Economic Data Watch and Market Outlook
Equity markets rose during the week as the MSCI World jumped 2.61% while the S&P 500 advanced 2.53% with 19% of its constituents hitting a new 52 week high, the most since 2021. The optimism was related to the Fed keeping rates unchanged and indicating there may be several rate cuts in 2024. The Bloomberg Aggregate Bond Index rose 2.16%.
This past week’s increase pushed the trailing 12 month and forward P/E ratios above their 5- and 10-year averages.
November Industrial Production rose 0.2% month over month with the estimate being for 0.3%. The previous month’s number was revised downward from -0.6% to -0.9%.
Global PMI fell to 48.2 versus the November release of 49.4. Despite cost pressures, new orders were the highest since July.
In an aggressive bid to rectify its economic crisis, President Javier Milei’s government in Argentina devalued the peso by 54%, setting it at 800 pesos per dollar, and announced major spending cuts totaling 2.9% of GDP. These measures, part of a shock-therapy program, were aimed at tackling the country’s persistent fiscal deficits and received support from the International Monetary Fund (IMF). Key areas of budget reduction include subsidies, social security, and pensions, alongside plans to streamline government ministries and public works. These steps signify a significant shift in Argentina’s economic policy, focusing on stabilization and sustainable growth.
Equities
Major indices finished the week positive as the S&P 500, Nasdaq, and the Dow Jones Industrial Average all recorded seventh straight week of gains. This is the longest weekly win streak since 2017 and both the Nasdaq and the S&P 500 reached 52-week highs and the Dow to an all-time high. These gains weren’t just led by big name stocks as gains were broad based leading the S&P 500 Equal Weighted Index to outpace the S&P 500 by 1.3%. Small caps also ended the week in the green and lifted the index out of bear territory for the first time in over 20 months. Stocks saw the biggest gains during the week in the wake of the CPI report which corresponded with the FOMC rate decision. Different major indices traded mixed on Friday after New York Fed President John Williams tried to walk back the case for rate cuts in March, but equities were still able to post its best weekly percentage gain since the first week of November.
During the week the Dow Jones Industrial Average gained 2.9%, the S&P 500 gained 2.53%, and the Nasdaq gained 2.8%. Small caps outperformed large caps as the Russell 2000 rose 5.6% while the Russell 1000 rose 2.7%. From a style standpoint, growth outperformed value in small caps but large caps saw the opposite with value outperforming growth. The rally was seen across all sectors with REITs, materials, industrials, financials, and consumer discretionary leading the way. Despite the rotation out of mega cap technology stocks, the technology sector hit a new all-time high. The Philadelphia Semiconductor Index hit a new record high rising 9.1% for the week and is up 31% from its October low. Crude oil prices were boosted slightly from a lower US dollar after falling below $70 a barrel during the week.
Internationally, developed lagged emerging markets and the Euro STOXX 600 ended the week higher up 0.9% as markets appeared to expect key rate cuts in 2024. France’s CAC 40 Index gained 0.9% while Germany’s DAX and Italy’s FTSE MIB were slightly lower, and the UK’s FTSE 100 Index gained 0.3%. In Asia, Japanese equities were positive during the week as the Nikkei 225 Index gained 2.1% and the TOPIX Index rose 0.3%. Shares were given support by the US Federal Reserve’s rate decision mid-week to pivot away from monetary tightening for now and holding rates steady with projected rate cuts in 2024. Chinese equities declined as deflationary pressures weighed on the economic outlook. The Shanghai Composite fell 0.9% while the blue-chip CSI 300 Index fell 1.7%. In Hong Kong, the Hang Seng Index rose 2.8% which was positively impacted following the US Fed interest rate decision as were many other global markets.
Fixed Income
This week, Treasury yields fell across the board in response to the Federal Reserve keeping their policy rate unchanged and signaling that three rate cuts could be coming in 2024. The Federal Reserve pointed to inflation remaining elevated, and that nobody is declaring victory yet and doing so would be “premature”, but Fed officials have begun discussing rate cuts. In response, the 2-year Treasury yield fell 27 bps to 4.44%, the 10-year Treasury yield fell 32 bps to 3.91%, and the 30-year Treasury yield fell 31 bps to 4.00% and dipped below 4% for the first time since July. Meanwhile, major bond indices jumped dramatically, with the Bloomberg US Aggregate Bond Index rising 2.16%, the Bloomberg US Corporate High Yield Index climbing 1.92% and the Bloomberg US MBS Index climbing 2.08%.
US money market funds recorded $11.6B of weekly outflows, their first since the week ending October 18th through Wednesday the 13th according to the Investment Company Institute. Furthermore, government funds, which invest in Treasury Bills, repurchase agreements, and agency debt saw outflows of $11.4B, while Prime funds, which invest in riskier assets saw inflows of $1.4B. According to the Investment Company Institute, total money market assets hit a record high of $5.9T on December 6th. For the last year, money markets have been seen as a risk-free way to get an average 4.5% return, but with the hint of loosening monetary policy, investors are beginning to pull assets from money markets and place them in riskier assets.
