Q1 2024 Quarterly Positioning

Amy: Hello, everyone.

I'm Amy Thomas, a strategist here at First Citizens Bank.

Today is January 18, 2024. I'm joined today by Mr. Patrick Nolan, our director of investment strategy with our Capital Management Group. We're going to talk about some of the positioning that we have for the quarter ahead, and some of the things his team is working on for the quarters ahead. By the way, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

So Patrick, how would you describe your team's perspective on the market this quarter?

Patrick: Yeah. I think we're pretty constructive. In fact, I think we're more constructive in Q1 than we were in Q4.

And recall when we talked last, as we were trading in that quarter, we were, our conviction was improving from even the time before that. So we're kind of gradually building into a more comfortable level with taking market risk.

I think the key questions that the market's going to wrestle with this year are number one, are we going to have hard landing, soft landing, no landing? Number two is what pathway will interest rates take, and what will the Fed be doing with interest rate policy for this year? And the third is, you know, going to be about the news flow around both the US presidential election—of course, that will dominate headlines in a lot of ways here in the US—but also geopolitics, of course, there's a lot going on, in that landscape, and markets will have to react to them in certain ways. So I think those are the big topics that the market's going to wrestle with this year. And, you know, we've got opinions on all of them and have positioned accordingly.

Just to briefly touch on each one of them. The topic of hard landing, soft landing. We are in the camp at this point of kind of that soft landing, no landing camp. I think the hard landing camp, which is the one that really caused people to be very concerned about market risk in the past, I think that's fading into the background. And it's allowing a number of market participants to be a bit more constructive at this point in time. So, you know, we're definitely in that camp.

From an interest rate policy perspective, the futures market is pricing in six or seven rate cuts this year. We definitely think that's too many.

And, ultimately, if it is fewer and rates stay higher for a bit longer, we actually think that's very constructive for equity markets. So part of the reason why we're also constructive kind of along that dimension as well. And then finally, the, you know, the presidential election is going to create a lot of news flow that you can't get away from.

So we try to stay grounded and make sure we really stay focused on the understanding that generally speaking here in the US, US presidential election years are pretty good for equity markets. So we kind of start with that baseline. They do also, however, tend to bring with them a bit more volatility in both the spring and the fall. So, while we're constructively positioned, we're also mindful that there could be some soft patches that we want to be prepared for. And on the geopolitical front, I think oftentimes geopolitics is really about understanding what's already in the price of the markets.

Right? And so many things in our geopolitical discussion today are have been well known for some time, right? So the markets have had a chance to digest the potential outcomes, and I would offer a lot is already in the price. It's really the things that you aren't thinking of that the market participants are not thinking of. The surprise factor, it's the thing that we should potentially be more worried about, it's the reason why we're pretty stable along our thinking, along the dimension of geopolitics.

Amy: So Patrick, in general, how were the portfolios positioned this quarter?

Patrick: Well, I think commensurate with our, you know, more constructive view, we've added a little bit of risk back into portfolios again. Remember, when we sat here and talked about this in Q4, I was talking about the fact that we had been lower in risk in portfolios against our benchmark and were—cautiously optimistic was the term I used at that point in time—we had introduced a bit more risk into the portfolios, but they weren't even running at benchmark risk levels even in Q4. So at this point in time, we've stepped into risk a bit more again. We've now brought them back to benchmark levels, maybe even a touch higher than that reflective of us being more constructive as we head into 2024.

The other thing I would say about positioning broadly in our portfolios is—and these two things are connected is—you know, we've removed a few of the satellite positions that we had in our market-focused portfolios.

And remember, satellite positions are actually geared to help us reduce risk in some ways. So, our removal of those satellite positions actually is what is helping us and to bring risk levels up a bit in the portfolios to make them match the benchmarks a little better.

Amy: Patrick, what are the main tilts in the portfolios?

Patrick: Yeah. So, the biggest tilt that we have on is still a—an overweight to US equities and underweight to non-US equities, specifically developed markets.

We also still maintain a bias towards smaller caps. So think, not just small caps, but small and mid versus large or even the lower end of large-cap space. So just kind of smaller in general.

