

Intuitively, many investors would expect such a big change in rate expectations to weigh heavily on markets, both equities and bonds. In that sense, equity performance was surprising during the first quarter, as the upward trend from 2023 continued. Predictably, bonds suffered as rates rose, but below investment grade sectors were profitable. To be fair, though, it should be noted that equities have endured a difficult start to this month, down 4.6% through April 22 as the higher for longer narrative has gained momentum.¹

Going forward, what should we watch for from asset classes as we venture into a market environment that looks much different than what we were expecting only three months ago?

2024 Market Preview Video

This video is a recording of a live webinar held January 25 by Marquette’s research team analyzing 2023 across the economy and various asset classes as well as what trends and themes we’ll be monitoring in the year ahead.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Senior Research Analyst
Catherine Hillier, Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Griffin Gildea, Associate Research Analyst
Hayley McCollum, Research Analyst
Chad Sheaffer, CFA, CAIA, Senior Research Analyst

 

Sign up for research alerts to be invited to future webinars and notified when we publish new videos. If you have any questions, please send us an email.

Marquette Views on 2024 U.S. Equities Outlook Featured on FIN News

Published May 14, Catherine Hillier, Research Analyst, was interviewed for “Q1 2024: Small-Cap Equity Hiring Sees Uptick,” by FIN News (subscription required).

Catherine discussed the outlook for U.S. equity performance, particularly in the small-cap space in the article, which posits, “Publicly-traded large-cap companies continue to garner the attention of media and investors, but allocator interest is beginning to look down market to the small-cap sector.”

The article also referenced Catherine’s November 2023 newsletter, U.S. Equities: Surprising Strength Gives Way to Macro Risks, and commentary in Marquette’s 1Q 2024 Market Insights webinar, available to watch as a recording here.

Great Expectations

After ending 2023 with a steep market rally, 2024 began on a more muted note, with Fed-pivot exuberance giving way to the details of execution. Of the many opportunities and risks facing markets this year, one of the most scrutinized will likely be how the Fed’s interest rate cuts compare to market expectations.

This newsletter analyzes current expectations for interest rate movements this year and potential scenarios that could influence the Fed’s policy decisions.