30 Apr 2024
23 min read

Investment Outlook - Q2 2024

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New Frontiers: How 2024’s US Election Redefines Boundaries

US elections do matter, but the reality is that rarely are they as meaningful for markets as investors expect. That's because the real changes tend to be correlated with sweep scenarios. At the risk of flying in the face of decades of collective wisdom, this year has the potential to be very different. Sweep scenarios in both directions are likely being underappreciated, and presidential executive actions may matter more to the economy and Fed policy than ever. The leading candidates' starkly diverging views on tariffs and immigration are likely to mark a pivotal moment for the economy in 2025 and beyond.

Additional highlights

  • Pension Solutions Monitor: We estimate that pension funding ratios increased over the first quarter of 2024. Based on market movements, the average funding ratio is estimated to have increased from 104.1% to 108.2%.
  • Fixed Income: We moved from neutral investment grade credit to modestly overweight over the course of the quarter. While the technical backdrop became less supportive due to record supply, spread widening in the middle of the quarter was relatively short-lived as yield-sensitive buyers ramped up demand. In long credit specifically, we believe that more than half of full-year M&A related issuance has already been met, and thus we expect supply to be less of a headwind going forward. 
  • Equities: The S&P 500 is up another 9% in the first quarter and nearly +28% since the low last October. To us, the most surprising aspect of the current leg of the rally is that it has come in the face of rising rates—both real rates and break-even inflation—which is a very different dynamic than the initial portion of the run-up. We interpret the price action as confirmation of both the relative strength of the US economy and of the reacceleration of growth and inflation.
  • Private Credit: On top of the traditional private illiquidity premium, IG private credit offers premiums for understanding more complex deal structures, newer issuers and relative size versus public markets. These premiums, historically averaging between a 50-100 basis point spread to public equivalents, have seen a recent increase as more borrowers turn to the IG private credit market in response to stricter bank lending conditions following the banking crisis in the spring of 2023. 

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Thanks to the adoption of LDI, plan sponsors have become much more sophisticated in their approach to managing pension liabilities in the last ten years. This increased sophistication sharpens plan sponsors’ and investment managers’ focus on funded status outcomes.

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