Cayside Review: 2024 Q2
This newsletter includes our second-quarter review, global market update and outlook, key numbers, and announcements.
Global Market Update & Outlook
U.S. Equity Markets continued another steady advance in the second quarter, with the S&P 500’s +4.4%. Through the end of June, year-to-date (YTD) total returns for major U.S. indexes are now as follows: S&P 500 +15.2%; Dow Jones Industrial Average +4.7% and the tech-focused Nasdaq +17.3%.
Bond yields and performance were mostly flat during the second quarter as interest rates remain elevated, but rate fluctuations have been less volatile (Barclays Aggregate Bond Index was flat in Q2, and now -0.7% YTD).
Global commodity prices showed meaningful moves during the second quarter. Gold reached another all-time high during the quarter advancing +4.5%. Silver also gained +16.9% during the quarter, bringing year-to-date performance to +22.1%. We expect elevated demand and volatility for assets typically associated with real interest rate imbalances and geopolitical concerns including commodity markets, energy markets, and currencies.
In recent weeks, the S&P 500 reached a new all-time high, driven prominently by the surge in U.S. tech stocks. This rally has been fueled by ongoing excitement surrounding advancements in artificial intelligence (AI), enabling tech firms to consistently surpass earnings expectations.
Despite concerns about the concentration of gains within a narrow group of stocks, we maintain an optimistic outlook on U.S. equities, particularly within companies that have defensible cash flows and pricing power during inflationary environments. We are also being very cautious and mindful of rising investor sentiment. The Volatility Index at a historically lower level of 12.45 (as of June 28, 2024) combined with American Association of Individual Investors (AAII Investor Sentiment Survey) ending the quarter well above historical averages for “bullish” sentiment is often a sign for increased volatility or market pull backs.
As we navigate through the remainder of the year, we also observe the upcoming presidential election and its potential implications for market dynamics. Historical data suggests that while economic fundamentals primarily drive market performance, differing policy approaches in areas such as taxes, tariffs, energy, healthcare, and other regulations could influence sectoral performance and volatility under different administrations.
Tax policy is one of the biggest issues that will be center stage over the next year. The most visible discussion concerns what will happen to the provisions of the Tax Cut & Jobs Act (TCJA), most of which are set to expire at the end of 2025. When passed in 2017, the package represented the most prominent domestic policy initiative of the Trump administration. If the provisions are extended, keeping tax rates lower creates new federal budget deficit concerns from the resulting tax collection reduction. However, if some or all provisions of the TCJA are not extended, tax rates could be higher for up to 60% of tax filers. Other expiring provisions would impact the standard deduction, child tax credits and estate and gift tax exemption amounts and tax rates. For corporations, an expiration of TCJA would result in the top corporate tax rate moving from 21% back to 35%. Given these potential changes, we suggest reviewing Tax and Trust & Estate planning with professionals to mitigate impacts of the potential changes in 2025.
Important Topics
INVESTMENT OPPORTUNITIES & RISKS
EQUITIES: Equities have been the beneficiary of fund flows from new money growth and investments that are perceived to be low real returns. Companies with large cash positions, low levels of debt and defensible products and revenue (Apple, Meta, Microsoft, etc.) have been viewed as safe havens against economic, consumer and geopolitical uncertainty and have benefited by driving markets capitalizations into the multiple trillions of dollars range.
However, under the surface, many companies are facing limited revenue growth as consumers struggle with inflation and decreased spending power. Additionally, corporations attempt to balance profit margins as price increases are being offset by increased productivity from technological advancements such as Artificial Intelligence. The rapid price appreciation in certain equities or sectors warrants caution as large price increases can be followed by large price decreases to those investors that show up late to the party. Our approach is to own great operating companies while adding capital to areas of the market that may have been overlooked and have strong fundamentals for long-term ownership.
CREDIT: Credit seems to be separated into three areas: (1) highly-liquid U.S. Treasury Bills, (2) less liquid corporate and private debt trading at attractive yields and (3) the rest of the credit market that has exhibited a poor risk-reward in terms of not being compensated in real yields and the potential for increased default rates and liquidity mismatches. In the credit space, we recommend a “Barbell” approach allocating to U.S. Treasury Bills for liquidity coupled with actively managed credit managers that have the potential to generate above average yields during a higher interest rate environment. To further take advantage of higher rates for taxable investors, we are also in favor of high-yield municipal credit in selective geographies and sectors of the municipal bond market.
Top Rated CLO Investments have been in trouble: Investments in AAA-rated tranches, traditionally perceived as the safest and most secure, have recently encountered unexpected and significant losses, challenging long-standing assumptions about their resilience. In April 2020, during the peak of the COVID-19 crisis and widespread economic uncertainty, a collateralized loan obligation (CLO) failed its AAA overcollateralization test. This marked the first instance of such a failure since the global financial crisis. However, given the context of a nearly complete economic shutdown and substantial interventions by the Federal Reserve, the event was somewhat understandable, albeit not entirely unexpected.
