At a Glance

Macro Indicators: Headline and core PCE inflation rose by 2.3% and 2.6%, respectively, in March, signaling a continued albeit slow downtrend in inflation, but this reading was overshadowed by the advance estimate of 1Q 2025 GDP, which came in at -0.3% as imports surged ahead of tariff implementation. This is the first negative quarterly GDP reading since Q1 2022 and has amplified concerns of continued economic weakness due to tariffs. All eyes are on the labor market for signs of weakening, perhaps the most important macro indicator to watch right now.

Trump 2.0: The announcement of “Liberation Day” tariffs wreaked havoc on markets in April, and with a majority of the reciprocal tariffs paused until July 8, markets are waiting with bated breath for news of trade deals to potentially lessen the economic impacts of tariffs.

Fed & Monetary Policy: Fed Chairman Powell endured criticism from President Trump over the month but held firm on his apolitical views. Markets are pricing in four rate cuts this year with the Fed currently projecting only two rate cuts. Once again, the Fed is remaining data dependent when it comes to making monetary policy decisions. The market expects the next interest rate cut at the June FOMC meeting.

Equity Markets: Equity markets witnessed the worst 100 days of a presidency since Nixon in 1974, down over 7% since Trump’s second inauguration and experienced great volatility intra-month. Fixed income markets saw curves steepen and yields rise over the month, particularly in the municipal market, with investment grade tax equivalent yields north of 6% as of month-end. 1Q 2025 earnings season is underway, with relatively positive results thus far, but some companies are pulling forward guidance due to tariff uncertainty.

Asset Class Performance

International assets, encompassing equities and fixed income, continue to perform well on both a year-to-date (YTD) basis and over the past month. After an extremely volatile month, U.S. large cap equities ended relatively flat, with small cap equities posting more modestly negative performance as companies continue to struggle to price in the potential effects of tariffs.

Source: YCharts. Asset class performance is presented using total returns for an index proxy that best represents the respective broad asset class. U.S. Bonds (Bloomberg U.S. Aggregate Bond TR), U.S. High Yield (Bloomberg U.S. Corporate High Yield TR), International Bonds (Bloomberg Global Aggregate ex-USD TR), U.S. Large Cap (S&P 500 TR), U.S. Small Cap (Russell 2000 TR), Developed International (MSCI ACWI ex US TR), Emerging Markets (MSCI EM TR), and Real Estate (Dow Jones U.S. Real Estate TR)

Markets & Macroeconomics

Trump Tariff Turmoil

President Trump has been publicly vocal about tariffs and unfair trading practices since the 1980s, so it should have come as no surprise to markets that he would pursue tariffs as part of his policy agenda. But it wasn’t Trump’s implementation of tariffs on April 2’s “Liberation Day” that surprised markets, it was the severity and magnitude of those tariffs, which were doled out globally and targeted countries with disproportionate trade surpluses, revealed by an esoteric tariff rate calculation. Without getting into the details, countries like Cambodia and Vietnam were given a “reciprocal” tariff of 49% and 46%, respectively, two of the higher rates as a result of their large trade surpluses with the U.S. On the other hand, China received a tariff of 145%, which was driven up from the original rate after a day or so of retaliation, and all imports into the U.S. received a base tariff of 10%. The majority of these tariffs (except for China and the 10% base tariffs) were paused on April 9 for 90-days to allow trade negotiations to take place. These announcements over the course of a few days translated into some substantial market swings that were ultimately being driven by concerns over how tariffs will impact economies, particularly the American economy. Most people understand the broad intent of tariffs: to strengthen U.S. manufacturing capabilities, promote domestic job growth, and, importantly, reduce the U.S. trade deficit. What is more difficult to stomach are the potential costs incurred by Trump’s tariffs, which many believe will ultimately be borne by the U.S. consumer and producer in the form of higher prices, particularly if negotiations fall through and tariffs remain in place.

Exhibit 1: U.S. Capital Market Reaction to Tariffs

Source: YCharts

These potential costs are why “Liberation Day” induced the largest 2-day sell-off in history, which saw U.S. equity markets lose more than $6 trillion in value between April 3–4 and the S&P 500 hit a drawdown of over 18% from its year-to-date high (February 18). While the equity market reaction garnered most of the attention, we also witnessed a sell-off in U.S. Treasuries, which pushed the 10-Year yield to a high of nearly 4.5%, as well as in the U.S. Dollar, illustrating another consequence of Trump’s tariffs: a global diversification effort away from U.S. assets. This consequence fueled investor fears of massive selling of U.S. assets, particularly Treasuries, but, as usual, the reality is more nuanced. The U.S. remains a powerhouse and the home of the global reserve currency, and this position does not change overnight. What is likelier the case is that foreign countries are realizing they need to diversify outside of the U.S.

In months like what we just experienced, it is important to remember where we started. After witnessing strength for years, ushering in an age of “exceptionalism,” U.S. assets became rich both because of the advantageous investment environment and the large amounts of foreign capital that this environment attracted. Contrary to some current beliefs, today’s tariff turmoil is not proof that this “U.S. exceptionalism” is over, but it is likely an indication that U.S. assets are repricing to a more “normal” level. Just like individual investors, it is important for global countries to be diversified, particularly when uncertainty is present.

After Trump announced the 90-day pause on most tariffs, markets reversed course and soared to end the month relatively flat, illustrating how the worst days in the market are often followed by the best days, emphasizing the importance of staying invested. Trump’s (second) first 100 days were volatile thanks to tariffs, and this trend is expected to continue as trade negotiations play out in the short-term and potentially conflict with other parts of his administration’s agenda and, importantly, monetary policy decisions from the Federal Reserve.

The Bottom Line: The “Liberation Day” tariffs announced on April 2 drove a major market sell-off and heightened concerns about future U.S. economic growth. Negotiations will continue to play out meaning volatility is likely here to stay in the short-term, further emphasizing the need for diversification across asset classes.

Looking Ahead

Investing Amid Uncertainty

Thus far, the word best describing 2025 has been uncertainty: uncertainty related to what impact tariffs will have, what the Fed will do with interest rates and monetary policy, and which companies will win the “AI arms race.” Uncertainties will likely be prevalent in every investment environment, meaning the all-important question is not “will there be uncertainty?” but “how should I invest amid the uncertainty?” As the U.S. economy grapples with the highest tariff rates seen in decades, slowing growth, inflation above the Fed’s target, and an unruly (and unpredictable) government, investment decisions for long-term growth are more important than ever.

Following the intra-day and daily moves of markets can be exhausting and potentially even counterproductive for long-term investors. In these types of scenarios, focusing instead on age-old investment principles like diversification and paying the right price for the value of an asset can help create clarity and a greater sense of control around potential investment outcomes. Making investment decisions that are rational and rooted in valuations and quality also helps remove the emotional decision-making that can occur during volatile times like what we are witnessing today.

Valuations matter and heavy concentrations in portfolios and indices can enhance volatility. Even with the recent repricing, U.S. equity markets remain concentrated and over-valued: the Magnificent 7 stocks still represent 30% of the S&P 500 as of month-end and are driving 85% of the overall index’s share of returns on a year-to-date basis. Exhibit 2 illustrates common valuation metrics across various asset classes, demonstrating how U.S. equities are more over-valued than asset classes like international equities and fixed income. For instance, municipal securities look extremely cheap relative to historical averages, indicating a potentially attractive entry-point into the asset class, which is still boasting a substantial tax equivalent yield advantage over corporate fixed income. For context, 10-year AAA corporate yields are 4.8% versus over 7% on a tax equivalent basis in the municipal market for the highest federal tax bracket.

