We remain suspicious on the general health of the economy and the ability of corporate operators to deliver on – what we perceive as – outsized expectations for earnings growth over the next twelve months.  (Consensus estimates for sales growth are roughly +5% for  CY’24 vs. CY’23 while earnings are expected to grow more than +12% to ~$248 per S&P share next year.)  Our chief economist, Don Rissmiller, examined more than 2,000 years of economic history across 24 countries and counted 62 discrete episodes of inflation.  In just 8 of these episodes (13%) were price surges confined to a single wave.  It has been far more common for inflation to return in multiple waves.  The Fed is concerned about this.  Inasmuch, it is likely that rates will remain elevated longer than the consensus expects.  The potential for rates to spike – 10-year Treasury north of 5% – is decidedly non-consensus; we believe it deserves at least some consideration.  Nothing has disproved our view that earnings and interest rates remain the building blocks of equity prices.  With Treasury yields out to ten years averaging ~4.82%, the cash advantage vs. the coupon market has shrunken substantially since the U.S. debt ceiling resolution in early-June.  Moreover, with the average term premia across the curve hovering close to +50bps, we’re in evidence of the largest cushion in bonds that we’ve seen in more than two decades.  This suggests that in the event of an economic downturn, 10-year Notes could provide approximately +5% price return in a very short period.  This alone supports a tactical move to add duration to our fixed income portfolios.  Investors may also consider that the higher 10-year yields go, the more likely it is that the economy will encounter a major economic contraction.  The knock-on effect of this would very likely push yields substantially lower.  Taken together, the intermediate-term risk/reward profile favors adding duration. To take advantage, we are lowering the Cash position in our tactical allocation portfolios, available on Envestnet, from 8% to 6% (inclusive of 2% in Gold) and increasing our allocation to Bonds as a defensive play.  Within the bond portfolio we are rotating within our Treasury holdings by adding to inflation protected bonds, i.e., TLT, while reducing exposure to shorter duration government bonds.  This trade is roughly yield neutral, but it amounts to a +0.20-year increase in duration and a small, but helpful, increase in convexity as well.

Source: Strategas Securities as of 9/22/2023

Given our outlook on the economy and the prevailing level of equity valuations in the context of stubbornly high core inflation and margin compression, we also view this move opportunistically.  What are the risks?  The principal consideration, particularly given the recent economic “strong patch” is that bond yields, as we consider above, have not yet peaked for the cycle.  We would not pound the table on the direction of the next 5 or 10bp move in yields from here (and would admit it is more likely higher than lower).  But, by our lights, the overwhelming consideration is the negative impact every basis point increase in intermediate-term Treasury yields from here, is likely to have on the broader economy.  The cumulation of which would, ostensibly, lead duration to outperform.  While there is more data to come, the Fed’s decision to pause and admire its handiwork is not surprising; it is unlikely -  in our view – to consider cuts at this stage.  We remain underweight Equities and tilted toward Value over Growth.

Source: Strategas Securities as of 9/22/2023

In addition to tactical duration opportunities on the fixed income side of the portfolio, our highest conviction equity sector position remains Energy. 

This communication was prepared by Strategas Asset Management, LLC ("we" or "us" or “our”). This communication represents our views as of 09/22/2023, which are subject to change, and are presented for illustrative purposes only. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.

Strategas Asset Management, LLC is an SEC Registered Investment Adviser affiliated with Strategas Securities, LLC, a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser. Both Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with Robert W. Baird & Co. Incorporated ("Baird"), a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser, although the firms conduct separate and distinct businesses.