EWA Stock Market and Portfolio Commentary Q4 2024

Welcome everyone. In today’s video, I’m going to be reviewing the changes that were made to the EWA portfolio in quarter three, and also the rationale behind those trades. However, first, I want to remind you that your quarterly report will be available in your Emoney vault and the EwA login. This will go through the asset allocation of your portfolio, the returns not only since inception, year to date, year trailing, three year trailing, et cetera. Any questions on these, please reach out and we’ll be happy to give a thorough review individually. Before I go through the rationale and market commentary for quarter three, just wanted to remind you that we have a podcast recently released on investing during election years and the importance of maintaining sound investment principles, especially during election years.
S
Speaker 1
00:53
There can be a lot of emotions from both political parties, but our view is don’t mix your political views with your investment policy or investment philosophy. Returns from Democrats versus Republicans, really over the last century have been very close, all within 1% returns. If you had stayed invested during both tenures of Democrat and republican president. Things may be volatile typically leading up to the election year, but history will show us that staying the course, staying asset allocated, staying diversified, are always the right decision. So again, reach out if you want to discuss further. All right, well, after the stock market rally in the first half and amidst the uncertainty of the upcoming election, we are reducing some of the risk by trimming back some of our active positions.
S
Speaker 1
01:43
We are taking our foot slightly off the gas, still preferring stocks over bonds and select areas of risk. But seasonal weakness leading up to the election drives us to right size some of our convictions and take some gains off the table. While we believe that large cap’s growth and US stocks will continue to outperform, we are reducing our equity overweight to 1% relative to fixed income, down from a prior 4% overweight stance. We’re still maintaining our exposure to tech and the highest earners of the market, but are proceeding with caution. Historically, financial markets regularly see a rise in volatility in October. This increase in volatility is especially pronounced in presidential election years, providing further support, and we took this risk off the table in early September. We do these videos every quarter. I just wanted to make this clear.
S
Speaker 1
02:32
This trade was made a month ago from when you’re watching this video. Also, earnings have been relatively strong, yet not extraordinary this season, an unprecedented presidential contest. Fed moves and recent volatility indicate that from here until November, there lies a path ridden with unknowns the market will have to digest. So therefore we are trimming our us exposure to these factors. Moving closer to the original benchmark on international growth. Stocks have had similar recalibration as their earnings outshined value, but not by the same magnitude as were seeing earlier this year in fixed income. We are trimming holdings on either extreme of the curve. Inflation nearing official targets, paired with softening in the labor market gives the Fed enough ammunition to embrace a dovish narrative and a hint of at a stark change in the rate path.
S
Speaker 1
03:18
The under loved long duration trade that we took finally paid off as the bond on rally price and aggressive Fed cuts. In the coming months, we are trimming that position, moving towards the belly of the curve. It’s been a historic run for tech growth and obviously the magnificent seven. Our position this year has helped deliver very strong results as we think it’s time to take some profits by reducing some of these winning convictions. While our signal set is still telling us that these are good areas to be invested in, a mild slowdown on earnings indicates that the fundamentals of these convictions are slightly weaker. Large cap stocks have outperformed year to date s and P 500, delivering around 18% total return, doubling the Russell 2000 mere 9% through the end of August.
S
Speaker 1
04:00
Summers volatility brought swings up and down in the small caps, yet we don’t find any of these short term moves convincing reasons to own. Therefore, we have a reduced position in our small caps. Currently, large caps continue to deliver superior earnings strength with double digit earnings growth in quarter two versus negative earning growth year over year for the Russell 2000. And again, reminder. The Russell 2000 is a mix of mid and small cap companies in the United States. We examined both the growth overweight as well as the value underweight. The same earnings analysis that drives much of our positioning currently shows that we should continue leaning towards growth. Again, quick reminder, this is why we have your portfolio separated between the s and p 500 growth allocation s and p value allocation so we can shift between the two as we see fit.
