Welcome everybody. Excited to provide a quarter two of 2024 look back and also, you know, thoughts on quarter three looking moving forward for the rest of the year. Just as a reminder, your quarterly performance report will be in your emoney vault that you can access. Please email if you have any questions. This will give you a detailed overview of your current breakdown of asset allocation, some of the moves we made this quarter, which we’ll describe in this video, and then also diversification. This also provides a performance report of what’s happened since inception when you join the firm, and then also key data as of last quarter and year to date. So again, please reach out if you have any questions. That report will not only show returns, but will show asset allocation and every holding that you hold as well.
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But just to summarize, so as we enter summer months, you know, our bullish thesis really remains intact. So the most part, the facts haven’t changed since some of the trades we made in this past quarter. So neither of our minds or forecast, we’re keeping our foot on the gas. We have leaned into earnings strengths and fading out that no cut narrative. We continue to prefer stocks over bonds, us over international, and mega cap over small cap, and growth over value. So one of the main things you’re going to see in your portfolio is instead of just investing in the s and P 500 index, we had this broken out between a growth s and p growth and s and p value. So we’re able to tilt favorably into one or the other.
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And right now we’re obviously tilted into growth, which has panned out very well. So the specifics of the rebounds that you saw in the past quarter with our broad asset allocation view, we moved now 4% overweight to stocks. Stocks have rallied tremendously since this trade, and while bonds have generally sold off slightly, this 4% overweight is fairly in line with where drifted portfolios sit. Today, we’re increasing our tilt into growth companies, as I just described, seeking to amplify exposure to earnings.
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Meters across both the US and developed non us markets have continued to blossom in the face of adversity, interest rate volatility, the Fed talk election uncertainty, and there’s a lot of escalating conflict in the Middle east, which had been no match for the earnings prowess of the mega cap tech and growth juggernauts who continue to defy even the most elevated analysts expectations. We expect the impact of the AI on spending and economic productivity to be a long term structural tailwind for the economy and the US overall, and this furthering the position as the economic growth engine of the world at whole. We are also closing our underweight to emerging market equities and shifting to be more selective in credit with spreads at ultra tight levels that make sense to position for potentially shifting wins in central bank policy.
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As inflation pressures cool, we expect these sticky inflation prints from the spring to weaken and perhaps even surprise the downside sometime late summer, early fall, providing the Fed with a requisite dove bait to follow through on the projected rate cuts before year end out of favor. Trades like duration, emerging market stocks and short dollar, among others, could benefit in this scenario. So we’re starting to adjust accordingly. So as we look further in the data, two things you’re going to notice in the portfolio, the strong tilt towards the s and P growth in the large cap, and also some specific exposure to the semiconductor ETF, Nvidia obviously being the number one holding in that, and then also the large cap tech holding that we have. This has all panned out extremely well.
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You see a lot of commentary out there that small cap stocks are undervalued or let’s go after value stocks right now. Well, this is really if people made bets in those fashion, it really hurt them. So if you just look at the data here, Tesla up until the last month had dropped significantly this year and even Apple has lagged significantly. But if you just look at the mag seven stocks overall, they have outperformed the equal weighted s and P 500 by over 20% on the year. So obviously Nvidia being a huge part of this. But in the three days following Nvidia’s 522 so May 22 earnings release where it announced earnings per share, revenue and sales results, they all topped the sky high analyst expectations and Nvidia rallied 20% with the broader S and P 500 index fell by 1%.
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So revenue from Nvidia’s data center category, responsible for producing the crucial GPU’s powering all AI applications. Not all AI, but a lot of AI applications, they rose by 427% from the year ago last quarter, valued at 22.6 billion. So growth stocks are beating their value counterparts by over 9% on the year. Large caps are beating small caps by 12%. And since we made this trade in March, both portfolio overweights have only extended their leads, as we speculated would be the case in our March trade commentary. Top callers, value hunters small cap that buyers have paid the price, positioning for a broadening trade that has yet to materialize. So in March, our investment signals suggested the gap between leaders and laggards would only widen and it did so today. Our signals are telling us that we should expect more of the same.
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And as we’ve been saying since we started this year, this is an earnings story that will continue on. So if we look at this next graph, this really depicts the story just described. So earnings in the US continue to center around large cap growth and more specifically tech as the only part of the broad market showing sequential earning growth with any kind of consistency. So the chart on the left plainly illustrates this dynamic, robust and accelerating earning per share growth for the tech sector over the past three quarters with S and P 500 without tech has delivered consistently negative earning per share growth quarter over quarter. The chart on the right shows the same reality for broader S and P 500, just simple growth basket versus value counterpart.