Exhibit 2: Current Valuations Across Asset Classes

Source: J.P. Morgan Guide to the Markets

It is this type of rational approach to investing that is warranted in the current environment where uncertainty is rampant. Perhaps more than ever, markets are being driven by emotions, which is being further amplified by the persistent, large concentrations and high valuations in certain asset classes, like U.S. large cap equities. Focusing too much on short-term market movements and trying to perfectly time the market is an unsustainable (and impossible) strategy for building long-term wealth. Rather, investors should instead be focused on areas of the market that are undervalued and attractive fundamentally and potentially rebalance away from those parts of the market that have become too rich. The current investment environment is creating unique challenges for investors but that doesn’t mean opportunities aren’t present. When all else fails, focus on valuations and quality to provide greater clarity and direction amid the uncertainty.

The Bottom Line: Amid uncertainty, go back to basics. Time-honored investment principles like diversification and valuation-driven decision-making can help maintain discipline and logic even when volatility and uncertainty rear their ugly heads.

Capital Markets Themes

What Worked, What Didn’t

•International Reigns Supreme: International equity outpaced U.S. equities in April as concerns over economic growth paralyzed U.S. equity markets, finally providing some justification for why having international exposure in one’s portfolio is important.

•Look Under the Hood on Munis: While municipal bonds underperformed taxable counterparts over the month, the market witnessed a steepening in its yield curve which caused longer end yields to rise, reinforcing that while bonds aren’t the best candidate for total returns in the current environment, they are a great source of income, particularly as it relates to municipal bonds.

Source: YCharts. Data call-out figures represent total monthly returns

On Alternatives

Spotlight on Triple Net Lease Real Estate

Real estate can be an important portfolio diversifier and a predictable source of income, particularly during times of uncertainty. A net lease is a type of commercial lease agreement in which the tenant is not just responsible for paying the rent, but other costs as well. A triple net lease agreement means the tenant pays the rent, as well as the property taxes, insurance costs, and maintenance costs – three additional costs and hence the name triple. Triple net leases provide unique advantages to investors versus other types of real estate, making them a potentially attractive and diversified opportunity amid today’s macroeconomic uncertainty.

By nature, triple net leases are longer term, typically greater than 10 years, which provides stability for tenants, landlords, and investors alike. Tenants in this type of real estate are usually corporations or businesses, which means they usually prefer a longer-term lease to secure their location. This benefits both the investor and landlord as credit risk is relatively low with this type of high quality, stable tenant. Additionally, due to their longer-term nature, triple net leases typically have rent escalators built into the lease agreement that generally grow with inflation. While this feature does not eliminate inflation risk, it does mitigate the loss of purchasing power and supports cash flow stability even in periods with rising or high inflation. These escalators, in addition to the long-term nature of the leases, translate into less tenant rollover, lower vacancy risk, and greater predictability in income versus other shorter-term or non-escalating leases. Exhibit 4 outlines some key characteristics of triple net lease real estate versus multifamily real estate.

Exhibit 3: Real Estate Sector Comparison

Importantly, triple net lease real estate is often found in real estate investment trust (REIT) structures, which provide important tax benefits to investors, like favorable corporate tax treatment. In addition, landlords and investors can utilize depreciation shields on the property to reduce their taxable income, ultimately increasing the ability for income production. These tax implications for triple net lease real estate make it a compelling and diversified alternative to other income-producing asset classes. As with any type of investment, it is important to know what you own, and certain sectors of an asset class are more attractive or carry more risk than others.

For instance, focusing on triple net leases that are critical to a specific tenant’s operations enhances the stability and long-term occupancy of the property, which ultimately benefits investors. Investing in uncertain times can be difficult, but considering asset classes like triple net lease real estate may mitigate some of the consequences of uncertainty and ultimately provide some of the stability that investors are likely looking for. Exhibit 5 shows that during the 2008 housing crisis, net lease investments held up extremely well compared to other sectors of real estate.

Exhibit 4: Case Study in Net Lease Resilience

Source: Blue Owl Capital

The Bottom Line: Real estate can provide important benefits during periods of volatility, and triple net lease real estate can provide greater predictability through its stable income streams, strong tenant creditworthiness, and tax efficiency, all of which promote its resilient and inflation-resistant nature.

Asset Class Performance Quilt

Markets are ever-changing, making diversification across asset classes and sectors a critical component to portfolio construction. As illustrated below, a Balanced 60/40 portfolio provides greater consistency of returns and less volatility over time.

Source: YCharts. Asset class performance is presented using market returns from an exchange-traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by Centura Wealth Advisory. The performance of those funds may be substantially different than the performance of broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High Yield Bonds (iShares iBoxx $ High Yield Corp Bond ETF); Intl Bonds (Invesco International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI ACWI ex US ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 40% U.S. Bonds, 12% International Stock, and 48% Large Blend.

At a Glance

Macro Indicators: Headline and core PCE inflation rose by 2.5% and 2.6%, respectively, in January. These increases matched expectations but, combined with higher CPI data, grew consumer worries that inflation may remain elevated. The January jobs report gave mixed signals, with only 143,000 jobs added in the labor market (vs. a 169,000 forecast), but another drop in the unemployment rate to 4.0%. Atlanta Fed GDPNow estimates for Q1 2025 GDP surprisingly turned sharply negative as of month-end.

Trump 2.0: Tariffs dominated headlines over the month, with a 10% tariff on China currently in place and possibly more tariffs coming on countries like Mexico, Canada, and the EU, in addition to reciprocal tariffs.

Fed & Monetary Policy: The Fed continues to reiterate its patient approach to interest rate cuts. The minutes from the January FOMC meeting revealed that tariffs are troubling the Fed, which could potentially result in fewer interest rate cuts than initially projected this year. As of the December “Dot Plot,” Fed officials have projected two 25-bps cuts in 2025.

Equity Markets: Major U.S. indices finished February in the red after a volatile month. The Q4 2024 earnings season is nearly wrapped up, with 97% of companies in the S&P 500 having already reported. The current quarterly earnings growth rate on a year-over-year basis is 18.2%, well above initial expectations.

Asset Class Performance

Somewhat surprisingly, Trump’s tariff announcements over the month hit U.S. equity markets hardest, whereas international equity markets posted modest growth. Real estate was the best performer over the month, a likely result of heightened inflation expectations, and bond markets saw positive growth, with investment grade outperforming high yield.

Source: YCharts. Asset class performance is presented using total returns for an index proxy that best represents the respective broad asset class. U.S. Bonds (Bloomberg U.S. Aggregate Bond TR), U.S. High Yield (Bloomberg U.S. Corporate High Yield TR), International Bonds (Bloomberg Global Aggregate ex-USD TR), U.S. Large Cap (S&P 500 TR), U.S. Small Cap (Russell 2000 TR), Developed International (MSCI ACWI ex US TR), Emerging Markets (MSCI EM TR), and Real Estate (Dow Jones U.S. Real Estate TR).

Markets & Macroeconomics

Trump’s Approach to Tariffs

February brought lots of action on the tariff front. President Trump applied tariffs on China (with possibly more to come) and threatened tariffs on neighboring countries Canada and Mexico, as well as commodities, like aluminum and steel. The administration also launched an investigation into the trading practices of copper, and in retaliation from impacted countries, Trump announced potential “reciprocal” tariffs, which could affect U.S. goods like electronics, motor vehicles, and pharmaceuticals. While most of these policies have not been implemented, taken in total, they could push tariff rates to their highest level since the 1930s, begging the questions: why higher tariffs now and should markets be concerned?

In answering the first question, it is important to remember that a tariff is a tax on imports, which typically raises prices for domestic consumers, but, theoretically, allows domestic producers to better compete globally – a stance that supports Trump’s “Make America Great Again” mantra. Higher tariffs should support domestic production of goods, making the U.S. less reliant on imports, hopefully to the dual benefit of promoting U.S. manufacturing and reducing the country’s trade deficit, which has been in deficit since the 1970s, illustrated in Exhibit 1. Trump’s tariffs are also meant to curb “national security” threats, including illegal immigration and drug trafficking, from places like China, Canada, and Mexico. When Trump focuses on “national security” measures, he is using tariffs as more of a negotiating tactic to end unfair trade practices and impose stricter border controls, all while producing government revenue to offset spending in other areas of his fiscal policy agenda. Whether or not all of Trump’s proposed tariffs will be implemented, there is no doubt that higher tariffs represent a departure from the low tariff environment that characterized much of the American 20th century, illustrated in Exhibit 2.

