How to Save the Olympics

We recently sat down with Dominic Nolan, CEO of Aristotle Pacific Capital, to get his insights on the latest trends in the equity and bond markets, developments in the economy, the Fed’s next possible move, the eye-opening economics of the Olympic Games, and opportunities in fixed income. We finished with a speed round of questions and a personal reflection.

‍Market Performance: Total Return

Let’s start with markets. We’ve wrapped up the first half of the year. Thoughts on 2024 so far?

In the first half of the year, the headline number was very strong with the S&P 500 Index up over 15%. The Russell 1000 Growth Index—led by the Magnificent 7 stocks—is up over 20%. When you dig a little deeper, the story is not as robust, with the S&P Equal Weight Index up only 5%. That’s not a poor return, but it does reflect a narrowness within the broad market. The real concerning part is the Russell 2000 Value Index. That was down nearly 1.7% in June and has returned -1% for the year. For smaller U.S. companies, I think the cost of financing and general slowdown in the economy is impacting the performance of businesses.

Any additional thoughts on the Mag 7?

Our technology companies continue to eat the world. The average return from the Mag 7 has been 37% in the past six months, whereas the remaining 493 stocks in the S&P 500 are only up about 4.6%. This sounds eerily familiar to something that happened about 25 years ago. We’ll see what happens.

What about fixed income?

The Bloomberg US Aggregate Bond Index (Agg) is down 71 basis points for the year. High-yield corporate bonds are up over 2.5% year-to-date, and the standout has been floating-rate loans, which are up almost 4.5% this year. We entered the year with the 10-year Treasury yield at 3.9%, and as we sit today, it’s about 4.25%. Now, most folks thought it would be lower this year. However, it does seem range bound at this time. It’d be interesting to see which way it breaks. The consensus is it’s going to break to the lower side, but again, we’ll see.

Magnificent 7: Concentrated Performance

10-Year Treasury Yields Remain Range Bound

What economic trends are you seeing?

It's a push and pull. We have an economy that’s slowing but still growing, with the cost of capital that is elevated. We’ll see to what extent rates will adjust to a slowing economy.

What has surprised you in the first half of the year?

It's the rate story. The curve is still significantly inverted. And if you would’ve said to most investors the curve will remain inverted for a year or two, they would’ve thought we would already be in a recession. We haven’t gotten there. I do think we are in the landing zone. We’ve talked about hard landing, soft landing for a year and a half. To me, the shape of the yield curve is going to give us a pretty good indication of how that landing’s going to go.

GDP, Inflation, Jobs, and Consumer Spending

How does the second half of the year look to you?

I’m going to be paying attention to the long end of the curve. If the long end of the curve starts to drop further and the curve essentially becomes more inverted, that to me shows we’re headed for a hard landing. However, if the Federal Reserve starts to preemptively cut rates and you actually have a long end of the curve that lets the front end come down giving you have a flatter yield curve, I think that will result in a softer landing.

What's the current data telling us about the economy?

Let’s look at four measurements: GDP, inflation, jobs, and consumer spending. A few months ago, the Atlanta Fed GDPNow had GDP for 2024 in the 3% to 4% range. Currently, that’s around 2%, which is consistent with blue-chip consensus. Two percent is a decent number, and that’s above what most Wall Street forecasts originally had for this year. As for inflation, the Consumer Price Index (CPI) sits around 3%. Once we get a two o=in front of that number, I think that’ll give the Fed some room to lower rates. The jobs report continues to be solid. Consumer spending is slowing, but corporations are doing well. So, all in, the economy is doing fine. It’s just a matter of how slow things are going to get.

GDP: Year-End Forecasts for 2024 by Major Banks

We're halfway through the year, and we want to give some over/under forecasts on end-of-year numbers. Let’s start with the 10-year Treasury rate. Five major sell-side banks have a 2024 year-end forecast average of 4.09% for the yield. Would you take the over or under?

I’ll take the under. I think the 10-year Treasury will get into the threes.

Let's move to GDP. The year-end forecast for those same sell-side banks averaged 1.19%. Over or under?

I’ll take the over. I think the major banks are a little too pessimistic on the economy.

Last data point: CPI. On average, the sell-side banks forecast inflation at 2.62% for year end. Over or under?

This one’s the toughest call for me to have conviction on. I think the 2.62% is actually pretty fair, but I will take slightly under on this.

CPI: Year-End Forecasts for 2024 by Major Banks

In June, the Federal Reserve dropped the number of expected rate cuts in 2024 to one. Do you think they have it right?

