Parsing Through a Solid Backdrop for Equities

One of the quarter’s more notable performances in traditional asset classes came from long-dated US government bonds, a proxy for which is the TLT ETF, which was up 12.9%. This was the asset’s fifth-best calendar quarter in twenty years. More remarkably, it was the only quarter in the past twenty years that long-dated US government bonds generated a double-digit return without a coinciding drawdown from equity markets. Every prior quarter in which the TLT was up more than it was in Q4 ‘23, the S&P 500’s return ranged from -11.4% (Q2 ’10) down to -21.9% (Q4 ’08). This is because investors tend to sell stocks and buy bonds as their psyches shift into a defensive posture, with their primary concern being a return “of” capital instead of a return “on” capital.

This past quarter’s rarely seen divergence is meaningful, we believe, because it could mark a turning point in market psychology around the persistence of inflation, a phenomenon that is notoriously hard to predict. January is the time of year when all kinds of outlooks and predictions about the coming year crop up, most of which are about as reliable as forecasts of what the weather will be next month or who will win the presidential election this year. Astute readers will note that this paragraph’s lead sentence is not a prediction but rather an interpretation of what could explain a unique combination of returns across asset classes. However, understanding the collective thinking that could elucidate market movements is an important starting point for thinking through future probabilities, as public markets are generally thought to be efficient discounting mechanisms.

Indeed, a broader look at market expectations and economic data suggests the system is in a pretty good spot right now. The bond market anticipates annualized inflation over the next two years of 2.1% as of this writing, down meaningfully from the 3.4% per year implied just nine months ago. The Commodity Research Bureau’s spot price index syncs up with this dynamic, closing 2023 at the lowest level in almost three years with continued downward movement to start this year. Fed officials are now talking about the timing and extent of interest rate cuts, as well as slowing the pace of asset sales from their balance sheet. Fed futures markets now imply a greater than 50/50 chance of a cut prior to the end of the first quarter; if that proves correct, it would be the first time in over 40 years that we have seen a rate cut on the heels of two consecutive quarters of GDP growth above 4.5%. The VIX enters the year in its 12th percentile, implying low fear broadly. In my view, these numbers indicate, other things being equal, that the path of least resistance for the market is likely higher, as it has been for most of its history.

As active managers, we are able to proactively make adjustments in our portfolios, a key difference from strategies that are rebalanced to a benchmark on a set frequency.

As always, we remain the largest investors in our strategies and welcome any comments or questions.

Bill Miller IV, CFA CMT
Miller Value Partners
@billfour

The iShares 20+ Year Treasury Bond ETF (Ticker: TLT) seeks to track the investment results of an index composed of US Treasury bonds with remaining maturities greater than 20 years. The Commodity Research Bureau BLS/US Spot All Commodities Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes in business activity. Fed funds futures are derivatives based on the federal funds rate and are a direct reflection of collective marketplace insight regarding the future course of the Federal Reserve’s monetary policy. The CBOE Volatility Index, or the “VIX”, is designed to produce a measure of the 30-day expected volatility of the US stock market based on the prices of S&P 500 call and put options

The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

References to indices and their respective performance data are not intended to imply that Miller Value Partners’ Strategy’s objectives, strategies, or investments were comparable to those of the indices in technique, composition or element of risk nor are they intended to imply that the fees or expense structures relating to the Strategy or its affiliates, were comparable to those of the indices. The indices are unmanaged and cannot be invested in directly.

The performance information referenced herein does not imply that future results will be similar. There can be no assurance that the Strategy’s investment objectives will be achieved and a return realized. Returns for periods greater than one year are annualized.

The views expressed in this commentary reflect those of the author as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Data from third-party sources cited herein is believed to be reliable, but may not have been independently audited by Miller Value Partners.