US banks soared this week as well with the KBW Bank Index climbing 9% throughout Thursday and Friday. This jump pushed the index to its highest level since March 8th, just prior to the regional banking crisis we saw in mid-March. The index finished the week up 8.1%. The landscape for regional banks is still unclear according to Wells Fargo analyst Mike Mayo, who stated that a number of different scenarios could play out over the next 12 months.
Hedge Funds as of Thursday, December 14th
Performance was positive this week across all regions. The average global hedge fund (HF) was up 77 bps this week which puts them +1% MTD (vs. MSCI +2.6% this week and +3.2% MTD). Americas-based long/short (L/S) equity funds fared better, capturing 60% of the S&P’s upside. The average Americas-based L/S fund was up +1.5% this week and +2.4% MTD (compared to the S&P up 2.5% this week and 3.4% MTD). Towards the end of the year, the average index upside capture has been increasing for US L/S equity funds as they have been running higher net leverage since November. Looking outside of the US, the average European-based HF was up 35 bps this week which puts them in the positive MTD at +7 bps after a challenging first week. They are still lagging their benchmark with the Euro STOXX up 93 bps this week and +3.3% MTD. The average Asia-based fund was also up this week, +62 bps, which puts them at +13 bps in December. Similarly, they are only capturing a fraction of their index with the MSCI Asia +1.9% this week and +1.1% MTD.
Optimism following the FOMC meeting on Wednesday carried markets higher and in turn caused some of the more concentrated themes to perform inversely to positioning tilts. While flows were relatively quiet at the start of the week, Wednesday and Thursday posted as relatively larger days of buying in North America (NA), and globally, as HFs covered shorts in outsized amounts and trimmed longs (though added longs within index level products). Within the US L/S group, gross leverage tracked higher to 199%, gaining +7% on the week (99th% percentile of 7-day moves since 2010) despite the active de-grossing due to mark-to-market impacts. Net leverage also rose by ~5% WoW to 52%, sitting right at 12 month highs. When stripping out ETFs from NA flows, HFs actually tilted towards being net sellers of single-names led by tech, where HFs have continued to trim exposure to mega-cap TMT; the heaviest weight in the long book. Healthcare was also net sold via biotech and providers & services. There were small amounts of buying in consumer discretionary as HFs covered shorts across hotels, restaurants & leisure, specialty/broadline retail and textiles, apparel & luxury goods. Notable covering was also observed across small-cap stocks through Wednesday and Thursday, though positioning to constituents of the Russell 2000 continue to remain at lows and sit even lower despite the covering due to mark-to-market impacts. Europe posted as the second most net bought region this week via short covers across most sectors. This was led by tech, consumer discretionary, financials and healthcare. Textiles, apparel & luxury goods, tech hardware, banks and biotech were the most covered industries across all sectors. Notably, about 50% of the shorts added since the start of August across EU equities have been covered through the December 14th close. HFs were also net buyers of Japan as they similarly trimmed gross exposure from the region with a short cover skew – led by tech and consumer discretionary stocks. AxJ was the only region this week to see gross additions, as HFs were net buyers of the region via long additions in tech, financials and consumer discretionary with the buying concentrated in Taiwan and South Korea, while China was net sold via short additions.
Private Equity
Private equity firms seeking capital from limited partners may face increased competition from investment-grade and US Treasury Bonds, as rising interest rates and supply dynamics in the Treasury Bond market make them more appealing to allocators. The 10-year Treasury Note’s yield reached 4.9%, surpassing the S&P 500, which yielded 4.6%, due to a bond sell-off. The Treasury is expected to issue a high volume of long-term bonds in the next 12 to 15 months, creating an attractive investment option for allocators.
PitchBook’s Quantitative Perspectives report notes that allocators may turn to Treasury Bonds for predictable returns as commercial banks and the Federal Reserve become net sellers. While bond yields recover, private equity fund performance is declining, with one-year-horizon IRRs at 1% through Q1 2023, compared to higher IRRs on three- and five-year horizons.
The private equity industry is facing challenges, including a low exit rate for existing investments. PE exit value hit a 30-year low in Q3, and the mean holding period for PE-backed companies has increased. Lower exits result in reduced distributions, with buyout fund distributions as a percentage of starting net asset value dropping from 37% to 11% in the trailing 12 months.
According to PitchBook’s fundraising forecasting model, the lower distributions could lead to a 30% decrease in PE buyout fundraising in 2024. The combination of lower fund performance and decreased demand for commitments in private equity strategies may impact fundraising in the coming years.
Due to the holiday next weekend, Clearbrook will produce a “slimmed down version”. Happy holidays to all our readers!
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Katie Fox, Managing Director
Michael McNamara, Analyst
Sam Morris, Analyst
Josh Friedberg, Fall Associate
Data Source: Apollo, Barron’s, Bloomberg, BBC, Charles Schwab, CNBC, the Daily Shot HFR (returns have a two-day lag), Goldman Sachs, Jim Bianco Research, J.P. Morgan, Market Watch, Morningstar, Morgan Stanley. Pitchbook, Standard & Poor’s and the Wall Street Journal.