2024 Has Marked a Pivot of Economic Conditions that Investors Should Consider

2024 has marked a pivot of economic conditions that investors should consider.

Over the past two years, we saw rampant inflation, rapid rate hikes, negative real rates, an earnings recession, tight corporate balance sheets as wages increased, and a recession that never manifested.

What has changed? We observe more robust economic growth, positive real rates, potential rate cuts, and a potential shift in market leadership.

These two environments require two very different portfolios. Astoria is now more constructive to start 2024 than we’ve been in the last couple of years. We entered this year overweight equities, particularly US equities. We continue to lean on quality (QUAL, DGRW, etc.)

We believe that market broadening will continue and eventually become more robust. Astoria holds that managing risk by diversifying away from highly concentrated passive funds is prudent. This does not mean we don’t own them; however, the concentration continues to grow, which concerns us. We diversified risk in our portfolios by allocating 1/3 to equal-weight, 1/3 to market-cap-weight, and 1/3 to quant/smart beta.

Internationally, we are constructive on Japan. We see strong earnings revisions, high growth estimates, strong price momentum, cheap relative valuations, attractive EPS growth, GDP growth potential, and improved corporate finances. DXJ is an ETF that expresses this view.

Regarding fixed income this year, we are barbelling corporates, Munis, and Treasurys. Astoria is neutral on duration vs. the benchmark. We’ve also begun purchasing MBS (SPMB). We’ve reduced our exposure to negatively correlated alternatives like BTAL. We continue to use our rate-sensitive / real assets strategy and gold (GLDM) in our portfolios.

Top ETF Picks:

• DXJ: Strong earnings revisions and price momentum, high growth estimates, and attractive valuation.
• QGRO: It has performed impressively without taking extreme concentration risk in the Mag 7. The largest holding is Booking Holdings (3.09%). Only 3 Mag 7 stocks in its top 10 holdings make up 8.09% (As of March 11, 2024)
• SPMB: Agency MBS have higher spreads than corporates, their YTM is attractive, and prepayment risk is low.

Astoria’s High Quality Strategy

Along with our top investment picks of 2024 is our High Quality US stock strategy. Since 2020, we’ve utilized this strategy. The strategy quantitatively selects the highest quality stocks within each sector, using sector-specific quality metrics. It is equally weighted and sector-optimized to the broad large/mid-cap US market. This is an important point because a broad market equal-weight index like the S&P 500 equal-weight assigns equal weight to all stocks, ending up with ~16% technology exposure. Astoria’s quality strategy, on the other hand, utilizing sector optimization, has ~31% technology exposure (As of March 11, 2024).

Why is it equal weight? Over time, SPXEW has outperformed SPX (market-cap-weighted). Since 1999, SPXEW has outperformed SPX by 310% cumulative returns and 1.96% annualized returns. See chart below.

Why quality? Research shows that the quality factor has a higher return/risk over time than other factors.

Astoria is a strategic investor. We use the equal-weight quality strategy as a long-term portfolio allocation. It complements our growth allocation and diversifies our market-cap-weighted core equity positions.

Astoria’s View on ETF Trends

Bitcoin is drawing all the headlines. We are constructive on the asset class but must wait for a pullback before it enters our alternatives allocation.

We believe equal weight is a crucial diversifier. As mentioned, we are implementing it with market-cap-weighted and quant/smart-beta (1/3 each).

Corporate spreads are very tight, and front-end rates remain stubbornly high; this must change before droves leave money markets and T-Bills.

Fixed income has taken in massive inflows YTD. This is strange since AGG is down 0.51% and SPY is up 7.57%, as of March 11, 2024.

Broader inflows into equities are reliant on economic data and Fed decisions. We’ve received a lot of inquiries about small caps and value. We would need to see rate cuts before allocating to smaller caps in our portfolios.

If economic strength continues, this will invariably keep rates where they are; value, small-caps, and overwriting will struggle while quality, growth, and market-cap-weight will remain attractive. QUAL saw significant inflows in 2023, returning 30.88% in the calendar year and +10.80% YTD as of March 11, 2024.

China’s deflation issues will cause DM exporter-driven countries to suffer. We expect US inflows to continue.

The ‘Year of the EM’ was forecasted, going into 2024, but it is yet to be seen. YTD through March 11, 2024, KWEB -4.81% and EEM +1.74%. Astoria believes EM will continue to struggle if the dollar strengthens and rates are held.

Send me an email if you would like to discuss or ask questions: [email protected]

Best,

Frank Tedesco

As of March 12, 2024, Astoria Portfolio Advisors held positions in QUAL, DGRW, DXJ, SPMB, BTAL, GLDM, QGRO, AGG, and KWEB on behalf of its clients. Past performance is not necessarily indicative of future results. All data as of March 11, 2024.

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