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And obviously all the majority of tech companies are part of that growth basket with five of the seven, the Mag seven, leading the way. So strong earnings justify strong performance, as we highlighted with our March trade, that the Mag seven is just the cream of the crop, where we see higher stock prices outpaced by even higher earning per share prints. So these companies have incredible business models with pristine balance sheets, as we do believe markets will show discipline with respect to valuation on these companies. This tells us that truly this is an earnings story and not just a bubble mindset. We do think a broadening may be percolating somewhere behind the rise and perhaps once we start to see the Fed shifting policies as high rates have disproportionately hurt smaller debt burden companies.
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Again, going back to the quality holding that we have in both the large us sector, these companies have focused on high cash on their balance sheet, high profits on their balance sheet, which they can really be nimble when the feds have increased rates and not starting to cut like we’ve seen in 2024. So remember, many large mega cap companies were able to refinance their debt as favorable rates during back in Covid and at a unique feature underpinning our strategic love for the tech sector is its squeaky clean balance sheet, low to no debt and robust free cash flows. Our indicators continue to support the cohort of the market, and the earnings momentum you see here is exactly why.
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All right, now shifting to a more forward looking macro picture, the question for economists and portfolio managers is when, by how much, or even if the Fed will cut interest rates in 2024. It wasn’t that long ago at the start of the year when the market was pricing an expectation for as many as six to seven rate cuts in 2024. And boy were most forecasters wrong recall in January trades, we suggested that the Fed we felt overly aggressive at the same time expecting more reasonable base case in line with the Fed’s own projections of two to three cuts.
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Instead, fast forward today and consensus has changed quite a bit, with market expectations gauged by futures market implied probabilities as of June 3, now suggesting only 11% probability of three rate cuts and a whopping 40% probability of just one cut, even a 16% probability that the Fed pushes any cuts out past the end of the year. So why the dramatic shift in expectations? Well, it has become obvious to us that inflation has risen back to prominence at the top data release, engaging potential Fed policy actions. It’ll be fair to say inflation has showed signs of stubbornness to start the year. This stubbornness has led to more hawkish Fed talk than previously anticipated, which in turn has driven what we believe may be an overreaction with respect to rate cut expectations.
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In fact, genuinely believe many market followers may just be playing board with the inflation story and may have given up any hope of improvement right as it may have begun to resume its downward trend. All this to say link dynamic between market expectations for inflation potential Fed policy response has experienced quite a bit of volatility over the first five months of 2024, and just like the markets were overly aggressive with their projections at the start of the year, we do think that this perhaps swung too far in the other direction. Today we find it very useful to pull back a bit and look at the overall trend. So here on this page we show readings from the past five years analyzing a hocdove sentiment score of the Fed speak using Bloomberg’s Fed sediment index.
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So this index measures the degree to which Fed speeches, interviews, meeting minutes lean more hawkish over dovish over time. This is generated using a machine learning model fine tuned to 6200 unique speaking engagements and statements made by the Fed members since 2009. So while we have observed a recent spike in hawkish tone, perhaps a rational reaction to stubbornness in the inflation prints over the first few months of the year, volatility in Fed speak is quite normal, and the multi year trend we observe is one that is clearly more dovish as investors anticipate future trends. It’s tricky yet critical component of well structured investment process. This is of course true for asset prices and market returns, but applies just to the same to macroeconomic insights such as future Fed policy direction.
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To us, medium long term dovish trend is undeniable and set to continue given our expectations for further softening inflation data as we approach the second half of the year. In short, don’t fight the Fed has become a common mantra for many investors, and in this particular instance, we believe investors should not fight the Fed’s dovish trend. As we look out further into the rest of 2024, what could cause the dovish trend from the previous slide to continue? That requires a slightly deeper look at what we believe is going on under the hood with respect to inflation data. So, as we have outlined in the market and trade commentaries of the previous quarter, focusing solely on headline inflation prints can be problematic.
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So we’ve witnessed the amount of noise and complex corpus of data that drives calculation of inflation itself, base effects, seasonality disruption from the course of the pandemic, lag effects, among others. So, Blinken, you’ll miss that for the 16th time in the last 18 months that the latest core CPI monthly increase was below the level twelve months prior, using data from Bloomberg for all of the following CPI data as of March 15, 2024. More importantly, we think there’s a reasonably high probability that we should expect inflation data to surprise to the downside somewhat late summer early fall. To explain the line of thinking, we think it’s important to acknowledge the primary culprits of the stubborn inflation up to this point, primarily rents. Travel insurance, which includes vehicle insurance. Rents and car insurance account for nearly all of the excess core inflation since the pandemic.
