Stocks rose slightly and bonds fell in a calm month in the markets. Despite the lack of information provided by prices last month, important variables remain worthy of attention. In this piece, we briefly summarize January in the market and economy, and survey the potential rewards and risks ahead.

Market

US and international stocks inched higher last month, as global stocks returned 0.59% [1]. Emerging market and global small cap stocks lagged [1], as investors slightly favored the areas that have outperformed in the past year.

Commercial real estate equity losses creeped into financial sector stocks last month. Working and shopping patterns have irrevocably changed since the onset of COVID, pressuring commercial real estate values [2]. These losses are denting the balance sheets of banks that lend in these areas, such as New York Community Bancorp, Aozora, and Deutsche Bank [3]. We expect even more commercial real estate equity declines this year, and we will be watching closely for fallout and opportunities.

Major bond indices drifted lower, with the Bloomberg US Aggregate, Bloomberg Global Aggregate Ex-U.S., and Bloomberg Municipal Bond indices losing 0.27%, 2.29%, and 0.51%, respectively [4]. We are pleased that our primary US floating rate and high-quality commercial mortgage-backed securities funds diversified client fixed income risk by gaining 0.65% and 0.92%, respectively [5].

Economy

We continue to believe a US recession is coming, based on our analysis of leading indicators and their predictive power. Moreover, the Federal Reserve is maintaining a restrictive policy, surprising the markets last month when Chairman Powell stated “it’s not likely” the benchmark rate would be reduced this March [6]. However, expansionary US fiscal policy [7] is providing a strong tailwind for the economy.

Houthi attacks on commercial shipping in the Red Sea are shifting trade routes and adding to transportation costs for a variety of goods [8]. This is unwelcome to a world battling inflation. China is particularly affected; the attacks are disturbing their trade, and the country is already enduring an historic investment and economic decline.

US Dollar – Long live the King?

The US Dollar holds an enviable position - it is viewed as the pre-eminent medium of exchange and store of value in the world [9], and a sanctuary in volatile times. Investors are attracted to the stability of the US government, and value the dollar’s access to open markets with potentially high returns. As a result, the US Dollar has performed well recently, against both developed and emerging currencies [10].

Nevertheless, it is important to prepare for this trend to reverse. The fiscal position of the US government is deteriorating rapidly, according to budget deficit and debt projections [11]. In addition, currently attractive short-term Treasury interest rates are expected to fall, as indicated by lower long-term rates [12]. We believe these factors may cause investors, on the margin, to eventually change their currency preferences. Therefore, we believe a thoughtful, long-term allocation to both international currencies and real assets (e.g., real estate, commodities) is warranted for appropriate portfolios.

Looking ahead

Opportunities and challenges lie ahead. We believe that market developments and new investment tools have allowed us to strengthen client portfolios and improve tax-efficiency. Nevertheless, many significant events are upcoming this year, and the potential fragility of important asset classes requires us to adapt and seek improvement.

Interested in discussing the markets and your portfolio? Contact us, we’re here to help.

¹ Eaton Vance: The BEAT, February 2024, slide 38, https://www.eatonvance.com/the-beat.php?DM=monthly-market-monitor

² Bloomberg: A $560 Billion Property Warning Hits Banks From NY to Tokyo, https://www.bloomberg.com/news/articles/2024-01-31/nycb-plunge-flashes-a-560-billion-real-estate-warning-for-banks

³ CNN: Banks are Being Rocked Again as Real Estate Losses Mount, https://www.cnn.com/2024/02/01/investing/bank-losses-office-real-estate/index.html

⁴ Eaton Vance: The BEAT, February 2024, slides 21, 25, https://www.eatonvance.com/the-beat.php?DM=monthly-market-monitor

⁵ Morningstar: Invesco Floating Rate ESG Y (AFRYX), +0.65%, DoubleLine Commercial Real Estate ETF (DCRE), +0.92%

⁶ Bloomberg: Federal Reserve's Powell, on ‘60 Minutes,’ Signals March Rate Cut Unlikely, https://www.bloomberg.com/news/videos/2024-02-05/powell-on-60-minutes-signals-march-rate-cut-unlikely-video

⁷ Eaton Vance: The BEAT, February 2024, slide 5, https://www.eatonvance.com/the-beat.php?DM=monthly-market-monitor

⁸ The New York Times: How Houthi Attacks Have Upended Global Shipping, https://www.nytimes.com/interactive/2024/01/20/world/middleeast/houthi-red-sea-shipping.html

⁹ Board of Governors of the Federal Reserve System: The International Role of the U.S. Dollar, Post-COVID Edition, https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-us-dollar-post-covid-edition-20230623.html

¹⁰ Eaton Vance: The BEAT, February 2024, slides 40, 41, 42, https://www.eatonvance.com/the-beat.php?DM=monthly-market-monitor

¹¹ Congressional Budget Office: The 2023 Long-Term Budget Outlook, https://www.cbo.gov/publication/59014

¹² U.S. Department of the Treasury: Daily Treasury Par Yield Curve Rates, https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202402

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not consider any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. This communication may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

Diversification does not ensure a profit or guarantee against loss.

KLR Investment Advisors LLC (“KLRIA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where KLR Investment and its representatives are properly licensed or exempt from licensure.