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Q1 Quarterly Commentary

Q1 Quarterly Commentary

April 29, 2024

Market Commentary

The themes that drove markets broadly in 2023 have persisted as we started out 2024. On the economic front, inflation remained a focal point for policymakers and investors alike. Despite efforts to curb price rises through interest rate hikes, several major economies reported stubbornly high inflation rates, albeit materially lower from the highs seen just a few quarters earlier. The labor market, however, continued to show strength, with unemployment rates in key economies remaining low, suggesting a degree of economic resilience. This dichotomy has presented central bankers with numerous challenges as to future monetary policy paths. Emerging markets faced their own set of challenges, with currency volatility and capital outflows exacerbated by the strengthening of the U.S. dollar. Meanwhile, overall global economic outlook remains cautious, with many analysts closely monitoring the potential impacts of geopolitical tensions, including the ongoing conflicts and trade negotiations, on international trade and investment flows.

With many economists' recession calls removed from their forecasts, much focus has been made recently on if the U.S. economy can realize a “soft landing,” in which the Fed is able to cool excess demand in the economy using its monetary policy tools and without causing a recession. It's worth noting the Fed does not have a strong track record of achieving this goal;  the only soft landing in the past 60 years was in the mid-1990s. While the Fed’s batting average does not lead to much confidence in the arena generally, we see similarities between today’s economy and that time period. The early 1990s saw the U.S. economy recovering from a recession being largely addressed by lowering interest rates to spark economic development. Monetary policy management in the mid-1990s was focused on quick, proactive rate adjustments to address both inflationary and growth metrics, followed by a “higher for longer” interest rate stance. A significant driver of economic growth in the 1990s was the commercialization of the internet, leading to massive productivity advancements across sectors. While there are differences between the 1990s and the 2020s, there are a number of overlaps that give us conviction we could be on track to repeat the so-called “soft landing”.

In the first quarter of 2024, while global markets experienced significant fluctuations, driven primarily by geopolitical tensions and the continued normalization of monetary policies across major economies, equity markets performed strongly with global equities, as measured by the MSCI ACWI benchmark, up 8.20% and the domestic only S&P 500 benchmark up even more. Fixed income was challenged with the delayed anticipation of policy shifts by central banks widely leading to rate cut expectations being pushed further into the future, causing interest rates to rise in the short term. This period also saw a pronounced divergence in sector performance, with technology and AI-related stocks showing resilience and, in some cases, remarkable gains, attributed to robust earnings reports and general excitement for these technological advancements. While we don’t expect markets to consistently deliver returns like we saw in Q1 2024, we do think there is additional room for upside for diversified portfolios that are focused on fundamental strength and quality growth, versus those trying to chase the en vogue investment of the day.

Portfolio Commentary

Equity Sleeve: We continue to maintain a mix of active and passive strategies across our equity exposures. While international equities look attractive with the backdrop of lower relative valuations and higher relative yields, we still favor an overweight to US Stocks and Large Cap Growth stocks in particular. We continue to maintain a small allocation to Small and Mid Cap Stocks as they exhibit historically low relative valuations to other equity asset classes and we introduced a small/mid cap manager that prioritizes high free cash flow growth at reasonable valuations.

Fixed Income Sleeve: Fixed Income continues to experience volatility as bond markets anticipate how many Fed cuts to expect in 2024. In the aftermath of significant inflation and a historically fast rate hiking cycle, fixed income now looks poised to contribute positively to portfolios with attractive yields not seen in decades and the potential for price appreciation. However, potential risks within credit markets and rate volatility remain. We continue to rely on active, core fixed income managers to help navigate choppy fixed income markets.

Alternative Fixed Income Sleeve: To further diversify the fixed income portion of portfolios, we rely on an Alternative Fixed Income Sleeve which is meant to provide fixed income like returns and risk utilizing non-traditional strategies that are less exposed to interest rate risk. This strategy is meant to complement, not replace your traditional fixed income strategy as we aim to produce meaningful real returns while maintaining the primary focus of fixed income which is diversification from stock volatility. So far in 2024, this sleeve has produced positive excess returns over a broad bond benchmark with less volatility.

Risk Mitigation Sleeve: The risk mitigation sleeve provides an additional form of downside risk management for clients who are in the preservation or distribution stage. Rather than relying solely on fixed income to reduce portfolio risk, the sleeve utilizes various differentiated risk mitigation strategies that complement each other to create an approach that focuses on downside risk protection first while allowing for moderate participation in rising markets. The Risk Mitigation sleeve was very defensive in the face of the market selloff in 2022, with some of the underlying strategies becoming increasingly defensive as the selloff intensified. In 2023 and so far in 2024, the Risk Mitigation sleeve has captured a moderate amount of the upside as certain tactical strategies have added more equity exposure. We recently updated this sleeve to favor more US stocks over a global portfolio.

Liquidity Sleeve: This sleeve is designed to provide liquidity for the retirement investor. The holdings are comprised of short-term fixed income holdings to maintain a spending reserve for clients in need of distributions. This component is replenished by gains in the other portfolio components as part of the retirement rebalancing strategy. We recently introduced a low duration opportunity manager which focuses on providing total returns through the Mortgage Bond space.

 

 


Past performance is not indicative of future results. The investments recommended by Horizon are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This information should not be considered a recommendation to buy or sell any security or adopt a particular investment strategy. Any information about performance, allocations, and contributors and detractors is illustrative of Horizon’s model strategies and is therefore hypothetical and not representative of any specific account. It should not be assumed that any of the transactions, holdings, or sectors discussed were or will be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Opinions referenced are as of the date of publication and may not necessarily come to pass. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that the any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change.  Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.

Any risk management processes described herein include an effort to monitor and manage risk, but should not be confused with and do not imply low risk or the ability to control risk.

The commentary in this report is not a complete analysis of every material fact in respect to any company, industry, or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if or when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device.

The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The MSCI All Country World Index (ACWI) is a global equity index that measures the equity performance in both the developed and emerging markets. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.

This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.

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