OCT 2024: Regime Change
1. Rising Rates vs Declining Rates
2. Growth vs Value (US Equity)
3. Normal Inflation vs High Inflation
4. Technology vs Energy/Commodities (US Equity)
5. Large Cap vs Small Cap (US Equity)
6. US Equity Vs International Equity
7. Developed Markets vs Emerging Markets
8. Renewables vs Nuclear Energy
9. 60/40 vs Something Else (Stocks Vs Bonds)
10. Interest Expense vs Defense Spending
11. Gold/Bitcoin vs Fiat Currency
12. Trump vs Harris
Regime change is on the horizon. I’m regularly amused to study potential changes and if there is an attractive risk/reward investment that can be associated, all the better. Here are 12 possible regime changes on my radar:
1. Rising Rates vs Declining Rates
Regime change? No.
The break neck pace of rate increases from roughly zero to 5% Fed Funds Rate is over. The Fed cuts rates 50bps in September and the market consensus has expressed many more rate cuts are coming. I believe additional rate cuts will be slower and smaller. The good performance from the bond market over the last 12 months is currently an exit point.
2. Growth vs Value (US Equity)
Regime Change? Yes.
As highlighted in JUNE 2024, Mega Cap Tech and the MAG 7 have been incredibly strong for 15 – 20 years. Since June 2024, Large Cap Value and Equal Weight (ticker RSP) have done well as market breadth has improved. I’m not expecting a massive regime change in Growth vs Value, I’m focused on putting client capital to work in both categories.
3. Normal Inflation vs High Inflation
Regime change? Yes.
I believe we are in an inflationary regime for years to come, whether it is 3% or 4%, I’m not interested to pin point the details quarter to quarter. The facts are simple, the rate of Federal Gov’t spending and budget deficit growth is unprecedented and is a major culprit. Until that reverses, inflation will remain greater than 3%...aka, nothing stops this train.
4. Technology vs Energy and/or Commodities (US Equity)
Regime change? Kind of.
With a core portfolio exposure focused on US Equity, WLA’s clients own a substantial amount of Technology. In the S&P500, Technology is 31.5% of the index. Energy is only 3.5%. Nobody really owns enough Energy…I include an allocation to Energy in all my clients’ portfolios. I’m not suggesting Energy replace Technology, but they do seem to compliment one another in the portfolio. It is the same story for Commodities…most clients have a small position in a commodity related ETF. Both Energy and Commodities should also help in an inflationary regime.
5. Large Cap vs Small Cap (US Equity)
Regime change? Maybe.
Small caps have struggled in the rising rate environment – will they do better in a lower rate regime? Yes. I’m on the lookout for a new small cap allocation, possibly an active manager strategy.
6. US Equity vs International Equity
Regime change? No.
International Equity is not something I’m interested in.
7. Developed Markets vs Emerging Markets
Regime change? No.
Emerging Markets Equity is not something I’m interested in. Maybe I’ll take interest in an India or Brazil focused fund, but the idea of a broad or passive EM index exposure is a waste of capital allocation.
8. Renewables vs Nuclear Energy
Regime Change? Yes
For Nuclear, the power is turning on…ESG + Net Zero + Renewable Energy is a fairy tale. Solar, Wind, Etc has not scaled successfully and will probably not meet expectations in my lifetime – if ever. After being shut out of new development for decades, Nuclear Energy is seeing widespread up-take across the US in recent months. Most of WLA’s client portfolios include exposure to Nuclear Energy related ETF.
9. 60/40 vs Something Else (e.g. Stocks vs Bonds)
Regime Change? Yes.
While WLA does invest in bonds, it is based on current investment appeal – it is not a permanent allocation like most “60/40 style” national wealth management firms. In the current environment, I’d rather barbell cash at 4.5% yield and steadily build a core position across the US Equity complex, plus a satellite portfolio of dividend paying equity and /or low correlation sectors for total return (examples have included Utilities, Energy, Commodities, Uranium). Bonds aren’t going to help you offset inflation.
10. Interest Expense vs Defense Spending
Regime Change? Yes.
For the first time ever, the US Federal Government spends more money on its interest expense than anything else (defense spending was previously the top category). It’s not good and it has meaningful impacts yet to be fully realized. Is it inflationary – yes.
11. Gold/Bitcoin vs Fiat Currency
Regime Change? Yes.
Your US Dollars and other developed world currencies are being debased by reckless government spending. While Gold and Bitcoin are two expressions to defend against this – they are not the only options to protect your wealth. US Equity, Real Estate, Commodities are other examples that may help in an inflationary regime.
PS, while Gold and Bitcoin get a lot of media coverage – unless they represent a substantial amount of a portfolio – US Equity has been the best place to defend against inflation and remains the most realistic option (plus real estate).
12. Trump vs Harris
Regime Change? We’ll find out in November.
I’ll simply state neither of them have expressed any views about reigning in the explosive growth in the Federal Government’s deficit. Both parties want to spend money like crazy…are both candidates inflationary? Yes. Maybe one slightly more than the other.
Best,
Jon Fritzinger
Founder / CEO
Western Level Advisors LLC
Hello@westernlevel.com
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Western Level Advisors LLC ("WLA") is a registered investment advisor. The information provided in this commentary is intended to be informative and not intended to be advice relative to any investment or portfolio offered through WLA. The views expressed in this commentary reflect the opinion of the author based on data available as of the date this commentary was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. This commentary is not intended to be a recommendation to buy or sell any investment. Please contact WLA with any questions regarding your accounts. The information provided in this commentary is not a solicitation for the investment management or other services offered by WLA. References incorporated into the commentary from third party sources are as of the date specified and are believed to be reliable. WLA is not responsible for errors in the third party data. Source information is provided under each chart. Additional disclosures are available at www.westernlevel.com.