AQS Performance and Perspective

AQS Performance and Perspective - February 2024

Market Movers YTD 2024

The Fed. Whether misplaced or not, almost all eyes remain on the U.S. Federal Reserve and its vision for short-term interest rates. Flows to money market funds increased in lockstep with Fed QE since 2010 - more money in the system. These assets reached $6 trillion, recently and continue to climb. For its part, the Fed continues to talk down the probability of an immediate cut to rates as evidenced from the January meeting minutes.

Supply. Quantitative Tightening (QT) that began in June 2022 continued throughout 2023 with longer treasuries (10 yr here) peaking in October 2023. QT refers to the runoff of the balance sheet, increasing supply. From a peak of $9 trillion, the Fed has now deftly run off assets to a balance of $7.7 trillion. What is the target balance and by when? Chair Powell indicated this will be discussed at the March 19-20 meeting.

Mortgage Rates. Fed balance sheet runoff caused the market to absorb mortgage supply as well. Mortgage rates peaked at slightly more than 8% in October / November 2023 and stand at about 7.25% today. While ground up multifamily development has slowed, owing mostly to supply outstripping absorption, single family residential starts now exceed pre-Covid levels.

Equities. have shown no fear with the S&P 500 breaching the 5,000 level in the month of February. Since mid-October 2022 (3580), a runup to 5087, a 42% gain is impressive. Upbeat earnings, anticipation of Fed cuts and FOMO (Fear Of Missing Out).

Geopolitical. Ukraine, Gaza Strip, Red Sea shipping lanes, the Middle East, China and Russia round out the most evident geopolitical risks.

Data. Absent a shock from any of the above, the next data point of interest will be the Personal Consumption Expenditures Price Index. The PCE Deflator, a favorite of Chairman Powell, captures financial services including the stock market. It is expected to be...'hot'.

More Inflation Data - A Little Hotter Than Expected.

January CPI: 0.3% MoM / 3.1% YoY; Ex-Food & Energy (Core): 0.4% / 3.9%

January PPI: 0.3% MoM / 0.9% YoY; Ex-Food & Energy (Core): 0.5% / 2.0%

AQS Trailing Reinvestment as of February 21, 2024

This Month

Credit Spreads - The Enemy is Us
AQS Supports Teachers - February winner
More Downsizing Inbound?
Upgrades / Downgrades

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Credit Spreads - We Have Met the Enemy and It Is Us

Historians recognize this as a play on a famous quote by Master Commandant Oliver Perry during the War of 1812:

"We have met the enemy and they are ours."

Those that spent some time in comic strips recognize the quote from "Pogo" from the comic strip of the same name:

"We have met the enemy and it is us."

Annuities, Demographics and Retirement Driving Debt Markets:

In 2023, annuity sales reached an all-time high of $385 billion, up 23% from the year before. Sales were driven by relief from the 'lost decade' of Quantitative Easing during which fixed income rates were held abnormally low.

The life insurer that sells the annuity typically invests the premium in a fixed income asset. Approximately 50% - 70% of this premium is invested in a corporate bond, mortgage backed or asset backed security. These sales figures which are predicted to remain strong due to demographics - retiring baby boomers seeking predictable income, suggest that insurers alongside pensions seeking all-in higher yields may continue to compress spreads and keep securities yields lower.

Record Balances in Money Market Funds

Money market fund balances have reached records too ($6 trillion). This 'cash' has increased from ~$3 trillion in 2011 due to QE (which put the cash in the system and put debt on the Fed's balance sheet) and (much) higher short-term rates. When the Fed does lower short-term rates, will this cash go to debt? The Fed certainly has ample supply. Or will stocks get pushed ever higher? Game on!

AQS Supports Teachers - February Winner

AQS has announced the first winner of our "AQS Supports Teachers Sweepstakes". Each month, AQS will award a $500 Amazon giftcard to a classroom teacher located anywhere in the United States.

We all know a classroom teacher. Many selflessly use their own funds for classroom items. AQS wants to help. All the information you can stand as well as the winner announcement can be found at

www.aqssupportsteachers.com

The winner annoucement(s) will be at the bottom of the page. If you do not see Amber's picture, simply 'refresh' or 'reload' your browser. The remaining pictures are placeholders - Amber is the first winner.

Know a teacher? Send them our way!

More Downsizing Inbound?

While employment data continues to show a robust economy, one cannot help but notice 'downsizing' announcements through December 2023:

· Hasbro layoffs: 20% (December 2023)

· Spotify layoffs: 17% (December, 2023)

· Nokia: 16% (October 2023)

· Roku: 10% (September 2023)

· Farmers Insurance: 11% (August 2023)

· Grubhub: 15% (June 2023)

· Paramount: 25% (May 2023)

· Shopify: 20% (May 2023)

· Meta layoffs: 13% (March, 2023)

· Twitter layoffs: 10% (February, 2023)

· Zoom layoffs: 15% (February, 2023)

· Google (Alphabet) layoffs: 6% (January, 2023)

· Salesforce layoffs: 10% (January, 2023)

· Vimeo layoffs: 11% (January, 2023)

The above is only a partial list and lesser known companies have been excluded. For a complete list see Mondo.

Upgrades / Downgrades

Looking at the upgrade / downgrade ratio at ratings agencies provides some perspective on their view of the economy. As presented, a ratio of less than 1.0 indicates more downgrades and upgrades. A ratio of more than 1.0 reflects more upgrades than downgrades. The following graphics are for corporate bonds only and reflect only the issues followed by each of the SROs. In alphabetical order and not inclusive of all NRSROs:

IF we were to assume that the universe of each SRO was approximately the same, it would appear that Fitch has been a little less optimistic than the others. This could also reflect more optimism during the Covid era. Consume this data responsibly!