Equities continue their inexorable seeming climb this month after companies like Nvidia beat earnings estimates. However, in an environment of continued equity gains, risks remain. Investors minding the risks within stocks this year and looking to increase bond allocations ahead of future rate cuts should consider the Natixis Loomis Sayles Short Duration Income ETF (LSST) for opportunity.
The Role of the Fed
Despite ongoing equity gains, a number of risks loom for continued performance. These include the impact of the Federal Reserve, earnings misses, and a surprise recession, according to David Rosenberg, founder and president of Rosenberg Research & Associates, at CNBC’s Financial Advisor Summit.
The one certainty in the last two years of the Fed’s rate-hiking regime is ongoing uncertainty. Markets proved unable to successfully forecast the path of rate hikes and inflation for much of the last two years. The difference between actual and expected Fed policy caused heightened volatility and market dislocations.
However, it’s no wonder the Fed proved difficult to forecast, with conflicting economic data at almost every turn. While inflation appears to potentially ease heading into the summer months, markets stay highly reactive to new economic data. At every step, the Fed continues to make clear it will do whatever is necessary to bring inflation in line with 2%.
Should rates remain elevated, it favors short-term bonds, money market funds, and cash. Rosenberg explained that the risk/reward analysis tilts in favor of these over stocks in a high-rate environment.
See also: “3 Tips When Looking to Short-Term Bonds”
Recession Risk and Earnings
The narrative of a soft landing whereby the U.S. economy sidesteps recession continues to grow. However, consumer resilience appears to finally be faltering as consumer confidence plummets. Consumer spending came in unchanged in April from March numbers. Meanwhile, consumer confidence dropped for the third month in a row, according to The Conference Board.
Should the U.S. economy skid into an unexpected recession, equities would take a significant hit. Uncertainty and surprise (geopolitical and economic) are markets’ and investors’ biggest enemies, according to Carla Harris, senior client advisor at Morgan Stanley.
Earnings make up the final component of risk for investors this year. While earnings beats from market favorites such as Nvidia dominated headlines, several companies increasingly missed the mark. The toll of elevated rates and inflation on consumers hit companies such as retail giant Target this earnings season. With stock performance and optimism carried largely by a handful of companies, an earnings miss could domino into broader equity capitulation a la the early 2000s’ dot-com bubble.
Bonds Offer Opportunity in 2024
Bonds historically serve as a hedge against equity drawdowns. Stock and bond correlations and rising rates led to a reduction of bonds within portfolios in the last two years. However, investors increasingly look to return to bonds in hopes of a falling rate environment. Given elevated yields, noteworthy opportunity exists in bonds this year.
Investors looking to add bond exposures should consider the Natixis Loomis Sayles Short Duration Income ETF (LSST). The fund is actively managed and uses top-down macro analysis and bottom-up security selection. It seeks to offer a balanced risk and reward profile against its benchmark, the Bloomberg US Government/Credit 1-3 Year Bond Index.
LSST’s strategy diversifies across sectors, including securitized debt and below-investment-grade bonds. The management team measures the risk of such investments against the income and return potential when investing.
The fund’s effective duration was 1.82 years as of 5/11/2024, with a 30-day SEC yield of 5.05%. LSST has an expense ratio of 0.35%.
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