2024 Regional Summits | Capital Markets

Jeff Elvander, our Chief Investment Officer, leads a panel with PIMCO, Fidelity, and AllianceBernstein (AB) about capital markets and discusses a variety of topics such as interest rates, the Federal Reserve's actions, the ever-evolving debate between active and passive investing, and how the election can impact the market.

The Federal Reserve's policies and interest rates have traditionally had a major role in influencing market movements. Investors should be aware of these shifts since the Fed's actions have the potential to either strengthen or weaken markets. The current consensus on interest rates and how these expectations affect portfolio posture is the subject of the first question posed to the panel.

Our panelists agree that there is less expectation in the market for large rate decreases. Up to six rate cuts were discussed at first, but as time goes on, most predict between a zero and one rate cut, with another rate hike potentially in the future. This change is the result of the Fed's cautious strategy, which aims to strike a balance between high inflation and an active labor market. Interest rates have a direct effect on the current value of future cash flows in the equities markets. Lower valuations are usually associated with higher rates unless growth of earnings can keep up with the rate hikes. Despite rising interest rates, the market is now projecting earnings to increase by 10–11% in 2024 and 13–14% in 2025, this maintains a positive view of equities.

For fixed incomes, the issue is relatively simple. The creation of income and ensuring a capital return at maturity are the main objectives of fixed income. If there are no significant defaults, investors can now obtain favorable dividends. In an inflationary environment, the typical 60/40 portfolio—60% equities and 40% fixed income—has faced difficulties because of the favorable correlation between stocks and bonds. Our panelists contend that this tactic is still relevant today, it could need to be improved using different alpha sources that have less correlation with the conventional elements. Although it's not the most likely scenario, another rate increase is a possibility. If we look at examples from the 1960s and 1970s, we can see that premature rate reduction has historically led to inflationary pressures reappearing, which has forced the Fed to boost rates again. Inflationary pressures may reappear as some areas of the economy start to improve, which would result in another rate hike.

One of the key topics within the financial industry is still the argument between active and passive investing. Although passive investing is a simple and inexpensive option, active investment can yield substantial returns, particularly in specific asset classes. Rich, from PIMCO, believes that because active bond managers are skilled at navigating the nuances of the bond market, they routinely beat their passive counterparts. Based on the US Aggregate Index's of more than 13,000 bonds, passive methods are unable to take advantage of inefficiencies that active managers can; active management offers benefits, even in the stock market. Greg, from AB, notes that opportunities for active managers to produce alpha are prevalent in inefficient markets, like small caps and international equities. Significant assets are getting transferred from passive to active mandates by institutional investors as they increasingly see the benefits of active management in large-cap stocks. Anu from Fidelity promotes a balanced strategy that combines active and passive tactics. While active management can add value by potentially producing alpha, passive investments offer a strong base. This core-satellite approach allows investors to benefit from the stability of passive investments while pursuing higher returns through active strategies.

Investors regularly dispute the possible effects of presidential election years on the market. However, the panelists stressed that election results have little long-term impact on market performance. Regardless of the political party in power, historical data consistently indicates annualized returns, indicating that other factors such as business earnings and Federal Reserve policies are more important in determining market movements. On top of that, a split government is often preferred by the market since it fosters stability and lessens the possibility of unfavorable policy changes. The introduction of a new Core Plus Bond CIT by Fidelity and the continuous discussion surrounding growth vs value investing highlight how crucial it is to diversify investment portfolios and adjust to changing market conditions.

Investors are advised to concentrate on disciplined, long-term strategy rather than responding to transient political events in order to manage the uncertainty of an election year. Investors should position themselves for long-term success in the dynamic capital markets environment by keeping a diverse and well-balanced portfolio and remaining aware of market developments. The panelists' insights on capital markets highlight how crucial it is to comprehend market dynamics and how the Fed influences these shifts. Making well-informed decisions is essential, whether navigating the complex relationship between interest rates and market positioning or weighing the pros and cons of active vs passive investing. Investors can successfully navigate the complexity of today's markets and set themselves up for future success by utilizing the experience of seasoned managers and continuing to adopt a flexible approach.

Tune into the full video for a more in-depth view into the world of capital markets and gain industry expert insights into their views on the Federal Reserve's actions, the implications of interest rate changes, active vs passive investing, and how the election can impact the market.

________________________________________