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Not For Profit Newsletter

In this quarter’s newsletter, we analyze market returns following negative years. We then provide an overview of private market investments in an inflationary environment and charitable gift trends. Finally, review State Street Global Advisors’ current positioning as a source for potential alpha.

Average Returns in the Year Following a Negative-Return Year

After historic market growth over the last few years, 2022 saw major equity indices end in negative territory. This was a culmination of several factors, particularly the inflation spike and the resulting rate hikes that followed. The fed funds rate was hiked seven times in 2022 to combat inflation. It increased from 0.25% in March-22 to 4.50% at present, and as a result the S&P 500 lost -18.1% in 2022, its worst return since 2008. Here, we take a look at historical negative-return years to build our expectations for 2023.

The above chart shows the average returns for the years following a negative-return year. As you can see, historically the market shows a healthy bounce-back across all major indexes. Positive returns were seen in 70% of years across US and World Equities and 60% in APAC, all a decent hit rate.

We remain cautious on equities in 2023. Our base case foresees an upside move in the second half of the year and is dependent on the rate-hike peak as well as how inflation and economic growth play out.

To get more insights on our outlook, read our latest Global Market Outlook report –GMO Outlook 2023.

How a Private Market Allocation Can Help Hedge Against Inflationary Risks

Experts have varying views on whether the current rates of higher inflation will be transitory, or represent a secular trend. While many credible arguments support the transitory inflation thesis – the possibility of more volatile, and perhaps even higher inflation cannot be ruled out. Given this uncertainty, private markets possess multiple characteristics to enable investors to hedge against (and even benefit from) an inflationary environment. For example:

  • Many private market assets contain features to hedge against the possibility of higher long-term inflation
  • The underlying assets of private market strategies have the potential to exhibit better resiliency in an inflationary or rising interest rate environment
  • Private market strategies can enable a focus on sectors and issuers better positioned to benefit from periods of high and persistent inflation
  • A consistent private market allocation strategy could help diversify an investment portfolio while adding favorable risk-adjusted returns

The Covid-19 pandemic induced supply-side shocks and accompanying stimulus measures marked a shift away from the benign inflationary environment of the past three decades. While markets seem to expect long-term inflation to normalize in the 2-3% range, contrarian views cite structural factors such as the changes in demographics, high public-debt loads and ongoing deglobalization to argue in favor of higher inflation going forward. Regardless of which view ultimately prevails – private market strategies across credit, equity, real estate, and infrastructure are well positioned to benefit from a range of inflationary and reflationary scenarios.

Asset Class

Private Credit

Private Equity

Real Estate



Credit oriented solutions for businesses

Equity capital to private companies

Commercial and residential properties

Financing of infrastructure projects

Key inflation hedge Feature

Floating rates

Value creation potential

Underlying asset values & cash flows

Long term contracts with indexed cash yields

Return Enhancement ✓✓ ✓✓✓ ✓✓
Diversification Potential ✓✓ ✓✓ ✓✓✓ ✓✓✓
Current Yield Potential ✓✓✓   ✓✓
Inbuilt Inflation Hedges ✓✓   ✓✓✓ ✓✓✓

With unique characteristics and a full spectrum of risk-return / yield-capital appreciation profiles, the private universe offers a range of opportunities to meet a variety of bespoke investment portfolio needs.

Through a consistent private market allocation strategy across market cycles, investors can explore multiple ways to further optimize the risk-return, diversification, volatility mitigation, and liquidity profile of an investment portfolio.

Click here for further detail on the ability of each asset class to hedge against (and even benefit from) an inflationary environment.

Relationship Between US Charitable Giving Trends and S&P 500 Performance

State Street’s Charitable Asset Management (CAM) group tracks annual giving trends. The chart below shows a significant drop in new gifts over the past two years, mimicking the downward trajectory of recent S&P 500 performance. The expected relationship between charitable giving and market performance is evident when comparing CAM data to the annual S&P 500 Index return.

Tactical Asset Allocation: Current Views

While there is still uncertainty about the economic outlook, recent data has generally been better than expected. This reinforces our view that near-term recession risks are low, but has drawn into question the disinflation narrative. It is likely that the recent data overstates the strength of the economy, but it is hard to dismiss the positive momentum. While inflationary indicators have surprised to the upside, highlighting the stickiness of elements, we still believe that the disinflationary trend will continue.

There are two sides to the current macroeconomic narrative. On one side, we have resolute economic activity. A strong rebound in January retail sales and continued robust labor markets suggest household consumption, a key pillar of growth, remains on solid footing. In the US, payrolls have outpaced expectations recently, while January’s Job Openings and Labor Turnover Survey reports surprised to the upside, with December’s reading revised upward.

In addition, the manufacturing sector appears to have stabilized, while the service sector continues to exhibit strength. The Federal Reserve Bank of Atlanta’s GDP Now tracker estimates a 2.6% YoY GDP growth for the US in Q1 2023, only slightly lower than Q4 2022 growth. Overall, the recent high frequency data suggests economic activity has held firm so far in 2023 and highlights the resilience of the US economy.

On the other side, resilience creates demand, and that fuels inflation. In the US, a string of data prints has given investors pause about the disinflation narrative. Consumer prices (CPI), producer prices (PPI) and even the US Fed’s preferred personal consumption expenditures (PCE) have exceeded expectations and point to stronger-than-expected inflation.

Figure 3: Asset Class Views Summary

Heat Map Figure Article

Source: State Street Global Advisors, as of 9 March 2023. Investment grade bonds consist of investment grade credit, Treasuries and aggregate bonds.

Despite numerous uncertainties surrounding geopolitics, inflation and central banks, investor risk sentiment has continued to remain strong, with our Market Regime Indicator finishing toward the bottom threshold of a low-risk regime. Optimism from January cooled in February after a surprising jobs print and a number of inflation indicators – from CPI to PPI – came in hotter than expected. Investors quickly repriced Fed rate hike expectations by increasing the number of rate hikes and reducing expectations for a cut to close out 2023.

State Street Global Advisors’ tactical asset allocation views are based upon a 1–3 month forward-looking horizon. If you are interested in reading more about our current tactical positioning, please follow the hyperlink here.

About State Street’s Commitment to Nonprofits

State Street has a 35+ year legacy of investing on behalf of our nonprofit clients, and is currently one of the largest managers of assets for endowments and foundations globally with over $150 billion in assets under management. Our team offers extensive solutions for charitable organizations including investment capabilities across all asset classes, OCIO, and planned giving. For more information, contact us.

State Street Global Advisors

Investment Solution Group

*As of September 30, 2022

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