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Over the last quarter of 2023 the LOM Fixed Income Fund gained 3.16% as fixed income markets responded positively to the potential end of tighter global monetary policies. For the year as a whole, the Fund provided a total return of 5.90%.
At the beginning of 2023 consensus projections saw a year of exceedingly weak growth amid tangible risks of a downturn. Federal Reserve members projected a recessionary increase in the unemployment rate and extremely low growth for 2023. Professional forecasters were not much more optimistic as they placed the chances of economic decline at some of the highest levels in years with 85% of economists forecasting a recession.
However, by the end of the year, growth had instead meaningfully exceeded expectations, with GDP rising 2.3% through Q3 as the US added approximately 2.8 million jobs. Meanwhile, inflation has cooled to some of the lowest levels since the initial price surges of 2021, with core PCE inflation already coming in below the Fed’s late-2022 projections. In short, 2023 turned what was once a bleak outlook into a story of remarkable recovery.
In the fixed income markets, the Federal Reserve executed a notable pivot in December, transitioning from a perceived adversary to an ally as we approach the critical 2024 U.S. election year. During the December meeting, the Fed appeared to be leaning into additional interest rate cuts in the months ahead.
Notably, the Fed’s “dot plot” diverges significantly from market pricing. The Fed is projecting only three rate cuts of 0.25% each, compared to the approximately six cuts or 1.5% priced into the bond market at current levels. Acknowledging a deceleration in inflation, the Fed now expresses equal concern for economic growth and employment. Meanwhile, corporate credit spreads remain close to 5-year lows as measured by the US Corporate BAA-Treasury Spread index.
Although there appears to be no substantial weakening in the U.S. economy yet, Chairman Powell appears willing to support growth should the ongoing economic expansion face significant challenges.
In this environment, we continue to focus on short to medium term investment grade bonds which we find attractive on an issue specific basis. We also continue to hold and opportunistically trade some hybrid securities paying up to 7% on a current yield basis.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
