Hedges, privates and tax alpha: How investors are navigating record-high markets

2024 Economic and Market Outlook

• U.S. equity markets are up approximately 10% year-to-date, driven by strong corporate earnings and sales growth.
• Corporate earnings growth is projected at roughly 8% for 2024, with margins expanding beyond initial expectations.
• The unemployment rate has remained below 4% for over two years, supporting rising wages and retail balance sheets.
• Consumer spending remains robust, accounting for nearly two-thirds of the economy.
• Moody's has lowered its recession forecast to a 15% probability (one in seven), viewing it primarily as a buffer for exogenous shocks.
• Valuation Constraints: High market valuations relative to historical averages are identified as the primary challenge for investors.

Investor Sentiment and Hedging Trends

• A pre-conference survey indicates 33% of clients hold negative views on markets, while 45% are positive and the remainder are neutral.
• Skittish sentiment correlates with demand for protection strategies as equity markets approach all-time highs.
• The U.S. structured notes market has expanded to over $100 billion annually, offering embedded downside protection.
• Investors are utilizing structured notes to maintain equity upside exposure while securing capital protection against potential drawdowns.

Fixed Income and Cash Management Strategy

• High current cash yields are creating inertia, though the Federal Reserve is expected to initiate rate cuts in the second half of 2024.
• Rate cuts are projected to continue at a measured pace through calendar 2025.
• 10-year Treasury yields are forecast to anchor around the 4% level despite the cutting cycle.
• Investment grade and high-yield corporate credit are viewed as attractive relative to Treasuries due to low recession risk.
• Private credit markets are noted as a potential alternative for yield enhancement and alpha generation.

Private Markets and Technology

• Private markets are increasingly accessible to individual investors due to improved reporting and technology platforms.
• U.S. tech companies are now staying private for an average of four years longer than they did 20 years ago.
• Companies are approximately six times larger at the time of their IPO compared to historical norms.
• The prolonged private status of firms allows private investors to capture a larger proportion of value creation before public markets enter.
• The "private for longer" narrative is resonating as a significant source of alpha given the shrinking pool of public equities.

RIA Sector Needs and Strategic Priorities

• RIAs require technology partnerships and institutional support to scale operations effectively, particularly as firms grow from $8 billion to $80 billion in assets.
• Product access is a critical priority for RIAs expanding their client bases to new demographics or asset classes.
• Independent wealth management firms prioritize partnering with large institutions to replicate the infrastructure of major financial bodies.
• Tax alpha and tax-efficient portfolio management are rising as top priorities for both RIAs and their individual clients.
• Providers are expected to demonstrate capabilities in delivering index-aligned returns with superior tax outcomes in both U.S. and international markets.