Exhibit 1: U.S. Goods Trade Balance to GDP

Source: Federal Reserve Bank of St. Louis

Tariffs in the context of 2025, however, have introduced concerns on their impact to inflation and economic expansion. So, should markets be concerned? The answer boils down to maybe. Tariffs can increase prices for the domestic consumer, and while this doesn’t always have a broader inflationary impact, they could threaten the progress the U.S. has made on inflation in the past two years, which investors worry could result in a potential slowdown in growth. If tariffs are indeed being used as a negotiating tactic, it could also spark trade wars with key trading partners (think China), which could have more lasting economic impacts. As with anything related to politics, uncertainty is perhaps the only thing that is certain, and investors should continue to focus on the potential economic impacts of tariffs while filtering through the political noise as best as possible. Tariffs are not the end of the world, but American consumers may feel some pain if (and when) implemented.

Exhibit 2: U.S. Average Effective Tariff Rate

Source: The Budget Lab

The Bottom Line: Tariffs are being used by the Trump Administration as a negotiating tactic to promote his “Make America Great Again” agenda and generate additional revenue for the government, prompting concerns from investors on the economic impacts to inflation and growth. The actual impact of tariffs remains uncertain, particularly as Trump continues to add to the tariff pile, potentially sparking trade wars with unknown timing and outcomes.

Looking Ahead

The Consumer Turns Gloomy

The American consumer has endured a great deal over the past few years: higher interest rates, which have raised financing costs (including the cost of owning a home), as well as inflation, which has resulted in higher prices in almost every pocket of the economy. Despite these trends, the consumer has remained steadfast in their spending and stayed relatively positive about the state of the U.S. economy, but uncertainty related to both fiscal and monetary policy in 2025 is causing the consumer to re-evaluate everything. There are multiple surveys and indicators that measure consumer confidence and expectations, which can provide important insight into what consumers are thinking, which is ultimately what drives consumer behavior and subsequently market performance and economic growth

Exhibit 3: Consumer Inflation Expectations

Source: The University of Michigan

The latest Consumer Confidence Index reading came in below forecasts, registering the largest decline since 2021. Similarly, the University of Michigan’s survey of consumer inflation expectations signified heightened uncertainty surrounding future inflation, illustrated in Exhibit 3. The results of these two surveys indicate that consumers have become more pessimistic about the future economy, and this is likely driven by multiple factors, including stubborn inflation that is causing the Fed to keep interest rates at current levels, in addition to a high degree of uncertainty coming from the White House, with policies that could negatively impact both inflation and growth.

Additionally, the yield curve, which normalized in August 2024 after being inverted for over 2 years, re-inverted in the 10-year to 3-month portion of the curve on February 26. Yield curve inversions are a well-known recession indicator, and the latest inversion added fuel to the consumer-gloom-fire. While the latest consumer data is concerning, the danger with measuring expectations is that they can sometimes become a self-fulfilling prophecy. Today, history can provide an important lesson and perhaps a potential opportunity: when consumer confidence bottoms, positive equity market returns have typically followed, illustrated in Exhibit 4.

Exhibit 4: Consumer Confidence vs. S&P 500

Source: J.P. Morgan Guide to the Markets

Even when consumer sentiment is negative, it remains critical to stay invested in markets because exiting the market could mean missing out on potential strong equity returns, like what was witnessed after the 2022 equity market bottom. Whether the U.S. is headed for a recession will depend on macroeconomic variables like inflation, the labor market, and GDP growth, not the results of consumer surveys, even though they can provide insights. Despite what consumers may believe, the U.S. economy is still faring relatively well, and while that doesn’t mean there aren’t risks, monitoring the incoming data and staying diversified will remain critical in both the current and future environments.

The Bottom Line: The most recent readings of consumer surveys indicate growing pessimism about the future state of the U.S. economy, but investors should remember that markets are subject to extremes, and it is better to stay prudently invested during these times of uncertainty to avoid missing out on the positive equity returns that can follow.

Capital Markets Themes

What Worked, What Didn’t

•Values Bests Growth (Again): Growth stocks continue to struggle in 2025, as AI and Mag 7 darlings couldn’t keep pace with high market expectations, continuing to support the story of equity market breadth, or broader participation.

•Flight to Quality: Investment-grade bonds outperformed high-yield counterparts by about 130 bps over the month, emphasizing the importance of maintaining core exposure to bonds.

•Long Duration Looks Favorable: Longer-duration bonds performed well over the month, an important reminder that this positioning stands to benefit from an investor flight to safety and even interest rate cuts.

Source: YCharts. Data call-out figures represent total monthly returns

On Alternatives

Private Versus Public Equities

Public equity valuations remain rich, with the S&P 500 trading at 21.2x forward earnings as of month-end, above both the 5- and 10-year averages of 19.8x and 18.3x, respectively. Looking under the hood, the top 10 stocks in the index have a combined price-to-earnings ratio of 26.7x. The current state of public equity markets highlights the need for diversification in other, more favorably valued markets.

Looking at the broad private equity asset class, valuations are certainly more favorable, trading in the 47th percentile versus the 96th percentile for the S&P 500, illustrated in Exhibit 5. Looking only at valuations, private equity appears to be the more attractive choice, particularly when considering the level of concentration in technology stocks in public markets today. However, just as investors want to diversify concentration risk in the public tech sector, private equity markets are also dealing with their own concentration struggles as it relates to the limited partner (LP) secondary market.

The secondary market facilitates the trading of stakes in private equity funds by LPs, or investors, in those funds. This market has witnessed a surge in demand, resulting in higher, and, in many cases, less favorable pricing, with all secondary-focused funds trading at 88% of net asset value as of the most recent data, illustrated in Exhibit 6.

Exhibit 5: Equity Valuation Percentiles

Source: Bow River Capital

This supply/demand imbalance in the secondary market is a direct result of the slow exit environment seen in recent years, which has forced LPs to source liquidity in other parts of the market, like secondaries, often at a discount. General partner (GP)-led secondary funds have also seen increased interest, illustrated by record fundraising for private equity behemoths Ardian and Lexington, who raised a combined $51 billion last year. This surge in fundraising has added to demand pressures in the secondary space, making the asset class less attractive than other parts of private equity.

On the macro front, elevated interest rates are not helping the current situation, but Trump’s potential deregulation policies could incentivize activity in the initial public offering (IPO) market, which may help accelerate exits and bring much-needed supply to the private equity market. Investors don’t want to wait indefinitely for interest rates to drop or for a more favorable regulatory environment, and while parts of both public and private equity markets are overvalued today, opportunities still exist.

When valuations are high and activity is concentrated in one sector of the market, selectivity and quality become even more important, as does managing concentration risks—regardless of whether an investor is looking at private or public markets.

Exhibit 6: LP Secondary Portfolio Pricing

Source: J.P. Morgan Guide to Alternatives

The Bottom Line: Whether investors are looking at public or private markets, valuations and concentrations remain a critical determinant in the investment decision-making process, with caution warranted in the overvalued parts of any market, like tech in public equity and secondaries in private equity markets today.

Asset Class Performance Quilt

Markets are ever-changing, making diversification across asset classes and sectors a critical component of portfolio construction. As illustrated below, a Balanced 60/40 portfolio provides greater consistency of returns and less volatility over time.

Source: YCharts. Asset class performance is presented using market returns from an exchange-traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by Centura Wealth Advisory. The performance of those funds may be substantially different than the performance of broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High Yield Bonds (iShares iBoxx $ High Yield Corp Bond ETF); Intl Bonds (Invesco International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI ACWI ex US ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 40% U.S. Bonds, 12% International Stock, and 48% Large Blend.