S
Speaker 1
04:46
So the ideal magnitude of this lean towards growth, however, has shrunk as earnings have started to even out throughout the quarter on our regional views. We are also buying into developed market stocks to move closer to the benchmark. As part of our move to take risk off the table, we’re also continuing to tilt a new emerging market equity exposure to the reason that still excludes China. A major reason why we think it’s time to be patient and de risk while we wait for opportunities is that earnings are showing signs of slowing in the United States, which has been the engine of the mark performance over the last year, consensus earnings estimates, as seen in this chart, are being revised downward for both the third and the fourth quarters.
S
Speaker 1
05:25
Earnings have added more clarity to the current business atmosphere and show that the extremely robust earnings coming out of the end of 2023 and really the start of 2024 are starting to moderate. Forecasts are showing growth recovery in 2025, and we are leaving the options to bite in quarter four at the table. But a mild earnings slowdown is a current base case of what Wall street analysts are expecting. We are remaining 1% overweight equities because there’s still a lot to like in the stock market. Tech is still delivering pretty impressive numbers, more companies are starting to share the love and report of earnings per share growth, and any earnings weakness looks like it could be temporary. At the same time, we want strong earnings before we can feel confident in returns.
S
Speaker 1
06:05
We don’t want to rely on multiple expansions to carry stocks, particularly during a seasonally choppy period. There’s not enough fuel in terms of earnings surprises, estimate revisions or guidance to tell us that stocks could substantially re rate higher. We are staying relatively bullish, but dialing it back for the time being. We’re also waiting at least until the next big release of new information such as the quarter three earnings season. In addition to what we’re seeing in earnings, we’re also seeing significant fragility in market conditions. Perfect example of this would be small cap price moves in July, when we saw the Russell 2000 gain more than 11% in just one week following the June CPI report.
S
Speaker 1
06:42
But then right after promptly giving all of those gains back, plotting those returns against a basket of the most shorted stocks in the market seen in yellow, you can see that a lot of this volatility was due to a change in the perception of interest rates, rate direction and fast money. Rather than a rotation. These swings were likely a warning sign that we’ve entered a shakier market, which is much more sensitive to the perception of data. Other popular positions have similar website like the yen carry trade. The yen side 12% melt up after consistent selling off in 2024. Snaps in sentiment and big moves driven by short sellers tend to embolden the downside potential of risky assets. It is clear to us that this is a short term shift in the investing landscape.
S
Speaker 1
07:20
While election year markets are generally more volatile, investors enjoyed a relatively calm first two quarters. We expect more chop in the fourth quarter and are cutting back our risk to avoid getting trapped by abnormal market fluctuations. Taking a step back for a more macro view, the Fed is finally prompted that it will begin to cut interest rates. Just months ago, the choir of no cuts this year was gaining steam, and markets were pricing in fewer and fewer cuts for 2024. But it is no longer a question of whether the Fed cuts, but instead a question of how aggressively they plan to we say at the beginning of the year that we expected multiple rate cuts in 2024. Markets have come around to that view, and we are still anticipating several cuts by year end.
S
Speaker 1
07:57
Historically, when the Fed cuts there are two types of outcomes for stocks. The first is when there’s a recession in the next twelve months and stocks don’t do well. They still tend to have somewhat positive returns. But it’s appropriate that recessions cause underperformance. The second type is the Fed cuts, and there’s no recession that’s typically fuel for stocks over the next twelve months. Lower borrowing costs and easier monetary policy are, unsurprisingly, a boon for business. We find the second scenario to be much more descriptive of the current macro environment uptick in unemployment and the current labor softening is primarily driven by the expansion of labor supply rather than job loss. Layoffs are still at historic lows. There would need to be substantially more softening to trigger a recession. Either way, we are cautiously bullish.
S
Speaker 1
08:39
Over the next year, 80% of the last 20 Fed cutting cycles have led stocks higher. This gives us reason to hold some of our overweight exposure to stocks and wait for the right entry point for more in the event that we see firms benefiting from a higher liquidity environment. Regardless of general longer term tailwinds that the stock market may have, there is a substantial evidence that now is the right time to pause on risk and wait for market uncertainty to shake out over the next few months. Investors like calm waters and lack of surprises. What we’re showing here is average performance since 1988 for all election years, and you can see that September through November is historically the worst three month period for performance in these years.