I mentioned that we've already, we've eliminated a few of the satellite positions. Specifically the ones that we took out were emerging market debt and high yield.

We've maintained REIT exposure in our satellite basket and that's both US and non-US. That tilt remains in the portfolio.

In our risk managing sleeve, which, of course, you know, is focused on just that—managing risk in our models, in our portfolio strategies—we've been moving the duration of the portfolio for that risk managing sleeve around to help it mitigate risk in the portfolio a bit better. We're maintaining a slightly longer duration posture.

In fact, it's the same one we had on in Q4. We've left that alone. So, you know, still trying to mitigate risk a bit more from that side of the portfolio, but the tilt is fairly small at this point.

And as we talked about last time, we're still waiting for the Fed to signal that first rate cut. And I think our decision to do something different within that risk managing sleeve will be driven by when we believe the Fed is going to start to cut rates. So, we'll be watching that closely as the year progresses.

Amy: So Patrick, there's always risk in investing. What are, what risks are standing out to you right now?

Patrick: Yeah. So I think the the first thing that we need to be mindful of is— markets never like to be surprised.

So the the first thing that we always think about is—and it's the kind of the focus question for us is—what is it that we're not thinking of? Because the things that are already known are generally already priced into the markets. Right? So it's—we wanna be try to be as as thoughtful and creative around the items that are not necessarily being thought of as much because they're probably not reflected in market prices sufficiently enough. Right? So first first question, what are we not thinking of?

Second is really about the idea of where the economy goes from here in the US. Right? We talked earlier about hard landing, soft landing, no landing. And we're very comfortable with our thinking around soft landing, no landing. That hard landing opinion is really faded into the background.

Amy: Okay.

Patrick: I think a risk would be, if that opinion, that that scenario starts to move back to the foreground, I don't know that the market is generally priced, prepared for that type of scenario. Right? The interesting thing is we talked about six or seven rate hikes and what does the Fed do from here and the like is the Fed will actually probably give us a pretty good signal as to what is going to be the intended pathway or what what do they at least think is the pathway of the economy.

Interestingly is, if they hold off on cutting rates, it should signal to the market that the soft landing-no landing scenario is probably intact and in play.

However, if they decide to come in, let's say, in March, and cut for the first time in March, it may actually signal to the market that there may be some more weakness afoot that it hadn't considered. Right? That thing that it's not pricing in as much.

So interestingly, I think the timing of when the Fed chooses to go first I think is going to create a signal for the market. It's also going to probably create the boundaries as to how many cuts are even possible this year. But ultimately, it's that it's that risk of hard landing coming back on the table.

And then finally, you know, we don't mind being part of consensus, but we always want to be mindful about how strong that consensus is. So, you know, because it is—it can be valuable to be a what I would describe as a thoughtful contrarian at times. Right?

And, interestingly, if you take a look at just the last couple of years here in the US—2022, we had a rough year. Right? S&P 500 down almost 20%. We entered 2023, consensus opinion was not nearly as constructive as it is right now. In fact, I would call it pretty dour at the start of 2023.

And what happened? That that positioning, that perspective—as consensus—I believe actually set us up. It was one of the contributors to what became a great 2023 performance year for the S&P 500.

Now we have the exact opposite happening. Right? We're coming off a great year in the S&P 500. I just described consensus opinion is much more constructive than it was a year ago, right? We're in that camp. We just want to be mindful of how strong that consensus opinion, that view gets. To us, it's not as strong enough to raise us to the level of concern yet.

Amy: Okay.

Patrick: But it's something we're very closely monitoring because if if the market were to continue to tilt more and more in a single direction, that's when we start to get a little squeamish.

Amy: Patrick, thank you so much for answering questions and for joining me today. If you have additional questions, please visit firstcitizens.com/wealth.

Outro Slide

Patrick Nolan

SVP, Director of Investment Strategy

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Patrick.Nolan@firstcitizens.com | 919-716-4905

Brent Ciliano

CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

brent.ciliano@firstcitizens.com | 919-716-2650

Phillip Neuhart SVP, Director of Market and Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

phillip.neuhart@firstcitizens.com | 919-716-2403

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