Global markets saw significant developments in the fourth quarter of 2024, concluding a year marked by economic shifts, policy changes, and geopolitical events. The S&P 500 achieved 57 new all-time highs, delivering a remarkable annual gain of 25% and marking its strongest back-to-back performance since 1997/1998. In the fourth quarter, the “Trump Trade” returned in full force following the November election results, significantly influencing market dynamics and delivering the strongest monthly performance of the year.

With Donald Trump securing another term as President, market participants quickly shifted their strategies to align with expected policy changes, including key proposed initiatives like deregulation, international trade, and lower taxes. As investors anticipated a favorable environment for corporate profits, U.S. equity markets, particularly those sectors with high exposure to domestic economic activity, benefited immensely. Focus on the “Trump Trade” also fostered renewed optimism in venture capital and the small-cap sector, which gained from speculation that domestic-focused companies would be prime beneficiaries under Trump’s administration. Below are highlights from the fourth quarter and year:

1. The S&P 500 and NASDAQ 100 both rallied +25% through year-end despite geopolitical headwinds, economic challenges, and the final five trading days of the year failing to materialize a Santa Claus Rally. Their strong performance was aided by the tech sector, which benefitted from the AI boom and contributed significantly to their growth. Magnificent Seven giants like Nvidia (NVDA), Meta (META), and Tesla (TSLA) propelled the indexes to new heights as these companies harnessed the transformative potential of AI and similar technologies, capturing investor interest and driving substantial returns.
2. The Magnificent Seven, comprising the seven largest technology stocks (Apple, Amazon, Alphabet, Microsoft, Meta Platforms, Nvidia, and Tesla), make up approximately 35% of the S&P 500 and nearly 50% of the NASDAQ. Investors fueled inflows into the stocks given their expanding service segments and innovative product lines, which resonated well with consumers worldwide. Given their size and profitability, investors believe that the Magnificent 7 companies’ scale and financial flexibility best position these companies to capitalize on artificial intelligence. While there has been some rotation out of the Magnificent Seven, given their exorbitant valuations, their complex interplay of innovation, market leadership, and strategic expansions contributed 55% of the S&P 500’s gains for 2024, with Nvidia alone producing 21% of the index’s return. Leveraging their financial flexibility and technological prowess, these companies positioned themselves at the forefront of market trends, setting the tone for technology-driven growth as we transition into 2025.
3. Cryptocurrency, once considered a high-risk investment, is gaining greater acceptance among retail and, importantly, institutional investors. Bitcoin (BTC-USD) surged to an all-time high of $108,369 in December, pushing the global crypto market’s value over $3T for the first time in three years, as BlackRock, the world’s largest asset manager, stated that a Bitcoin allocation of up to 2% in portfolios is “reasonable.” The shifting regulatory environment with Trump’s victory further aided the advance of cryptocurrency. While Bitcoin contracted from its peak to close the year, as digital assets grow and regulatory acceptance increases, many investors may seek an opportunity to capitalize.
4. Bloomberg Barclays U.S. Aggregate Bond Index experienced a rollercoaster year, though it turned into a positive year for the second in a row. Driven by growth prospects, inflation, and monetary policy projections, the 10-Year Treasury entered 2024 at 3.88%, only to rise and peak at 4.70% before collapsing to 3.63%. As growth improved and the “Trump Trade” took hold, rates reversed sharply to end the year at 5.58%. Despite the yield rising 0.77% in 2024; the bond index eked out a positive 1.25% return.
5. Geopolitical Tensions and Volatility further supported the case for U.S. equities and pushed valuations higher. Tensions in the Middle East and Russia-Ukraine continued to escalate, as did tensions between China and Taiwan. Additionally, South Korea finds itself in the middle of a political crisis after their now impeached president briefly declared martial law, and both France and Germany saw their governments collapse in December, fueling geopolitical concerns.
6. Gold Bullion returned the best year since 2010 with gains of +27%. Strong global central bank purchases, rising geopolitical uncertainties, and monetary policy easing all propelled the safe-haven asset’s record-breaking rally near an all-time high of $2,790.15 on Halloween. While the surging U.S. Dollar took some of the air out of gold’s sail, the same catalysts that pushed gold higher in 2024 remain, potentially supporting further gains in 2025.
7. U.S. Dollar strengthens nearly 8%, the most since 2015 as solid U.S. economic growth, sticky inflation, and Donald Trump’s potential fiscal policy initiatives signal rates will likely remain elevated.

Market Recap 

Equities – U.S. stocks continued their impressive run through Q4, building on gains from earlier in the year. The technology sector remained a key driver of market performance, buoyed by an ongoing enthusiasm for artificial intelligence and other emerging technologies. Nvidia (NVDA) continued its meteoric rise, solidifying its position as one of the world’s most valuable companies. The S&P 500 rose 2.41% for the quarter, bringing its year-to-date return to an impressive 25%.
      
Bonds – The bond market experienced significant volatility in Q4, largely driven by shifting expectations for the economy, hypothetical fiscal policy, Fed policy, and inflation. Entering the quarter at 3.81%, the 10-Year Treasury yield rose sharply over the course of 2024’s final months to end the year at 4.58%. Robust economic growth paired with a slower pace of Fed rate cuts and the prospects of pro-inflation fiscal policy initiatives caused the market to reassess both long-term growth and inflation expectations higher, lifting long-term bond yields. With the upward move in yields, the Bloomberg U.S. Aggregate Bond Index fell 3.06% in Q4, erasing earlier gains, though it still produced a positive calendar year, closing 2024 up 1.25%.

 Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.  All returns are based on total return levels as of 12/31/2024.

Economy: Robust Consumer Spending in 2024 

Consumption has remained one of the biggest drivers for the U.S. economy, whose real GDP is on track to expand more than 3% in Q4 2024. The consumer discretionary sector was the top-performing sector in December and one of the top sectors in 2024. Major retailers and discretionary companies capitalized on this year’s seasonal surge in holiday sales, which saw record-breaking transactions amid consumers’ willingness to stretch budgets for year-end gifting.

Despite the optimistic consumption data, businesses remain cautious and keenly aware of the potential risks posed by fluctuating consumer sentiment and the specter of inflationary pressures lingering from policy shifts both domestically and globally.

During Q4 2024, consumer spending remained a pivotal component of the economic landscape, although it exhibited signs of moderation. Robust consumer activity, invigorated by wage growth and stronger purchasing power than previous years, continued to support the broader economy. Despite elevated borrowing costs, consumers showcased resilience, navigating a complex environment marked by geopolitical tensions and evolving fiscal policies. The U.S. economy continued to demonstrate resilience in Q4. According to the Atlanta Fed’s GDPNow model, as of Christmas Eve, Q4 growth is estimated at 3.1%, reflecting a continuation of the robust 3.1% expansion seen in Q3. This growth aligns with the Federal Reserve’s efforts to reach a “soft landing” and avoid recession while combating inflation.

Consumer spending is a bellwether for economic growth, but it also faces notable headwinds, most notably the rising levels of household debt. U.S. credit card defaults jumped to the highest level since 2010 as credit card lenders wrote off $46 billion in seriously delinquent loans through September (50% year-over-year increase); a sign that the financial well-being of lower-income consumers is waning after years of high inflation. Trump’s planned fiscal policy changes also have the potential to further erode consumers’ purchasing power, particularly if his policies lead to a resurgence in inflation.

Labor Market Dynamics

As one of the dual mandates of the Fed, the labor market remains a focal point of economic analysis. Marred by two hurricanes and a Boeing strike, October’s labor gains were anemic. Meanwhile, 227,000 jobs were added in November, beating expectations, as the unemployment rate inched up to 4.2%, which represents a 0.5% increase in unemployment from 3.7% to start the year.

Higher unemployment figures and reduced job openings tested the labor market’s resilience, with October job openings (JOLTs) around eight million, a palpable decline from nearly nine million openings in January 2024. Another signal of labor market softening is the ratio of job openings to those unemployed, which moved down over the year to 1.08:1. While the ratio of 1.08:1 is near historical levels, the ratio has fallen significantly from nearly two job openings for every job posting in 2022, indicating the labor market is showing signs of tightening.