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In fact, owner’s equivalent rent measure alone is currently contributing about one and a half percent of the 2.9% year over year increase in core consumer price indexes, with car insurance costs contributing another 0.6%. Using again data from the Bloomberg as of March of 2024. Why is this important? Well, we believe that the present day real time measures of rents or car and car part prices don’t line up with the CPI data, and they converge in the coming months. We show here what we believe to be a more accurate measure of actual rent prices in the chart on the left. Using a blend of zillow and BLS Cleveland Fed rent indexes, this data suggests year over year rent inflation is closer to 2% and actually below pre pandemic levels.
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If you then adjust Fed’s preferred measure of inflation, core PCE, using the real time data, as we do in the chart on the right, you see, inflation actually may already be at or near the Fed’s target, providing a backdrop for the Fed that is quite different than what headlines actually suggest. Moving to positioning outside of our well discussed long duration tech growth allocations, which will clearly do well in a cutting cycle we also want to call attention to emerging markets. Emerging market equities are an asset class that we have been underweight dating back to July of last year. And if you remember, our current emerging markets exclude China. Historically, with high us rates, you tend to see performance in these smaller emerging market countries suffer. That has certainly been the case recently.
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However, when us rates come down, you can see a powerful use upswing in these markets and risk appetite improves. In fact, we’ve seen emerging markets deliver strong positive performance during four of the last five rate cutting cycles, which average returns in excess of developed markets counterparts in the two years that follow cutting cycles. Beyond the possibility for the Fed policy to provide upside, here we see three catalysts that support a shift in the positioning. First, looking at earnings in the chart on the left, we have seen quite an uptick here in 2024 where growth expectations represented by twelve month forward earning per share have moved much higher over the prior few months and are well above 2023 levels. Secondly, improving global growth and dovish central bank globally creates an environment that supports growth.
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Emerging market central banks are already cutting rates and when we start to see inflation in the US cooperate with the Fed policy, easing this can unleash a wave of optimism and loosening financial conditions that may fuel emerging market stocks. And last but not least third will not highlight it on the page. Emerging market stocks are trading today at very attractive valuation and deep discount relative to their own average. So we are adding to emerging markets and choosing to close our underweight position extremely conscious still that these factors create a potential recipe for a snapback and some global broadening.
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Switching to fixed income side of the models, we are making small adjustments to align more closely with how we want the portfolio to be positioned in the strong macro environments, with high starting yields, low defaults and interest coverage coming down, there remains some attractive carry with credit. However, tight spreads means less compensation for taking on the risk and therefore we see selectivity as being key and wanting to move more towards quality within the credit exposure. And as you can see in the chart on the left, spreads are as tight as they’ve been in some time and at the start of June, IG spreads are currently sitting at 86 basis points and high yield spreads are just over 3%, both hovering near tights for the cycles IG meaning investment grade and obviously high yield being the comparison.
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We therefore express strong continued preference for active managers, both in plus sectors as well with investment grade. So while many companies have successfully mitigated the impact of higher trades, strategies that can effectively screen for higher quality and avoid the riskiest borrowers still make a lot of sense while rates remain in restrictive territory. In quarter one of 2024, we spoke about the volatility and challenges to market returns that can persist in the first half of an election year. Looking at the seasonal return averages going back to 1928 for presidential election years, the old adage of sell in May and go away may have investors miss out on what we observe to be a very strong period of summer performance historically.
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In this chart we show the rolling three month average return by starting period and you can see that the three month period starting in June stocks average 7.3% during election years, the highest for the year before the real election jettison settle in, so the election years always present significant uncertainty for investors. We do observe stronger performance in the second half of the year and in fact we tend to get relative outperformance in quarter three and quarter four relative to non election years. We would highlight the economic and inflation trends have a far greater impact on returns. But observing seasonal trends considering reviews that the direction of travel for the Fed is that towards easing all just help support the stance that continue to risk appetite will be rewarded throughout the year to bring it all together.
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Number one, 4% overweight in stocks and secondly, we’re leaning into growth which have been earning beaters across not only the US but developed markets as well. And then we are focused on preparing for Fed policy in 2024 and looking for in 2025. That wraps up our quarter two look back and quarter three looking forward video. We welcome any questions you have. Please reach out and look forward to our next financial planning review. To make sure your financial plan is calibrated and supporting your life by design.
