October 2-6, 2023

Tactical Signal 9

Sowell’s technical averages again were weakened by last week’s market volatility but cautiously remain in full position (100%), helped by positive economic reports on consumer sentiment, GDP, and durable goods orders.

In September, cementing its historical reputation for the September Effect, the month concluded on a somber note, with equity averages surrendering -0.77% and -4.77%, respectively. This decline was primarily driven by the looming specter of a federal government shutdown and the simultaneous surge in bond yields. The week closed on a disquieting note as markets grappled with the absence of federal funding approval. However, a last-minute deal on Saturday breathed a sigh of relief, securing short-term stop-gap funding for the government, extending the saga 45 more days until November 17.

Of paramount concern, the bond market experienced heightened volatility, propelling mortgage rates to levels not seen since the early 2000s, posing a formidable headwind for the housing sector. 20-yr and 30-yr bond yields rose in excess of 20 bps last week to 4.92% and 4.73%, respectively.

September proved to be a challenging landscape for equity markets, leaving little refuge for investors. Both growth and value stocks, as well as stalwarts in the Technology and Consumer sectors, suffered losses exceeding 5%. In a sea of red, the Energy sector boasted a 2.4% gain for the month, thanks to a robust rise in oil prices that exceeded 5%. Exxon Mobil, the sole energy heavyweight among the top-10 holdings in the S&P 500 index, saw a commendable gain of +5.75% in September, while the broader index itself retreated by -4.77%. Meanwhile, the Technology-related giants, including Apple (-8.87%), Microsoft (-3.66%), Alphabet (-3.90%), Amazon (-7.89%), and NVIDIA (-11.86%), played a significant role in dragging the S&P 500 into negative territory.

As we bid adieu to September, market sentiment is poised to be influenced by the temporary relief stemming from the avoidance of a government shutdown, upcoming third-quarter earnings reports, and pivotal economic indicators on the horizon, including Manufacturing PMI, Construction Spending, Factory Orders, and the Unemployment Rate.

"The guys today, they have no plan. They're not going to touch taxes. They are not going to touch entitlements. It's just all make-believe. And it's a lesson that, once you start pretending to other people, you end up lying to yourself."

– NY Times Columnist David Brooks, PBS Newshour on Why a Government Shutdown, September 29, 2023.

Private Credit Primer

Private credit has been on the rise in recent years. It is a world where borrowers from corporations to small and medium-sized enterprises and real estate projects seek financing from non-bank sources. Tighter banking regulations, a legacy of the 2008 financial crisis, forced traditional banks to enhance their capital cushions. Especially after the Dodd-Frank Act of 2010, riskier lending was nudged outside the banking sector. In this environment, non-bank lenders, including private equity firms, asset managers, and specialized lending institutions, stepped in to meet the financing needs of a wide range of borrowers. Global private debt has doubled from $500 billion to over $1 trillion in less than ten years. The size of the private credit market at the start of 2023 was approximately $1.4 trillion and is estimated to reach $2.3 trillion by 2027, according to Preqin & Bloomberg.

Private credit is also becoming an attractive vehicle for investors to manage and grow their assets. One of the primary draws of private credit lies in the potential for attractive and less correlated returns. These investments often offer yields that surpass those available through traditional fixed-income securities. Besides, this asset class tends to have a low correlation with traditional stocks and bonds, making it a valuable tool for spreading risk and enhancing overall portfolio stability. It is also a tool that's flexible enough to be tailored to meet the specific preferences and risk appetites of individual investors. From structuring deals to negotiating terms, investors have the power to customize their investments to align with their financial goals.

Yet, private credit is not without its challenges. Chief among the concerns is illiquidity, which often results in capital being tied up for extended durations. Additionally, private credit carries a heightened exposure to various risks, including the risk of default. Furthermore, private credit investments typically entail a two-part fee structure that has the potential to erode a portion of the excess profits. As in Callan's newest 2023 research, the median number of the management fee is slightly over 1%, topped with an extra 15% of the performance fee, with a preferred return rate of 6-7%. Given its private nature, successful investment in this field necessitates expertise, active management skills, and substantial experience in due diligence, which makes it a relatively expensive structure of investment.

The private credit market has undeniably grown remarkably in recent years, transforming into a vital player in the financial landscape. While investors take the tailwind of the high potential return of private credit investment, it is always critical to understand the risk and return relationship within the vehicle. The heightened potential returns in this asset class arise from increased exposure to risks and do not come without a cost. It is important to understand your risk appetite and tolerance to choose the right asset allocation and investment strategy.

Private credit, a world where borrowers from small to mid-sized enterprises and reel estate projects seek financing from non-bank sources, has been on the rise in recent years.

Reports Oct 2-6, 2023

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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