As the number of open jobs trended lower, the number of unemployed job seekers trended higher, as evidenced by the more than one million additional unemployed persons from January through November. The current levels show signs of tightening, reflecting a labor market that remains healthy but is gradually moderating after an extended period of strength. More concerning is the reversal witnessed in wage growth. After bottoming in June at 3.83%, wage inflation has risen back above the critical 4% threshold. Robust wage gains have bolstered consumer spending but have also heightened the risk of reigniting inflation. Heading into 2025, the job market will serve as a key indicator of economic stability, with any significant downturn threatening consumer spending and overall economic growth, and also prompting potential shifts in monetary policy.

Inflation and Monetary Policy

Inflation trends remained a central focus for markets and policymakers. After showing signs of moderation in early 2024, inflation has remained sticky, with measures ticking up slightly in the latter part of Q4. The headline Consumer Price Index (CPI) edged higher to 2.7% year-over-year in November, while core CPI (excluding food and energy) held steady at 3.2%. In line with CPI, the Fed’s preferred inflation gauge ran into the proverbial wall mid-year and has proven stubborn during this last mile of contraction as the Core Personal Consumption Expenditures (PCE) price index has risen from 2.6% in June to 2.8% in November. While significantly lower than the peaks seen in 2023, these figures remain above the Federal Reserve’s 2% target.

Following their surprisingly aggressive 50 basis point rate cut in September, the Federal Reserve reduced interest rates by another 50 basis points in the fourth quarter, bringing the interest rate cut total to 100 bps for 2024. December’s meeting also provided insight into the Fed’s outlook for 2025 and beyond. The Fed’s updated Statement of Economic Projections showed a slower pace of rate reductions in 2025 than previously projected in September, cutting projections in half from 100 basis points of cuts, to 50 basis points, or two potential 25 basis point cuts in 2025. This deviation sent long-term bond yields surging and prompted a risk-off mentality as investors started repricing a “higher-for-longer” outlook, causing a sell-off in interest rate-sensitive small-cap and technology stocks. With persistent inflation, wage growth elevated, and Trump set to take office, we anticipate the Fed to adopt a patient and methodical approach to future rate reductions.

Centura’s Outlook

We believe the Fed will ultimately deliver on their goal to lower inflation to its 2% mandate and avoid a recession for the U.S. economy. However, the Fed will need to monitor the state of the labor market deterioration and reversal of inflation closely if they are to fully avoid an economic contraction and achieve their inflation target. Successfully delivering lower inflation and monetary policy normalization should bode well for equities and bonds. As always, there are several potential risks looming, and investors should proceed carefully.

By most measures, the S&P 500 remains overvalued. According to FactSet, as of December 15, the forward 12-month Price-to-Earnings Ratio (P/E) was 22.3x, which is higher than both the 5-year and 10-year averages of 19.7x and 18.1x, respectively. Valuations continue to pose a risk to the market, as negative sentiment can lead to sharper sell-offs. Furthermore, the concentration of the Top 10 largest stocks in the S&P 500 poses a significant concentration risk. According to JPMorgan Asset Management, the 10 largest constituents represent 38.7% of the index as of December 31. Concentrations of this magnitude make the index more sensitive to changes in its top constituents, particularly when those 10 companies are significantly more overvalued than the remaining 490 companies, as is the case in the current environment. The P/E of the top 10 is currently 29.8x, while the remaining stocks currently boast a P/E of only 18.2x, both of which are above their historical averages. Concentrations like this are precisely why we favor global diversification across several asset classes, both public and private. This high level of concentration also supported our decision to reduce overall large-cap exposure, particularly to large-cap technology stocks, in our public model allocations as we enter the new year.

Looking under the hood of public markets, corporate profits remain resilient despite elevated borrowing costs. This trend is illustrated by the S&P 500’s fifth consecutive quarter of positive earnings growth, rising 5.9% in Q3 2024. As of December 20, FactSet estimates fourth-quarter earnings to expand at a faster pace of 11.9% year-over-year.

Since 2023, the Magnificent Seven has been responsible for most of the market’s earnings growth, increasing 31%, versus the -4% contraction of the remaining 493 companies’ earnings in the S&P 500 last year. This trend is expected to persist in 2024, but we remain optimistic as JPMorgan predicts the remaining companies outside the Magnificent Seven to catch up and accelerate earnings growth in the forward-looking environment. Both groups are expected to experience robust year-over-year earnings growth of 21% and 13%, respectively, in 2025. A broadening of earnings growth should bode well for increased market breadth and carve a path for higher broad-based returns for equities outside the Magnificent Seven.

Perhaps even more encouraging is the rebound and contribution to earnings growth expected from both mid- and small-cap companies. While elevated rates will continue to cause issues for some smaller companies, earnings for small caps are expected to grow 44% in 2025. When coupled with easing monetary policy, potentially pro-business fiscal policies like deregulation, international trade, and lower tax rates, the backdrop appears encouraging for mid- and small-cap companies; hence supporting our decision to eliminate our underweight and increase exposure in our allocations to align with our long-term target allocations.

From the political crisis in South Korea, to the government collapses in France and Germany, to the armed conflicts, notably in the Middle East, where tensions between Israel and Iran escalated, and in Russia-Ukraine, and the threat of intensifying conflicts between China and Taiwan – international markets are on fragile ground. As these international disputes unfold, they have a cascading effect on market sentiment, influencing everything from currency valuations to sector performance. The specter of further geopolitical instability remains a crucial factor to monitor in the upcoming year, with potential policy responses from global leaders poised to have far-reaching consequences for economic forecasts and asset allocations worldwide. One of the most significant economic initiatives anticipated in 2025 is the resurgence of tariffs under President Trump’s administration. Known for a protectionist stance, Trump’s economic strategy could reignite trade tensions globally as the administration revisits import tariffs with the goal of reshoring jobs and boosting domestic manufacturing. This strategy is expected to lead to a more protectionist trade policy, potentially affecting global trade dynamics and introducing volatility into markets sensitive to international trade. Given the disruption abroad, paired with a strengthening dollar, we further reduced our allocations to foreign equities.

Interest rate volatility was once again prevalent in 2024, and while we expect this trend to continue in 2025, we do anticipate more moderate moves. Markets repriced their growth and inflation expectations over the second half of the year, pushing long-term rates (as measured by the 10-Year Treasury) back over 4.5%. At this point, with so much unknown on the path of inflation and the fiscal policy front with Trump entering office, barring an exogenous event, we would expect long-term yields to remain range-bound, producing a return relatively in line with the coupons on bonds. We also expect to witness further bull steepening – where shorter-term yields fall quicker than longer-term yields, eventually normalizing the yield curve back to upward sloping, albeit given the latest Fed rate projections, at a slower pace than previously anticipated.

In conclusion, Q4 2024 capped off another year of significant market gains and economic resilience. The Federal Reserve’s pivot towards monetary easing provided a tailwind for both stocks and bonds, setting the stage for an interesting 2025. With so much uncertainty surrounding the changing political landscape and resulting policy changes, we enter the year with our allocations balanced and in line with our long-term targets. The reset to our allocations reflects our expectations for volatility in 2025 as markets work through the political noise and reassess potential economic ramifications, and, on the other hand, our expectation for solid earnings growth across U.S. equities. Diversification across several public and private market asset classes should serve clients well in 2025. As always, investors should remain vigilant to potential risks while positioning themselves to capitalize on opportunities in the evolving market landscape.

Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.   

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 take into account 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 the market and other conditions. These documents 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. 

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At a Glance

Inflation & Labor Data: With inflation data continuing to decline, illustrated by the latest headline and core PCE data of 2.1% and 2.7%, respectively, the focus has turned to the labor market. September’s labor report included noise related to Hurricanes Helene and Milton and the Boeing strike, making it difficult to assess the latest reading of labor market health. The unemployment rate remains at 4.1%.

