Examining 2024’s Growth and Risks Across Key Asset Classes
Exencial Wealth Advisors
Exencial is a leading independent wealth management firm providing leadership to our clients.
By Tim Courtney , Chief Investment Officer
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This year has been surprisingly strong across almost every asset class, something we don’t often see. Inflation has been cooling, interest rates have steadied, and markets are largely optimistic. However, returns ultimately come from risks, and each asset class still faces risks and challenges. Let’s take a closer look at where things stand.
Starting with fixed income, investment-grade bonds returned 5.8% during Q3.,1 delivering a positive real return above the current inflation rate of 2-3%.2 This happened because interest rates fell. However, this creates a narrower cushion between rates and inflation. If inflation picks back up and moves higher than current rates, real bond returns could be negative. This would be a repeat of the purchasing power lost between 2020 and 2023.3
High-yield bonds, including floating-rate loans, are up around 6.6%.4 The catch, though, is that these bonds are far more sensitive to economic slowdowns. The companies issuing high-yield bonds typically have lower quality balance sheets. While prices for these assets are holding steady, they will likely start to decline if the market senses we are approaching a recession.?
Turning to equities, U.S. large caps, driven by the S&P 500, have gained about 25% this year, making them the top-performing equity class globally.5 Much of this growth is fueled by strong sentiment around tech and AI. But, the historically high price of these assets remains a concern. Large caps are trading at roughly a 50% premium to their historical valuations.6 The last time we saw prices this elevated was in the early 2000s, which led to a “lost decade” of negative returns from 2000 through 2009.7 If AI’s potential doesn’t fully pan out or enthusiasm wanes, portfolios focused on the most expensive areas of the market could see a large correction.
Other equity segments, including small caps8 and international stocks,9 have also seen strong returns, up about 16% and 7%, respectively. While not as high as large caps, these areas benefit from more reasonable valuations, aligning closely to their historical averages. However, like high-yield bonds, they tend to be more economically sensitive, so a slowdown could hit them harder. Internationals also have the risk of a rising U.S. dollar, which has limited their returns YTD.10
?Real assets, specifically REITs, have had returns between 5-11%.11 They’ve gotten a boost from the recent stability in interest rates, but questions remain about demand, especially in the office and retail spaces. There’s an oversupply in many places, and shifts in how companies and consumers use space are still playing out.
?Commodities are mixed this year. Master Limited Partnerships, primarily pipeline companies, are up over 20%,12 yet broader commodity indexes, including oil, metals, and agricultural goods, are mostly flat due to cooling inflation. One standout is gold, which has risen about 30%,13 an unusual performance given the broader market optimism and falling inflation.
In short, it’s been a strong year with almost every broad asset class positive. As always, there are risks associated with every asset. If you have questions about this, please contact your Exencial advisor.
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PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.
The S&P 500? Index (S&P 500?) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.? Index (S&P 500?) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.