Looking Under the Hood

Looking Under the Hood

After the first fourth months of the year, we have noticed there are several headlining themes:  that the market’s fate is tied directly to monetary policy, inflation may be evolving into stagflation, geopolitical conflicts hover as a risk, and technology stocks have been the darlings of 2024.

Source: Bloomberg as of 12/31/23

Source: Bloomberg as of 03/31/24

Source: Bloomberg. S&P 500 returns from 12/31/23 through 03/31/24

Source: Bloomberg. S&P 500 returns from 03/31/24 through 04/30/24

In our opinion, the first theme is a pretty convincing one as we see that at the beginning of the calendar year, the Fed Funds Futures were projecting roughly 6 interest rate cuts in 2024 with the first one expected as early as March.  As we can see, the S&P 500 had a banner first quarter.  Then, as the first quarter concluded, we noticed the Fed Funds Futures implied half the number of interest rate cuts for 2024 as they did to begin the year, down to less than 3 cuts with the first cut unlikely until the middle of summer.  Between now and then, the Fed Funds Futures (as of 04/30/24) are now implying only two interest rate cuts with the first one expected in September, thanks in large part due to recently reported higher than expected inflation data.  Since that development, the S&P 500 Index lost nearly 40% of its first quarter gains.

Source: Bloomberg year-over-year Consumer Price Index growth plotted from 12/31/23 through 04/30/24

Source: Bloomberg year-over-year Gross Domestic Product growth plotted from 09/30/23 through 04/30/24

The second theme seems to be a bit of a recent trend but one that economists have feared – stagflation, which is an economic atomic bomb of persistent inflation coupled with declining economic growth.   The above two graphs illustrate that condition may be unfolding.  As we can see, inflation continues to be persistent between a 3% and 3.5% year-over-year growth rate.  In fact, the most recent read came in higher than expectations.  Additionally, the most recent GDP number (reported on 04/25/24) came in lower than expected and contracted from December’s number.  Of course, it will take more than one quarter’s worth of data to make this assertion with conviction, however, the trend seems to indicate some concern.

Source: Bloomberg. S&P 500 returns from 04/25/24 through 05/07/24

As discussed above, GDP was reported on 04/25/24.  The S&P 500 is up nearly 3% from that point through the time this blog was written (05/07/24).  We believe this is an indication that the market is not only less concerned about inflation but view a decline in GDP as hope for potential interest rate cuts.

The third point is geopolitical risk, highlighted specifically by the Israel and Hamas conflict.  Most recently, on April 1, Israel bombed Iran’s embassy in Damascus, which sparked concerns that the Israel/Hamas war may involve more nations and effectively become a World War.

Source: Bloomberg. S&P 500 returns from 04/01/24 through 04/05/24

The S&P 500 experienced some decline in the wake of this event; however, it is not the decline we believe we would typically see pricing in the event of a World War.  Therefore, we believe that, while it remains a risk, it does not seem to be one that the market is baking in.

Lastly is the narrative that the market is being predominantly driven by technology stocks (specifically, AI related technology stocks).  Of course, there is no question that those securities have largely contributed to the S&P 500’s recent performance as we discussed in our most recent blog.  However, as we also discussed in that blog, there were indications of market breadth during the first quarter.  To take it another step further, we can look at the performance of the S&P 500 versus the Nasdaq 100, which generally represents mostly technology stocks.

Source: Bloomberg. S&P 500 returns from 12/31/2023 through 04/30/24

As we can see through the plotted graph, the S&P 500’s performance exceeded the Nasdaq 100 through March and has maintained that lead through April.  We believe that is further evidence that the market is not simply being led by technology or AI.

To summarize, we believe that the biggest and most impactful market risk is inflation and how it relates to monetary policy.  The other themes have demonstrated some effect on the market, but it does not appear to us that any of the other three themes have the magnitude that inflation/monetary policy do.  Of course, these themes could develop into stronger extremes, and thus, eventually have a stronger impact on the market.  However, as it stands now, they are serving more as headline grabs than they are as market movers.  That said, potential stagflation could put the Federal Reserve in a difficult position as it relates to their stance on interest rate cuts and ensuring a “soft landing”.  At this point, the market seems to view this as a positive, however, we believe it will come with long-term consequences.  We still believe 2-3 interest rate cuts are more likely than not in 2024 with the first one likely to occur between the July and September meetings.  As discussed, we believe a move like that will have a meaningful impact (in this case, positive) on the market.

Kevin Battista

VP of Product

Kevin leads Artha’s product, design, and SCRUM teams and his responsibilities include overseeing the strategic vision of Artha, the product roadmap, the end-to-end user experience, as well as the delivery cycles. With 12+ years of experience in product development and product design, Kevin has developed and implemented creative solutions that have solved countless problems within the FinTech community. He’s built software that’s used in the largest financial institutions in the U.S. and has successfully led teams through the product development lifecycle, resulting in multiple acquisitions and exits. Kevin has a B.S. in Finance and Information Technology from Virginia Tech and an MBA from Wake Forest University.