U.S. Election: Donald Trump was elected the 47th President, and markets are likely to experience short-term volatility as they adjust to the results and the subsequent implications for broader markets.

Fed & Monetary Policy: The Fed cut interest rates by 50-bps in September, with an additional 50-bps of cuts forecasted by Fed officials through the end of 2024. Monetary policy decisions continue to be data dependent, meaning markets have become more data dependent, creating volatility ahead of future Federal Open Market Committee (FOMC) meetings, including the next one on November 6.

Equity Markets: As of month-end, the S&P 500 is experiencing the best first 10 months of an election year since 1936. Additionally, the third quarter earnings season is off to a solid start, with positive, albeit slowing, quarter-over-quarter earnings growth.

Asset Class Performance

International markets fared the worst in October, with bonds, developed international equities, and emerging market equities all down over 4%. U.S. large cap equities were slightly down for the month and experienced volatility ahead of the November U.S. election but remain up 20% on a year-to-date basis. High yield bonds performed better than investment grade bonds in the U.S.

Source: YCharts. Asset class performance is presented using total returns for an index proxy that best represents the respective broad asset class. U.S. Bonds (Bloomberg U.S. Aggregate Bond TR), U.S. High Yield (Bloomberg U.S. Corporate High Yield TR), International Bonds (Bloomberg Global Aggregate ex-USD TR), U.S. Large Cap (S&P 500 TR), U.S. Small Cap (Russell 2000 TR), Developed International (MSCI EAFE TR), Emerging Markets (MSCI EM TR), and Real Estate (Dow Jones U.S. Real Estate TR). 

Markets & Macroeconomics

3Q Earnings Season – Slower but Solid Growth

U.S. equity markets continue to surprise investors in 2024 with their solid performance. Even amidst the volatility and uncertainty in the lead-up to the U.S. Election throughout October, major equity indices, like the S&P 500 and Nasdaq-100, continued their run-up and reached all-time highs over the month, with both indices up 20% year-to-date through October 31. In fact, the S&P 500 experienced the best first 10 months of an election year since 1936, and this trend may continue depending on the election outcome.

Looking at third quarter (Q3) earnings data, 70% of companies in the S&P 500 have reported earnings as of month-end, with eight out of the eleven sectors reporting year-over-year growth. A lot of this has to do with the larger macroeconomic picture, where the U.S. is seeing a resilient consumer and a strong labor market, both of which have contributed to solid corporate profits. Additionally, the percentage of companies in the S&P 500 reporting earnings above consensus estimates is the predominant trend across most sectors, depicted by the green bars in Exhibit 1 below.

Exhibit 1: Earnings Scorecard

The S&P 500 is currently reporting 5.1% earnings growth as of month-end, and, if this trend continues through the end of earnings season, it will mark the fifth-straight quarter of earnings growth. The magnitude of growth, however, illustrates a slowing trend, compared to the 10.9% and 11.3% growth seen in Q1 and Q2 of this year, respectively. This slowdown in Q3 is largely being driven by the energy sector.

Source: FactSet. Data as of 11/01/24

With the slower growth trend in Q3 earnings, investors may be wondering why equity markets continue to reach new highs, and, while earnings are generally supportive of current market valuations, the S&P 500 remains relatively rich in today’s environment, placing even greater focus on future company earnings growth potential. 

Prudent investors understand that markets don’t go up forever, nor do company earnings, and while we have witnessed solid performance in the ongoing Q3 earnings season, as well as in 2024 as a whole, it does not mean this trend will continue in perpetuity. The U.S. will have to contend with falling interest rates, a new political regime, and potential policy changes, all of which could have trickle-down effects on corporate earnings, making this and future earnings seasons ever-important to watch.

The Bottom Line: Thus far, third quarter earnings have been relatively solid, surprising investors to the upside, illustrated by above-estimate earnings growth, and while we are starting to see this growth moderate from recent quarterly trends, corporate profits remain on solid footing amidst an uncertain macro and fiscal backdrop. 

Looking Ahead

U.S. Election, Fiscal Policy & Muni Markets

The 2024 U.S. Presidential election has shaped up to be one for the history books, with major policy decisions surrounding international trade, health care, and, perhaps most importantly, taxes, on the docket. The uncertainty surrounding these potential policy changes may concern some investors, but it is important to keep in mind that policy implementation takes time and is not a foregone conclusion given how close races across Congress have been.

One of the most important policy decisions that will have to be addressed is the Tax Cuts and Jobs Act (TCJA), which is scheduled to sunset at the end of 2025, unless the newly elected President moves to extend it. Choosing to extend all, or part, of the TCJA could impact corporate tax rates, individual income tax rates, alternative minimum tax (AMT) exemptions, to name a few, and most importantly, any extension is expected to increase the federal deficit. The Congressional Budget Office (CBO) estimates that, if extended, the TCJA could cause federal net debt-to-GDP to increase to nearly 132% by 2034, as illustrated in Exhibit 2, from the current level of approximately 98%.

Exhibit 2

Source: J.P. Morgan Asset Management. Data as of 10/31/24

These potential tax changes offer investors the opportunity to assess their tax ramifications and diversify their fixed income exposure, particularly in the tax-exempt, or municipal, bond market. Municipal bonds are issued to fund local projects and agencies, including initiatives related to schools, parks, airports, and toll roads. The interest on municipal bonds is typically exempt from federal, often state, and even local taxes, making them attractive for higher-taxed individuals and entities. Unlike the federal government, municipal governments are not facing the same level of fiscal challenges as they are required to have a balanced budget, making them a potentially important diversifier as the federal deficit expands.

It does not appear either party in the U.S. is equipped to deal with the rising federal deficit, and, while worrisome, investors should focus on what they can control: managing risk and exposure of their investments. Diversifying exposure by looking to other areas of fixed income, like municipal bonds, can help provide greater stability and manage risk related to fiscal and tax policy decisions on the horizon.

Remember, policy changes take time and require collective government action, and, while investors wait for any changes to occur, they can enjoy elevated tax equivalent yields across the municipal curve and a strong outlook for fixed income amidst the falling interest rate and fiscally challenged environment.

The Bottom Line: With voting for the U.S. Election closed and markets digesting the results, the focus will begin to turn to fiscal policy, particularly as it relates to tax policy and the 2017 Tax Cuts and Jobs Act. Given continued rising fiscal deficits, the timing may be appropriate for investors to consider diversifying exposure across the entire fixed income spectrum, including in municipal securities, which are currently offering higher income advantages relative to historical averages, and, in many cases, traditional fixed income on a tax-adjusted basis.

Capital Markets Themes

What Worked, What Didn’t

•International Markets Had Tougher October: International markets, including both developed international and emerging markets equities, performed the worst for the month of October, down over 5% and 4%, respectively.

•Municipal Bonds Outperform Taxable: Municipal bonds underperformed in October but outpaced taxable bonds by 100 bps, with high yield municipals delivering the strongest performance and highest yield advantages.

Source: YCharts. Data call-out figures represent total monthly returns

On Alternatives

Supply/Demand Dynamics in Multifamily Real Estate

The multifamily real estate market is currently experiencing a historic wave of new supply in 2024, with over 671,000 units projected to be completed this year according to RealPage, the highest level since 1974. This supply/demand dynamic is illustrated in Exhibit 3, where deliveries in the multifamily sector have outpaced absorption since 2022 when the Fed started raising interest rates. While this current surge in supply is meaningful, it is likely to be temporary, as the increased cost of financing due to higher interest rates have halted new construction projects. Experts project multifamily supply will start to dry up after 2025, causing the supply/demand dynamic to shift once again.

Exhibit 3

Source: J.P. Morgan Asset Management. Data as of 9/30/24

The current oversupply within multifamily severely hampers rent growth, which benefits tenants, but restricts the property’s ability to drive revenue growth. Coupled with higher interest rates, operating expense growth has outpaced rent growth, a trend that is expected to continue until supply dwindles in 2026. 