A more concerning development emerged in May 2024. Despite the S&P 500 reaching historic highs, the AAA tranche of a $308 million commercial mortgage-backed security (CMBS) note, backed by the 1740 Broadway building in Manhattan, incurred significant losses. Investors in this supposedly secure tranche received less than three-quarters of their initial investment after the loan was sold at a substantial discount. This incident marked the first time since the Lehman Brothers collapse in 2008 that holders of top-tier CMBS debt experienced such losses, exposing potential vulnerabilities for more defaults in credit markets.
UNCORRELATED STRATEGIES: In an attempt to diversify away from traditional strategies that have become increasingly overlapped in terms of owning similar securities, Cayside has been recommending allocations to active managers and strategies that have the potential for a differentiated investment return profile. Additionally, these strategies have the potential to mitigate the many risks that exist in the current market. We acknowledge an increased potential of “Black Swan” risks that could arise from global military conflict, political upheaval and oversized global public debt burdens. We view certain uncorrelated strategies, including diversified hedge fund strategies, macro and quantitative trading strategies as an effective way to gain portfolio diversification.
REAL ASSETS: We have been increasing our allocation to a basket of real assets (Gold, Silver, Bitcoin, REITs). We believe the potential for persistent inflation and possible deflation loom on the horizon and should be addressed as a risk to portfolios and protecting wealth. Cayside recently released a Whitepaper, “Protecting Purchasing Power in Inflationary and Deflationary Markets” to address these concerns and offer solutions in more detail.
Business Updates & Personnel News
IN THE COMMUNITY | Cayside Partners was very involved in The Benjamin School Alumni Golf Tournament this year which was held in May at Lost Tree Golf Club in North Palm Beach, FL. The event brought together alumni, friends, and parents of The Benjamin School to help raise funds and awareness for alumni initiatives and scholarships. As our three founding partners Colin, TJ, and Tod, met each other at The Benjamin School over 20 years ago they each look forward to helping grow the legacy of the school and quality of the alumni initiatives. As Palm Beach County continues to grow, driven by an influx of new families and individuals seeking the exceptional quality of life and opportunity it offers, we recognize the pivotal role of education in shaping our community’s future.
A NEW CAYSIDER | Colin Hickey, our Co-Founder and Managing Partner, welcomed a beautiful baby girl into their family. Carly and Colin brought Quinn Sullivan into the world during the second quarter at Jupiter Medical Center. We are grateful for the outpouring of support from our colleagues and clients.
BUSINESS UPDATES | We are delighted to share an update on our summer internship program, which showcases our commitment to nurturing talent and fostering future leaders in finance. This summer, we have welcomed Ryan Spilman, who has brought a fresh perspective and enthusiasm to our team, contributing actively to various projects and gaining invaluable hands-on experience. Ryan is currently a junior at the University of Richmond and an accomplished student-athlete for the Men’s Lacrosse team. Our internship program not only benefits our interns by providing practical exposure to real-world financial operations but also enriches our firm by infusing new ideas and energy. We are proud to support the growth and development of young professionals like Ryan, who represent the future of our industry.
Congratulations to our Co-Founder and Managing Partner, Todger Strunk, for recently becoming CEPA certified! The Certified Exit Planning Advisor (CEPA) designation is a testament to our commitment to helping clients and business owners navigate the complex process of preparing their businesses for sale. With Todger's expertise and experience in dealing in Investment Banking, Initial Public Offerings and Business Sales, we can help business owners enhance their business's value, streamline operations, and provide holistic advisory support customized to their needs before and after a transaction occurs.
We are also pleased to announce that Samantha Albert, our newly minted Director of Client Advisory, has successfully passed the Uniform Investment Adviser Law Examination (Series 65). Samantha's new role and certification will further enhance our firm's ability to deliver comprehensive and personalized investment advisory services to our clients.
We now have Assets Under Management of approximately $200 million and continue to improve our offering of services to our valuable clients. We appreciate your support and confidence in our process and are excited to keep adding value for each of our client families.
- Contact Us -
Please do not hesitate to reach out with questions or comments via email at
operations@caysidepartners.com or by calling 561.768.9621. We look forward to hearing from you!
Disclosures: Cayside Partners, LLC ("Cayside") makes no warranty as to the accuracy or completeness of any data herein. Information presented in this report is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Past performance is not indicative of future results. This report is intended for the recipient(s) only and not for further distribution without written consent. Investment advice offered through Cayside Partners, LLC, a Securities and Exchange Commission registered investment advisor able to provide investment advice in states where it is registered, exempt, or excluded from registration. Content contained herein should not be construed as an offer or solicitation for investment advice or for the purchase or sale of any security, insurance, or other investment product. Investments involve the risk of loss, including possible loss of principal. Please consult with a qualified financial, tax, accounting, or legal professional before implementing any ideas or strategies discussed here. Content provided is obtained from sources believed to be reliable but cannot be guaranteed as to its accuracy or completeness. The AUM figures disclosed herein are as of June 30th, 2024, and may be subject to change. Our firm's AUM figures are reported on a gross U.S. Dollar basis and may include assets managed on a discretionary and non-discretionary basis. Past performance is not indicative of future results, and AUM figures are subject to change. For further information regarding our firm's AUM or to obtain a copy of our most recent Form ADV, please contact us.