Natallia Sakharuk

VP of Quality Assurance

Natallia is the VP of Quality Assurance at Artha who leads with a commitment to elevating product and service quality across the organization. She possesses a deep understanding of quality methodologies, industry standards, and is recognized for her strategic vision, a data-driven approach to decision-making, and her unwavering dedication to upholding the highest standards of quality in all aspects of the business. With over 8 years of dynamic experience in QA, she successfully orchestrated quality initiatives in FinTech and Corporate Real Estate projects resulting in enhanced product reliability, reduced defects, and increased customer satisfaction. Natallia holds a B.S. in Economics & Logistics from Belarusian State Economic University, a B.A. in Foreign Language from Academy of Postgraduate Education, is certified by ISTQB (International Software Testing Qualifications Board), and she has continued to stay at the forefront of industry advancements by attending workshops, seminars, and conferences.

As a trusted leader, Natallia is poised to drive Artha’s quality assurance initiatives to new heights, ensuring a lasting impact on both customer satisfaction and business growth.

Alexandre Junges

VP of Engineering

Alexandre leads Artha’s development team, collaborating closely with developers and software engineers to architect and construct a robust application that aligns with business requirements, prioritizing security, performance, and scalability. A fervent technology enthusiast, Alexandre is committed to enriching lives through innovative solutions. With over a decade of experience in application development spanning diverse industries, he holds a B. Tech. in Analysis and Systems Development from Unisinos, a Project Specialization from UFRGS (both universities in Brazil), and he is a Certified Microsoft Professional.

Justin Lowry

President And Chief Investment Officer

Justin Lowry is the President and Chief Investment Officer of Global Beta Advisors. Justin’s responsibilities include the oversight of investment activity, market research, and product development at Global Beta Advisors. Justin joined the firm as an executive member upon its foundation. Prior to working at Global Beta Advisors, Justin worked at Oppenheimer Funds as Head of Research and Product Development for its Beta Solutions exchange-traded fund business from 2015 until 2017, which at the time, held over $2 billion in assets in the Revenue Shares ETF suite. One of the cornerstone ETFs in the business, RDIV, won the ETF Innovation “Smart Beta ETF of the Year” award (Click here for more information about the award, contestants, and its qualifications). From 2010 until 2015, Justin served as CIO for Index Management Solutions, a subsidiary of VTL Associates, where he served as a subadvisor, providing custom portfolio solutions, portfolio management, and trading services to many ETF issuers that summed to $2 billion in management. Those funds included the Revenue Shares ETFs, KraneShares China ETFs, and several ETF issuers who launched their funds through Exchange Traded Concepts. Prior to the inception of Index Management Solutions, Justin worked as an analyst at VTL Associates since 2008. Justin earned his B.S. in Business Management from Saint Joseph’s University.

Vince Lowry

CHAIRMAN

With over 40 years of experience in the financial industry, Vince Lowry has built a distinguished career as an Investment Advisor. He began his journey in 1984 at Shearson Lehman, where he quickly established himself as a leader in the field. Over the next two decades, he grew his investment business to an impressive $20 billion in assets under management (AUM). Vince attributes this success to using modern portfolio theories as he was an early adopter of global asset allocation for diversification as well as utilizing advances being offered by technology.

In 2004, Vince and his team departed from Smith Barney Citigroup to launch their own Registered Investment Advisor (RIA) firm, VTL Associates. Over the next 11 years, they continued managing client assets while also developing an ETF family of funds known as RevenueShares.

One of Vince’s most notable achievements came in 2009 during the financial crisis. As the Investment Advisor to the Pennsylvania Treasury, he recognized an opportunity amid market turmoil. He advised the Treasury to leverage the New York Federal Reserve’s TALF program, investing in CMOs, ABS, and other distressed yet highly rated fixed-income securities. This strategic move resulted in a remarkable $3 billion gain for the Pennsylvania Treasury within just nine months.

In 2015, Vince and his team sold VTL Associates to Oppenheimer Funds, a subsidiary of MassMutual. Over the next two years, they played a key role in expanding Oppenheimer Funds’ ETF business. By August 2017, after fulfilling their obligations under the acquisition agreement, Vince and his team set out on a new path. Recognizing the agility of smaller firms, who are better positioned to explore and create creative strategies by embracing the rapid changes in the world of technology, they launched a new venture focused on delivering investment advice through innovative technology-driven solutions.

Vince Lowry continues to be a thought leader in the industry, leveraging decades of expertise to navigate the evolving financial landscape and drive meaningful results for his clients.