The 1% Move Report

Wealth Management — November 6, 2024

• The S&P 500 increased 2.5% Wednesday to end the day at 5,929.04, having gained 24.3% thus far in 2024.
• Eight of the 11 S&P sectors were higher on the day, as Financials (6.2%) and Industrials (3.9%) were the strongest-performing S&P 500 sectors, while Consumer Staples (-1.6%) and Real Estate (-2.6%) underperformed.
• By the 4:00 p.m. equity market close, the US 10-year Treasury yield increased to 4.43%; WTI Crude increased to $71.83 per barrel; and gold decreased to $2,659.79 per ounce.

• The S&P 500 Index rose on Wednesday to a new all-time high as Donald Trump won the US presidential election, earning a second term. A risk-on sentiment pervaded in markets, lifting the USD, small-caps stocks, and the Financials sector, among other assets.
• The 30-year US Treasury yield rose as much as 24 bp, the most since 2020, triggering a Treasury bear steepening. The prospect of higher tariffs and wider deficits under a new administration may keep longer-dated yields higher for longer. Both real yields and breakeven inflation moved appreciably higher, while expectations for Fed easing over the coming 12 months declined.
• The VIX Index, often referred to as the market's fear gauge, receded below 16, falling the most since August. Concerns about volatility faded, as Tuesday's results overcame the potential for a protracted period of election uncertainty.

• The GIC recommends preparing for sideways-churning markets, neutralizing portfolio tilts versus benchmarks, and erring on the side of asset class diversification. With megacap and large-cap stocks likely continuing to trump small caps, add international exposure, stay neutral duration in rates and corporate credit, and use real assets and hedge funds to help mitigate emerging risks. Today's move does not meaningfully impact the GIC’s outlook. 
• Please find more information on the GIC's tactical positioning on the next two pages and reach out to your Morgan Stanley Financial Advisor to discuss portfolio strategies.

US: We recently took profits in US Large Cap growth equities redeploying proceeds into large-cap value and mid-cap growth stocks on the premise that rising odds of a successful soft landing will lead to market broadening. This plus a brightening outlook for global growth in 2025 premised on ongoing enhancements to China stimulus programs suggests an improving outlook for cyclicals and we have a preference for financials and industrials. 2025 ambitious earnings estimates which imply 15% annual growth in profits are a risk but recent developments around labor markets and productivity dynamics could hold the key.

International Equities (Developed Markets): Given weak currencies and dovish central banks in Japan and Europe, economic rebound should be at hand. Developed market exposure should skew toward commodities and materials exporters, especially those in the Asia Pacific region, including Japan.

Emerging Markets: China stimulus, while potentially insufficient to address the challenges of the secular bear market there, are likely enough in the short term to help global trade and regional growth, especially as valuations in the region are more interesting than in the US. Peaking US rates and, in turn, the US dollar, likely set up a second half rebound for EM ex China, given improving global growth dynamics. We favor Brazil, India and Mexico.

US Investment Grade: Stronger-than-anticipated economic growth is preserving the strength of corporate cash flows. While rates have backed up to reflect "higher-for-longer" expectations, yield spreads have remained well behaved. With geopolitical uncertainty high and equity valuations broadly rich, we like coupons of bonds with index-matching or shorter durations.

International Investment Grade: Yields are decent, central banks may soon cut rates and there is room for spread tightening as economic growth improves.

Inflation-Protected Securities: Real yields have sold off and are now bordering on cheap relative to the past two years. The securities could be a potential buy in a stagflationary environment.

High Yield: We have eliminated our exposure to the equity-like asset class to reduce equity beta of portfolios. High yield bonds rallied aggressively after the unprecedented provision of liquidity from the Fed and fiscal stimulus from Washington. However, currently, there appears to be limited upside and much downside to investments in riskier products, given the market environment.

REITS: We expect higher stock-bond correlations, which place a premium on the diversification benefits of investing in real assets. Nevertheless, with real interest rates positive and services inflation remaining quite sticky, we would need to be selective in adding to this asset class.

Commodities: Global reflation, tense geopolitics, especially in the Middle East, and ongoing fiscal spending suggest decent upside potential for precious metals and industrial-related commodities, including energy.

MLP/Energy Infrastructure: We previously increased exposure to real assets, with a preference for energy infrastructure and MLPs. Competitive yields and expectations for continued capital discipline amid stable oil and gas prices underpin our decision, as does hedging against geopolitical risks.

Hedged Strategies (Hedge Funds and Managed Futures): We recently added to equity hedged positions noting the pick-up in idiosyncratic risk, falling borrowing costs and rising volatility. The current environment appears constructive for hedge fund managers, who are frequently good stock pickers and can use leverage and risk management to potentially amplify returns. We prefer very active and fundamental strategies, especially high-quality, low beta, low volatility and absolute return hedge funds.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.