Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. Today is Tuesday, March 26th, 2024. I'm joined by Patrick Nolan, our Director of Investment Strategy here at the bank. Each quarter, I sit down with Patrick to discuss some of the headwinds and tailwinds that the Capital Management Group is navigating on behalf of assets held here at First Citizens Bank. 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.
Patrick, how would you describe your team's perspective on the market this quarter?
Patrick: Generally speaking, we feel pretty good. You know, remember, we came into January with an increase in risk appetite in our portfolios. We had adjusted the risk upward. And I think we were justified in doing that. You know, if you look at the performance that we've seen thus far, S&P 500 is up almost 10% as we sit here year to date.
You know, 10% is normally a number you would take for a full year of equity returns, and we've got it, you know, right out of the gate in the first 3 months. So we feel pretty good about where the market is postured. People are going to say that the market's expensive, and, you know, in certain measurements we wouldn't argue that point. But we would, you know, also remind all that, you know, markets can become expensive and stay expensive for a long time. So price by itself does not necessarily concern us.
You know, when we talked in January, we were talking about three things that we felt the market was going to be wrestling with this year. The one was the direction on the economy itself—hard landing, soft landing, no landing. The second was, what would the Federal Reserve be doing with interest rates? And the third was what was going to happen relative to presidential politics, the election, geopolitics, et cetera. And, you know, as we sit here today saying, like, well, 3 months later, what have we learned?
On the economics front, you know, we had made a call that we thought that the hard-landing scenario was probably a back burner item, that the soft landing, no landing was the more likely outcome in our opinion. Three months later, we think the hard-landing scenario is actually further on the back burner than it even was in January. So, you know, we feel good about that.
Federal Reserve at that point, remember, consensus was pricing in between six and seven rate cuts in 2024. We thought that was aggressive. We were kind of thinking it was going to be more half that. And, 3 months later, it does appear now market's pricing in about half of what they started with. So pathway for rates to us feels normal. It's a sign of economic health.
And then, you know, finally, as it relates to presidential politics and, you know, in January, we kind of thought we knew who the nominees would be. Now we actually know who the nominees will be. You know, the polls will suggest that, you know, citizens may not be crazy about the nominees, but the certainty around knowing who the nominees are is generally helpful for markets.
Amy: So in general, how are portfolios positioned this quarter?
Patrick: Yeah, generally speaking, following this constructive mindset that we have—and even I think we're a bit more positive now than we even were in January. Portfolios are up. We're actually going to choose this quarter to not reallocate or rebalance them. We're going to effectively stand pat with the positions that we put in place in our January trading.
What that means is, you know, we've had a bit of what some have called an everything rally, right? The idea that, you know, if you think about when you put a portfolio together and you have certain weights, and then everything goes up, the weights actually generally don't change all that much. So where we sit today inside of our return-generating sleeve—it's the portion of the portfolio designed to take risk and seek returns—the nature of the weights that exist inside of that sleeve of the portfolio actually aren't that different from where we set them up in January. So leaving them alone feels right to us.
What has changed is the fact that equities went up quite a bit as I made reference to, but bonds didn't. So in essence, what that means is every portfolio that we run, every strategy that has a mixture of stocks and bonds actually owns a bit more stocks today than it did in January and on a percentage basis, a bit less bonds. And we're intentionally leaving that in place as well.
So to give you an example, the 60/40 portfolio—60% stocks and 40% bonds—as it was allocated in January, by the end of this quarter, roughly where we are today, is now 62/38. It's about 2% overweight to stocks. That's the weighting that we're going to leave in place at the moment because we feel as constructive as we do about the markets at this point in time. There will be a moment for us to reallocate, and we will certainly do so as we watch markets going forward.
But at the moment, we've kind of left all of the underlying holdings in place. And, you know, the big callout is to leave this this 2% overweight to equities in place as well.
Amy: So what are the main tilts that you're making this quarter?