S
Speaker 1
09:17
If you look at the chart of volatility, we also see the vixen typically spike during this time as news heats up in the weeks before election day. With the recent swings of the VIX over the summer months, we’re already starting to see investor jitters creep up. This apprehension is shared amongst businesses. A lot of decision making remains in limbo until firms can determine the best path forward. Looking at the latest ISM report, for example, we’re seeing new order intake, but a bit sluggish and suggesting those who are responsible for making expenditure decisions are in a bit of a holding pattern spending and expansion, things that will later drive the bottom line. Investor enthusiasm should weave their way back into the narrative early to mid November, on average. That’s when we’ll see risky assets start to see more appreciation.
S
Speaker 1
09:57
Given that the big unknowns are taken off the table, investors feel more comfortable assessing risk as the VIX tends to cool off in November and December. Stocks historically enjoy the period immediately following an election. In our March trade, we talked about a lot of bullish tailwinds that we saw in the market. In June. We doubled down on a lot of these convictions. So far, the conviction has paid off, as this has been a positive environment for stocks. We are taking a pause during a historically weak period with elevated risk, but we expect the markets will move on regardless of which party is in the White House. Our quantitative signals are showing us that the earnings strength that brought us a strong stock market year to date has mildly slowed down on the precipice of a bumpy period.
S
Speaker 1
10:36
We’re taking some risk off the table until things shake out in the next twelve months, we expect the market to be driven much more by economic activity and earnings power. There are factors that tend to move markets, and as we can see in this chart, politics tend to play an outsized role in the conversation, but a very minimal role in long run market returns. Regardless of Democrat or Republican, we are watching the Fed path, monitoring the labor market and awaiting earnings. As markets weather the storm. We remain cautiously bullish and are satisfied with taking some of the gains off the table. With our high conviction, allocations will wait for attractive opportunities to appear in the future. So, just to put a summary on all of this data, the first thing is we are tactically reducing equity overweight down from 4% prior to now 1%.
S
Speaker 1
11:22
As the undergrounds driving many successful year to date market themes lose momentum or lowering down the hatches with a 3% reduction to our equity overweight. A very well timed move to more nimbly navigate the choppy waters that lay ahead historically characterized the final act of an election season that we’re currently in by tempering our exposure. Now, we’re not just playing defense, but setting the stage to potentially capitalize on opportunities that frequently emerge in the wake of uncertainty. The second thing we’re doing is we’re recalibrating regional and growth value factor convictions. So our systematic analysis of earnings surprises and estimate revisions the detected cooling trends, suggesting at least some potential moderation of earnings fueled advantages that catalyze such narrow market leadership last 18 months, we still maintain a growth bias but tactically prune exposure.
S
Speaker 1
12:13

Following significant outperformance that we’ve seen and rising short term mark macro uncertainty, we also move closer to the benchmark waiting across US developed markets and emerging markets, again excluding China. Last but not least, medium term outlook remains cautiously optimistic. So despite the recalibration of our portfolio, we’re not abandoning ship by any means. Looking beyond the immediate horizon, our medium term outlook remains optimistic with a view that recession odds remain low. Accordingly, we are maintaining our preference for stocks over bonds and many of our long term favorite tilts with a reduction in magnitude. This position allows us to stay engaged with and exposed to market upside, while giving us flexibility to be opportunistic.
S
Speaker 1
12:55
So, just to put a visual behind your portfolio, this shows the risk factors on the right side where were prior quarter and now where we currently are the arrow you can also see the stock to bond overweight. Still, were very overweight prior and now we’re at 1% overweight. Also, regions you can see we’re going back to the norm from the US favorite over international and then duration, we are going back towards the belly of the curve along with credit risk and then the value versus growth. We’re very focused on growth. We still are, just not as much as were in prior quarters. Well, that wraps up our quarter three market commentary in your EWA portfolio. We encourage you to reach out if you have any questions and look forward to our next review meeting.