While the multifamily sector is trying to absorb the excess supply hitting the market, demand remains somewhat strong, due in large part by the lack of home affordability across the nation. Along with high interest rates, mortgage rates have also been historically high, with the 30-year mortgage rate around 6.7%, causing home affordability to reach a 10-year low, both illustrated in Exhibit 4. In fact, the median price of a home in the U.S. is currently around $420,000, a 32% increase over the past 5 years.

While the home affordability metrics are grim, they create a significant tailwind for multifamily housing as the double-whammy of high mortgage rates and low home affordability have priced many tenants out of single-family homes, pushing them into multifamily housing instead.

It may be a bumpy ride along the way as supply/demand dynamics shift back into favor, but beyond 2025, we expect properties to perform well and rent growth to pick back up in the multifamily sector, particularly as the Fed continues to cut interest rates.

Exhibit 4: Home Affordability vs. Mortgage Rate

Source: YCharts. Data as of 10/31/24

The Bottom Line: The multifamily real estate sector is currently experiencing a surge of new supply, hampering rent growth amid rising expenses due to high interest rates, labor costs, and insurance. Demand remains robust as home affordability in the U.S. has reached a 10-year low. These supply and demand dynamics are expected to shift after 2025 when the influx of new supply falls off a cliff.

Asset Class Performance Quilt

Markets are ever-changing, making diversification across asset classes and sectors a critical component to portfolio construction. As illustrated below, a Balanced 60/40 portfolio provides greater consistency of returns and less volatility over time.

Source: YCharts. Asset class performance is presented using market returns from an exchange-traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by Centura Wealth Advisory. The performance of those funds may be substantially different than the performance of broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High Yield Bonds (iShares iBoxx $ High Yield Corp Bond ETF); Intl Bonds (Invesco International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares Core MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 40% U.S. Bonds, 12% International Stock, and 48% Large Blend.

Disclosure: CCG Wealth Management LLC (“Centura Wealth Advisory”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura and its representatives are properly licensed or exempt from licensure. Insurance products are implemented through CCG Insurance Services, LLC (“Centura Insurance Solutions”). Centura Wealth Advisory and Centura Insurance Solutions are affiliated. For current Centura Wealth Advisory information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Centura Wealth Advisory’s CRD #296985.

After rising more than 10% in the first quarter of 2024, the S&P 500 stumbled out of the gate in the second quarter. The index contracted more than 4% in April and produced the first negative month of the year as the market reassessed the timing of the Fed’s first rate cut. While the Fed’s higher for longer mantra has not changed, they are stressing their dependence on data, which has proven mixed. The market, on the other hand, has become Fed-dependent, placing great emphasis on each major economic reading, primarily inflation, labor, and economic production. With hopes that the Fed will initiate rate cuts sooner, the market applauds lower inflation and negative growth signals, like a slowing economy or consumer spending. Conversely, traditionally well-received data points, such as a robust and resilient labor market, can trigger market selloffs. This counterintuitive reaction occurs because positive economic news suggests that the Federal Reserve might delay its first rate reduction, extending the timeline for monetary easing.

Following two positive reports that inflation is trending lower, the S&P 500 witnessed solid rebounds of 4.80% and 3.47% in May and June, respectively, driven primarily by gains in Big Tech stocks. With hopes of an early rate cut, the equity markets continued to fuel the Nvidia-led AI frenzy. The sustained AI rally is heavily influenced by expectations surrounding the timing of monetary policy adjustments.

In line with the April selloff in equities, bonds saw the yield on the 10-year US Treasury whipsaw 0.37% higher, from 4.33% to 4.70%, before peaking on April 25. Like their equity counterparts, longer-dated bonds have become too reliant on the path of monetary policy, with return expectations tied to the timing of the Fed’s first cut. As the Fed provides clarity on their path forward, yield volatility should ultimately subside, leading to more stable outcomes. Until then, we expect continued bond volatility.

Market Recap

Equities – Unlike the ‘everything rally’ that closed out 2023, where small caps and technology stocks – both sensitive to elevated interest rates – were the largest benefactors, 2024 has witnessed further decoupling amongst asset classes. Any projected rate cut speculation has tended to support higher returns by the Magnificent Seven and technology stocks, though small caps have lagged behind. Small caps, measured by the Russell 2000, produced only about half the return of their large cap counterparts in the first quarter. The second quarter witnessed smaller companies contract -3.62%, bringing the year-to-date gains to a paltry 1.02%. Meanwhile, the S&P 500’s price advances for the second quarter was 3.92%, bringing the index’s return for the year to 14.48%.

Bonds – As yields reversed course, bonds kicked off the quarter in the red, adding to their multi-year downward trend. With stronger-than-expected economic data and Fed uncertainty, the market repriced Fed expectations, and the yield on the 10-year U.S. Treasury rose sharply.  As inflation readings and consumer spending data continued trending lower, the market again reassessed their rate cut projections, sending the 10-year U.S. Treasury yield back to 4.2% and bringing the bond index back into positive territory for 2024. The Fed’s messaging that it needs to witness several months of sustained data before feeling comfortable lowering rates prompted another yield reversal upward with the 10-Year U.S. Treasury closing the quarter at 4.36%. While the market has appeared to reprice monetary policy changes, robust U.S. debt issuance and the demand for U.S. Treasury securities remains relatively weak, failing to absorb supply and applying additional upward pressure on yields. The Bloomberg U.S. Aggregate Bond Index rose by a modest 0.7% in the quarter, while it declined -0.71% for the year.

Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.  All returns are based on price returns as of 06/30/2024.

Though economic data remains mixed, base case expectations still call for the Fed to successfully achieve a ‘soft landing’ and avoid recession. However, many growth metrics continue to moderate, leading many to question the Fed’s decision to keep rates elevated for longer.

Economy: The Consumer continues to slow

After growing approximately 2.5% in 2023, the U.S. economy continues growing at a moderate pace. Driven primarily by softening consumer spending, the first quarter of 2024 GDP grew 1.4%. Reflecting an uptick over the first quarter, as of July 2, 2024, the Atlanta ‘Fed’s GDPNow model for Q2 has been revised from 2.2% to 1.7%. This revision is primarily due to lower projections for consumer spending and net exports, which have contracted from the initial growth forecast.

Source: Atlanta Fed GDPNow

The combination of unwavering spending in the face of rising prices and a robust labor market has underpinned the strong economic growth of recent years. However, with the $2 trillion of pandemic savings now exhausted as of March, household debt has reached record levels, and delinquencies are beginning to mount, threatening the sustainability of the nation’s growth. Despite elevated borrowing costs, the consumer continues to spend, albeit at a slower pace, thanks in large part to a strong labor market, producing wage increases that have outpaced inflation for more than a year. While the market is hoping for the labor market to soften and result in an earlier Fed rate cut, too much labor market deterioration could result in further spending reductions, ultimately leaving little room for the Fed to thread the needle and both produce a ‘soft landing’ and avoid a recession.

Unemployment    

June’s Labor Market Report registered the 42nd consecutive month of job gains. Estimates called for 200,000 jobs in May, and the market once again surprised to the upside with the addition of 206,000 jobs. On the other hand, the unemployment rate edged up slightly to 4.1%, the highest level since October 2021.

The labor market continues to post robust results. While trending lower since peaking in 2022, job openings (JOLTs) surprisingly broke its three-month trend of fewer job openings in May. They reversed back above eight million (8.14 million), bringing the ratio of job openings to those unemployed to down to 1.22:1. While the ratio of 1.22:1 is still elevated above levels historically witnessed, the ratio has fallen significantly from nearly two job openings for every job posting in 2022, indicating slack is working itself out of the system and the labor market is showing signs of tightening. The number of open jobs has fallen, while the number of unemployed job seekers has trended higher, as evidenced by the additional 687,000 unemployed persons from January to May.

