January 12 2024

The Next 100 Years

When you stop and think about big issues, you usually come up with ones with long-term implications: Climate, AI, geopolitics/politics disruptions to name the top ones.

However, these are unlikely to be the issues that are front of mind when you wake up in the morning. They usually range from trivial but timely – take the kids to school on time, shop for groceries, respond to urgent emails – to the less trivial but necessary – get back to my client on her question, find prospects to grow my business, educate on product innovations. This rarely leaves space for issues that are, well, existential.

Yet, your legacy as a business and human being will be determined by how well you surf existential transformations. Whether you will be considered a pioneer, or a follower will be judged in retrospect, and it doesn’t matter to be frank. The imperative is to take care of the here-and-now, while positioning yourself and your clients to be long-term beneficiaries.

The here-and-now: despite the noise, the economy is “slowingly” fine. Small Business optimism rebounded from the low in Dec23, but pretty downbeat compared to history with outlook still negative. Capex expectations improved but hiring plans moved lower.

Despite inflation cooling, it remains the single most important issue for Small Businesses, while labor quality concerns have eased a lot.

Hard to be entirely optimistic when the SBA (Small Business Administration) reports loan rates for 2024 between 11.5% and 15%. Yes, ouch.

Indeed, higher rates are still needed to contain inflation. Inflation for Dec23 came out at 3.4% year-on-year (vs 3.2% expected). CPI ex-Food & Energy at 3.9% (vs 3.8% expected). Services are still driving inflation higher, while energy prices have been contained by weak supply/demand couple.

Jobless claims released on the same day remain low at 202k (vs 210k expected), depicting a sturdy economy.

However, financial distress has meaningfully increased for credit cards and auto loans that reset much quicker than mortgages. For the latter, the pain of higher mortgage rates in the 7%+ has not been felt yet due to (1) fixing of interest rates, a key feature of US mortgages, and (2) a cooldown in buy/sell property activity and new mortgage demand.

After retreating a lot over the past month, USD yields are trading sideways, as it looks like the Fed is likely to maintain rates elevated for a little while longer, as rising credit defaults are contained for now. As a fixed income investor, extending duration looks less appealing for now, and you should pause and stick to the short-end.

On equities, my friends from JP Morgan Asset Management are firmly in the camp of doing more of the same thing in 2024. While acknowledging valuations above long-term average, they still vouch for US large caps and also position for a widening market breadth. This sounds plausible, assuming the providential “soft landing”.

The long-term: Appearing futile at first glance, the SEC approved Bitcoin ETFs this week, after protracted conversations. However, the rise of digital assets and tokenized finance carries the promise of more modularity in portfolio management. Similarly, the AI craze seems to undershoot high expectations for now, but Ai-powered applications would make data work harder for us, and make us more productive. This has this ability to make the gadgetry of wearable+iphone+laptop really save time in doing repetitive day-to-day checks. Look at Rabbit’s R1 to peep into the new realm of devices.

Everything in between: Markets ebb and flow, and ETF movements have become bellwethers. In 2023, US equity attracted ~50% of all ETF flows, against 30% for US bonds. In terms of sectors, Tech and Consumer Discretionary benefited, to the detriment of Healthcare, Energy, Staples, and Materials. A keen observer of money flows over the past 2 months, going into 2024, could observe part of a trend reversal. Markets like nature loves balance after all, and fixed income would tend to prosper disproportionately in 2024.

I’d take the opportunity to add that the realm of ETF is expanding. While it was true that ETFs were initially associated with “passive” indexed investments, they are increasingly a tool of “active” investment. First, there has been between 2x and 3x as much active ETF launches compared to passive over the last 3 years. Secondly, even passive ETFs have come to play a greater role in active portfolio management.

While this sounds like intricate semantics, just keep in mind that active thinking and portfolio management are back. A wider array of vehicles allow more flexibility in asset management, with lower fees and tax frictions for the end investors. This matters for you investor, as you want to be advised by someone who can actively incorporate these into solutions that are responsive to market changes and your circumstances.

At the end of the day, investment advice is not solely about investment, it’s a job from the ground up. Listening to and understanding our clients’ daily concerns. Providing adhoc response for the short-term, while keeping an eye on macro cycles and long-term upheavals so that their investment sustains the passage of time for the next 100 years.

Stay safe out there !

About –

360 Advisory LLC is a Boston-based RIA managing investments