Patrick: Yeah, so having answered that last question the way I did, effectively the overweights that we had in place are still overweights, and underweights are still underweights. And we've got that kind of one different position, if you will, which is the relationship of stocks versus bonds in the portfolio that own them both.
But just, you know, kind of to hearken back to what we talked about in January, where we were looking to be tilted. Generally speaking, we are overweight US versus non-US. We are overweight in smaller-cap stocks versus larger-cap stocks, and I say it that way intentionally. It's not so much small caps or large caps. It's just if you think about the capitalization as a continuum, we generally are drifted a bit lower in the way our portfolios are constructed.
So, you know, when you start to see smaller size rewarded in the markets, we think our portfolios will benefit from that. We went down to only a few satellite positions in the portfolio. We had positions on in REITs, both US and non-US. Those positions, of course, are still there with the status quo decision we've made.
And then finally, in the risk-managing sleeve, we talked a little bit about having a slightly longer level, slightly larger level of interest rate risk—we would call duration. And we chose to own what translates to owning a bit longer maturity bonds in the portfolio on average, and that position is still there. And, if you remember, we talked in January, I said our next big decision, watching the Federal Reserve, is going to likely be to lengthen the maturities in that risk-managing sleeve even further. The tilt right now is very small. We are probably going to make it bigger, but we're going to try to time it a bit closer to where we believe the Fed is close to making its first rate cut. That's when you'll see that action take place.
Amy: So how are you thinking about risk in the portfolio since you're allowing it to drift this quarter?
Patrick: Yeah. When you make the decision to be overweight equities, you better be comfortable with the risk environment that you're operating in, and we in fact are. And, you know, I like to think about risk as a dial that you turn. It's not a switch on the wall that you flip on and off. And as we've sat and had this conversation for the last four quarters—each conversation we've had, I've talked a bit more about we're adding a little risk, we're adding a little more risk, we're adding a little more risk. And we're slowly turning that dial up quarter over quarter, getting the portfolio, you know, more and more engaged in the equity markets as we do it. And we're comfortable with that, at this moment in time.
We think the conditions are right for us to continue to turn the dial subtly, but consistently over time. There'll be a moment where we want to turn that dial back, right? And the important thing is—if there is a risk that we haven't contemplated and we're constantly thinking about, you know, what's the risk that we're not thinking about at this moment? But if you're ever confronted with those—I've said markets don't like to be surprised—and if you're ever confronted with that, we can turn that dial pretty quickly, right, when we need to. So we're not concerned about that as much, but, you know, we want to make sure that we're properly adjusting the risk that we're taking to be in line with the sentiment that we have.
And, ultimately, as it relates to the equity markets where risk-taking occurs in our markets, generally—the market to us right now feels pretty rotational in the sense that you don't have everything going up and going down all at the same time, right? You have this changing of leadership that seems to be occurring under the surface. And when you have that happen, first of all, what it indicates is a general broadening out of the market where it's not just about the Magnificent Seven anymore. It's about changing leadership, changing participation across the markets. That's a much healthier market environment where you can actually have equities persistently move higher without necessarily creating, like, dislocations or these kind of bubble-type formations that might occur, these imbalances that might occur in the portfolio.
So, you know, overall, we think, you know, yes, equities continue to go higher, but they seem to be going higher in a manner that seems pretty healthy to us. So it gives us less pause about, you know, taking on more risk at this point. And then, you know, we think it's the right environment to do what we're doing.
Amy: Patrick, thank you so much for being here, and thank you all for watching. We hope you found this information helpful. For more information, 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
Disclosures
The views expressed are those of the author(s) at the time of writing and are subject to change without notice. First Citizens does not assume any liability for losses that may result from the information in this piece. This is intended for general educational and informational purposes only and should not be viewed as investment advice or recommendation for a security, investment product or personal investment advice.
Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.
First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA and SIPC an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.
Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA and SIPC. First Citizens Asset Management, Inc. provides investment advisory services.