For now, the strength and resiliency of the labor market have given the Fed the confidence to keep rates higher for longer. However, the data point that is giving the Fed continued anxiety is wage growth. Despite falling below the key level of 4% in April for the first time since 2021, wage growth has exhibited stickiness and has been hovering around the 4% threshold, rising 4.1% and 3.9% year-over-year in May and June, respectively. While wage growth outpacing inflation bodes well for continued consumer spending, prolonged, elevated wage growth raises concerns about a potential resurgence in inflation. Several readings below the 4% threshold would certainly be welcomed by the Fed.

Inflation

On the surface, all major inflation readings have fallen below 4%, with both PCE readings coming in at 2.6% in May. Core services increased by 0.2% in May, lifted by higher housing, utilities, and healthcare, and financial services, while insurance costs declined by 0.3% after five consecutive months of growth. Housing, financial services, and insurance costs were among the major drivers supporting elevated services costs, so witnessing a reversal in two of the three variables presents a positive affirmation that inflation is indeed heading lower.

Just as elevated wage growth is troublesome to the Fed, the stickiness of core services, particularly housing, fortifies the decision to exercise patience before cutting rates. Federal Reserve Chair Jerome Powell stated “we want to be more confident that inflation is moving down towards 2%” before lowering rates.

More Evidence Needed

The Federal Open Market Committee (FOMC) elected to keep rates unchanged in June for the seventh consecutive meeting. While the Fed’s decision was largely expected, the big news was centered around the Fed’s changes to their Summary of Economic Projections, particularly their median projection for rate cuts, where policymakers adjusted their expectations from three rate cuts in 2024 to only one 0.25% rate cut. The Committee also raised its projection for 2025 as well, indicating a slower pace of change as the Fed adopts a more patient data-dependent position. The number of Fed officials who projected no cuts in 2024 doubled from two to four, and not one official anticipated cutting rates more than twice. We also saw the Fed lift economic projections for 2024 increasing their 2024 inflation expectations and revising their 2025 rate normalization path.

Powell acknowledged that inflation has begun trending lower, yet expressed concerns that cutting rates too early may jeopardize the progress made towards reducing inflation. Interestingly, the Core PCE print in May was 2.6%, which is higher than the Fed’s year-end projection for Core Inflation. This indicates that the Fed anticipates a slight increase in prices from this point, which would likely be accompanied by ensuing market volatility.

Source:  US Federal Reserve Summary of Economic Projections, June 2024

Barring any resurgence of inflation, we believe the Fed has finished its rate-hiking regime and is nearing its first rate cut. Our base case assumptions have not changed given the Fed’s steadfast commitment to bringing inflation down. We continue to believe the earliest the Fed will cut rates is September, which now aligns with current market expectations. However, any prolonged stickiness or resurgence of inflation would likely push our expectations for rate cuts into the fourth quarter this year.

Centura’s Outlook

The Fed’s goal to lower inflation to its 2% mandate and avoid recession is now the base outcome expected by the Fed and most market participants. However, given the slowdown in consumer spending, the Fed will need to monitor the state of the labor market deterioration closely if they are to fully avoid an economic contraction. Successfully delivering lower inflation and monetary policy normalization should bode well for equities and bonds. However, there are several potential risks looming and investors should proceed carefully.

In the chart below, Pitchbook outlines four likely paths forward: scenarios of stagflation, higher for longer, recession, or a soft landing. While any of the four scenarios could occur and the risk of recession has fallen, this risk remains above average due to the restrictive level of interest rates. Ultimately, our expectations fall into the lower right-hand corner: the soft-landing camp. We believe inflationary pressures will continue to ease while labor demand and wage growth will soften, resulting in the Fed slowly beginning to bring short-term rates down.

In the face of higher borrowing costs, corporate profits have remained surprisingly resilient, illustrated by the S&P 500 posting positive earnings growth for the third consecutive quarter in the first quarter of 2024, rising 5.9%. As of June 21, FactSet estimates second-quarter earnings to accelerate and grow at 8.8% year-over-year. Last year, the Magnificent Seven were responsible for most of the market’s earnings growth, increasing 31%, versus the -4% contraction of the remaining 493 companies’ earnings in the S&P 500. While this trend is expected to hold in 2024, with gains of 30% and 7%, respectively, we are encouraged that JPMorgan is expecting the remaining companies outside the Magnificent Seven to catch up and accelerate earnings over the remainder of the year. Both groups are expected to experience year-over-year earnings growth of 17% in the fourth quarter. A broadening of earnings growth should bode well for increased market breadth and carve a path for higher broad-based returns on equities.

Source: JPMorgan Guide to the Markets

The market remains too dependent on the Fed, which has become dependent on poor economic data. Following worsening conditions, the Fed is more likely to pivot and cut rates sooner. We believe economic activity will continue to surprise moderately, putting the Fed on pace to start lowering rates in either September or November, yet any resurgence of inflation will likely spur bouts of volatility in both stocks and bonds.

Persistent, elevated rates will continue to cause issues for some companies, like small caps, though earnings are expected to grow broadly in 2024 and 2025. While equities generally produce positive returns during election years, we expect volatility is likely to increase as we approach the election in the third and fourth quarters. The recent political turmoil in France and India, the first U.S. Presidential Debate, and the ensuing market volatility remind us how sensitive the markets are to political uncertainty. While we anticipate increased volatility as November nears, we do not believe this volatility source is sustainable. Outside of a resurgence of inflation or Fed policy misstep, we believe geopolitical risks pose a major threat and are more fearful of those potential exogenous events that are harder to predict.

While the path may be bumpy, we believe yields should continue to grind lower over the course of the year, presenting attractive opportunities to produce asymmetric returns in bonds.  Extending duration within portfolios should allow investors to clip an attractive yield, while also providing them with the opportunity to experience capital appreciation for a total return exceeding what they might clip sitting in money market funds or short-term Treasury bills, particularly in municipal bonds on an after-tax basis.

Elevated interest rates continue to punish private real estate returns, with further slight downward valuation adjustments expected from their previous marks. Real estate serves as an interest rate-sensitive asset class; as rates move lower, we anticipate a pick-up in activity and a subsequent reversal of valuations over the next several years. While we believe we are nearing the light at the end of the tunnel for several real estate sectors like multifamily and industrial, unfortunately, we believe more pain will be experienced, particularly with the underlying debt that real estate operators hold. We anticipate a pickup in defaults across several real estate sectors, likely resulting in further pain across both public and private markets. For the foreseeable future, we remain extremely cautious and selective, focusing on select submarkets and attractive risk-adjusted returns.

Private equity, particularly lower middle market buyouts, appears to have stabilized, potentially presenting attractive investment opportunities relative to public market alternatives. Current yield levels present challenges for private equity valuations, though according to Pitchbook, elevated and expanding public equity market valuations position new buyout investments favorably when compared to their public market counterparts. Generally, when public market valuations are well above historical norms, buyout strategies launched during these periods tend to outperform, particularly smaller and emerging managers, which aligns with our natural preference.  With limited private equity exit opportunities today, we also align with Pitchbook’s stance that secondary investments should also create attractive opportunities for investors in this environment.

Given that private credit is predominantly floating and tied to a base rate such as the Secured Overnight Financing Rate (SOFR), closely linked to the Fed Funds overnight rate, we believe the asset class remains attractive. Yields on private credit should remain similar to current levels until the Fed begins to cut rates. Even as the Fed cuts rates, the floating rate on private loans does not adjust immediately. Rather, there is a delay before the loan terms reset lower.  Barring a catastrophic event, the Fed is likely to lower rates slowly, supporting higher yields for longer in private credit. According to commentary shared with us from Cliffwater, companies appear to be navigating the higher financing costs well, as interest coverage in their pipeline has increased from 1.75x to 1.93x.

Like markets and the Fed, we are digesting data points as they print, but we remain laser-focused on long-term objectives and minimizing volatility in the short-term amidst this data dependent backdrop.
     
Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.

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 take into account 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 the market and other conditions. These documents 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.  

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