It’s close enough. Let’s walk through the FOMC’s schedule for the rest of the years. The next meeting is end of July, and the market’s not expecting a cut but some guidance on what’s coming. I think the guidance is going to be set up a cut at the FOMC meeting in September. This aligns with market expectations, which forecasts an 80% chance of a September cut. The November meeting may be a little wonky because it’s two days after the election, but I wouldn’t be surprised if the Fed cuts there. However, a more likely scenario to me is the Fed cuts in September, pauses in November and cuts again in December.

FOMC members said that the rate-cut forecasts in June were a very close call. Who do you think has Fed Chair Jerome Powell’s ear, the hawks or the doves?

I’m of the camp that Chair Powell has wanted to be a dove this whole time. So, I still think the doves have his ear, and I think that’s where his bias is.

Fed Futures: Accelerating Timing of Rate Cuts – Expectations are for 1-2 Cuts

This summer, the Olympics are taking place in Paris. In the past, how have host cities fared financially?

With rare exceptions, host cities have lost a significant amount of money. In the 21st Century, the biggest losers have been Beijing, which lost a reported $25 billion, and Sochi, which lost over $40 billion (which includes $8.7 billion spent on a high-speed railway, which has had limited use). Those are authoritarian countries where information is difficult to get, so those losses might even be larger.

One of the biggest variables in the financial calculations has been a host city’s infrastructure; the less infrastructure you have, the higher the toll you’re going to have.

Historical Costs: Estimated vs. Final Olympic Costs

The 1984 Games in Los Angeles were one of the few Olympics that turned a profit. How did that happen?

Well, the infrastructure was largely in place, including sporting venues and housing for athletes at USC and UCLA. You also had some strong decision makers organizing the games and came up with new revenue streams with corporate sponsorships. Plus, Los Angeles got a sweetheart deal from the International Olympic Committee (IOC). Why? At the time, not many cities wanted to host the Olympics because of the cost. The IOC wanted Los Angeles to be a financial success to spark other cities’ interest in hosting future Olympics. The IOC got the narrative it wanted, marketed that story extremely well, and spiked interest again in hosting the Olympics. Bidders from the Olympic Games went from one in 1984 to a peak of 11 in 2006. Now, because of the financial burden, the bidders for Paris 2024 and Los Angeles 2028 were back down to two each.

Network TV viewership has been in decline for years. How did the Olympics stay top of mind for younger generations?

Generally, interest in the Olympics is on the decline and so are television audiences. That’s not a great combination. How do you combat that? Well, we’re seeing a change in media consumption in general. I think the Olympics have to be more aligned with the streaming mindset. I say give people access to almost every event on a streaming level and maybe have something along the lines of NFL RedZone—very quick snippets of critical moments of almost any sport. That would help keep people engaged. An Olympic RedZone might be a way to engage audiences. Another thing that could really help—but it’s not going to be a popular opinion in some corners—is to enhance wagering. Fantasy football and betting have increased NFL viewership significantly. I wouldn’t be surprised if that would do the same for the Olympics.

Interest in Hosting Has Rapidly Declined: Number of Bidding Cities for Summer Olympics

With trendlines going in the wrong direction, how do you save the Olympics?

In addition to the streaming and gambling aspect, I think costs need to be reduced, especially now when you have cities less interested in hosting. How do you do that? It might be helpful to establish rotating continents so the infrastructure and venue costs would be greatly reduced. Maybe North America, South America, Europe, and Asia rotate once every 16 years as host. Or maybe you have a city or two—such as Los Angeles and Tokyo, for example—act as permanent hosts.

(Editor's note: If you’d like a master class on Olympic economics, the latest episode of our medal-worthy podcast, “Getting Credit,” features Andrew Zimbalist, an economics professor at Smith College and one of the world’s experts on Olympic finances. The episode is available on www.Aristotle-Funds.com and all major podcast platforms, including Apple Podcasts and Spotify.)

Olympic Games Face Declining Engagement

Let’s turn to bonds. Where do you see opportunities in fixed income today?

For the past two years, we have been very constructive on the bank-loan asset class. That trade has had strong yields, you’re immune from movement in the  long end of the curve, and, quite frankly, the credit conditions have been sound. It’s outperforming fixed-rate bonds by over 400 basis points this year and continues to have yields that are 500 basis points higher than the Agg. That’s a great story, yet that asset class has seen outflows for most of the weeks over the past two years. In my opinion, even if rates drop—let’s say the 10-year Treasury gets inside of 4%—I still don’t think you catch up to the loan side. On the investment-grade corporate bond side, the yields are 5.5%. If you think rates are going to drop, I think it’s a wonderful place to be. That’s been part of that barbell narrative we’ve liked for a while now.

