Channel 11: October Markets, Red Election Wave

DoubleLine Portfolio Manager Ken Shinoda reviews (0:00) financial markets for the month of October and year-to-date through Nov. 11, 2024, including the rally in equities and credits amid rise in interest rates driven by expectations of more deficit spending, inflation and growth under the second presidency of Donald Trump. Among potential investment ideas, Mr. Shinoda points out the value of credit relative to equities and sees opportunities in Agency mortgage-backed securities. On the interest-rate front, he shares his outlook for further curve steepening and considers at what point higher yields could hurt heretofore hard-charging but narrowly led equities. This segment of Channel 11 was recorded Nov. 12, 2024.

Highlights:

(0:47) Rallies in asset classes off growing expectations of a Trump victory and the fact of that victory amid a Republican sweep of the Senate and the House of Representatives. These asset classes include small-cap stocks on the outlook for corporate tax cuts and financials on the outlook for deregulation.

(3:02) The ignition of fervor in the most speculative “Trump trades” as exhibited in rallies in bitcoin, dogecoin and Tesla shares. “Dogecoin had done nothing for a while; it has gone parabolic.”

(3:42) A modest boost for commodities with the growing odds of a Trump victory, although this was offset by weakness in China, the world’s heaviest consumer of raw materials. Precious metals have been the winners year-to-date through Nov. 11.

(4:31) Bonds rallied into September on “super-dovish” expectations of Fed cuts, then “a pretty dramatic sell-off as Trump’s odds to win ignited a sell-off in the yield curve, a steepening, a term premium priced into the back end.” In part, this reflects expectations of higher inflation as exhibited in break-evens. If the 10-year yield reaches around 4.7%, Ken Shinoda sees possible headwinds for equities.

(6:05) Rallying corporate credit in the face of rising Treasury rates, narrowing investment grade and high yield spreads to their tightest levels since the Global Financial Crisis.

(7:17) Big contraction since the Sept. 18 meeting of the Federal Open Market Committee in the market’s expectations of cuts in the federal funds rate. Mr. Shinoda also notes the de-inversion of the Treasury yield curve after the longest inversion of two- to 10-year yields in history. “I think the curve will continue to steepen, either because the Fed cuts and/or because the long end’s going higher. So we do not like the ultra-long end.”

(8:32) In the fixed income universe, “lot of spread tightening month-over-month across the board, except for Agency mortgage-backed securities. Poor Agencies just can’t win – wider on the month but still looking cheap. That has been a value trap because of a lack of buyers with banks out of the picture. As the curve steepens and the Fed cuts, the banks will come back.”

(10:22) The attractiveness of credit to equities. “While spreads have come in, we still think credit looks really compelling, especially relative to equities that have been on such a tear. At current valuations, it just makes the case for a diversified credit portfolio to be able to potentially outperform equities over the next decade.”