Fixed Income Yields and Year-To-Date Returns

Now time for the Olympic edition of the lightning round. I’m going to give you three choices, and I want you to rank them in order: gold, silver, and bronze. Let’s start with Nvidia, generative AI and Bitcoin.

As strong as Nvidia has been, I give them the silver because generative AI is the big tailwind here to me. They get the gold, Nvidia the silver, and the bronze to Bitcoin.

Residential home buyers, sellers or homeowners staying in place.

With prices and rates where they are, the sitters take the gold. The sellers get the silver because it’s still a seller’s market. Buyers are in the weakest position.

Elon Musk, Tim Cook, Jensen Huang.

Jensen’s the guy right now, so he gets the gold. To me, Elon is still Elon, doing magnificent things, particularly in space. So, silver for him. And the bronze goes to Cook, who has shown himself to be a very good operator, though the jury’s still out on his role as an innovator.

“Ted Lasso,” “The Bear,” “Yellowstone.”

These are three series I’ve enjoyed, but my favorite is “Lasso.” It’s fantastic and deserves the gold medal. I’d give the silver to “Yellowstone” and bronze to “The Bear,” though it’s close.

New summer Olympic sports: Break dancing, men’s artistic swimming, kiteboarding.

To me, this shows why the Olympics are struggling. I remember watching break dancing in the 1980s, so that might be nostalgic. Kiteboarding sounds interesting, but maybe not TV friendly. I’d put men’s artistic swimming a distant third.

Baseball, the Olympics, UEFA Gold Cup.

The gold to UEFA Cup Gold. If the Angels were better than they are, they would get my silver medal. But they’re not, so the Olympics will get silver for me.

Let’s close with a personal reflection.

Our family just got back from our annual vacation—this one to Iceland. We went with other families and had a wonderful time. However, there was a significant part missing from our vacation, and that was my college-age son. He’s doing an internship and was unable to make it. I know this is just the natural progression of change and kids growing up, but it still a big hole.

I’ve often heard the advice, “Cherish the years with your kids.” But in my heart, I feel like that’s too passive. I would change it to: “Seize the years.” Do what you can when you can while your kids are still with you.

Definitions:

10-year Treasury note is the interest rate the U.S. government pays to borrow money for a decade.

The Atlanta Fed GDPNow is a running estimate of real GDP growth based on available economic data for the current measured quarter.

Bank loans (or floating-rate loans) are financial instruments that pay a variable or floating interest rate. A floating rate fund invests in bonds and debt instruments whose interest payments fluctuate with an underlying interest-rate level.

Basis points, otherwise known as bps or bips, are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

The Bloomberg US Aggregate Bond Index (Agg) is composed of investment-grade U.S. government bonds, invest-ment-grade corporate bonds, mortgage pass-through securities, and asset-backed securities, and is commonly used to track the performance of U.S. investment-grade bonds.

Blue Chip Economic Indicators is a monthly survey and associated publication by Wolters Kluwer collecting macroeconomic forecasts related to the economy of the United States. Bonds are debt instruments and represent loans made to the issuer. Governments and corporations commonly use bonds in order to borrow money.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

FOMC refers to the Federal Reserve’s Federal Open Market Committee.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

High-yield bonds are debt securities, also known as junk bonds, that are issued by corporations.

Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's.

The Magnificent 7 stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The nominal Gross Domestic Product (GDP) growth rate compares the year-over-year (or quarterly) change in a country’s economic output to measure how fast an economy is growing. Real GDP is GDP adjusted for inflation.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-value ratios and higher forecasted growth values.

The Russell 2000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell1000 companies with lower price-to-book ratios and lower expected growth values.

The S&P 500 Index is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

The S&P 500 Equal Weight Index is the equal-weight version of the widely used S&P 500 Index, which is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

U.S. Treasuries represent the Bloomberg US Treasury Index, which is made up of U.S. government bonds of various durations.

The U.S. Treasury yield curve refers to a line chart that depicts the yields of short-term Treasury bills compared to the yields of long-term Treasury notes and bonds.

Yield is the income returned on an investment, such as the interest received from holding a security.

Any performance data quoted represent past performance, which does not guarantee future results. Index performance is not indicative of any fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index. For current standardized performance of the funds, please visit www.AristotleFunds.com.

The views expressed are as of the publication date and are presented for informational purposes only. These views should not be considered as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment or market. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

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