SEI Forward Look

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SEI Forward Look

Second quarter 2024.

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Hi, I'm Jim Smigiel, SEI's Chief Investment Officer. The Paris Olympics kickoff later this month and athletes from all around the world will gather to compete under the motto faster, higher, stronger. Today, we will examine the current state of the capital markets through the lens of this Olympic maxim. First up, faster. While the winners of the a hundred meter dash will be crowned the world's fastest man and woman in markets, nothing has kept up with NVIDIA's price action. During the second quarter, chip maker added nearly 1 trillion to its market value in just 30 trading days. It added more than the market value of Berkshire Hathaway in six weeks. Year To date, it has grown by roughly the market value of Amazon at over 1.8 trillion. While no doubt impressive the dominance of Nvidia and a few other mega cap names has dashed hopes of a broadening out of this past year's market rally.

While the S&P 500 index delivered a solid four plus percent over the quarter and has seen year date performance over 15%, most other developed equity markets posted negative performance for the quarter and have fallen even further behind year to date as the big get even bigger. We see this development as risky, given the high level of volatility in the market's biggest names while the VS. or the so-called "Fear index" close the month at roughly 12.5%. The implied volatility for NVIDIA is roughly four times that at over 50%. While it makes sense for a single name to be more volatile than the market when one of the biggest companies in the world is trading at such high levels, this suggests to us that potential turbulence could be on the horizon for equity investors in keeping with the Olympic theme. Let's move on to higher and if government debt were an Olympic event, the U.S. would certainly take home the gold.

As the second quarter was coming to a close, the U.S. Congressional Budget Office projected that the US budget deficit will reach just under 2 trillion for the fiscal year 2024. This total debt projection should hit 99% of gross domestic product this year before growing to a record of over 120% of GDP by 2034, which would be the highest level in U.S. history. Interest costs on the ballooning debt are forecast to reach the highest levels in reported history. And while rising debt is not unique to the U.S. alone, it's dramatic post-COVID-19 pro-cyclical debt dynamics, leave it alone at the top of the podium, these dynamics inform our pessimistic outlook for U.S. interest rates. The U.S. 10-year treasury yield ended the second quarter at 4.36%, which is down roughly 30 basis points from the quarter's high mark on softer inflation and a more accommodative tone from the Federal Reserve.

Spite of this good news, we expect that stubborn inflation and a resilient job market will keep the fed from cutting interest rates until at least November. As such, we remain positioned for higher long-term interest rates. In spite of the quarter's interest rate moves, we'll close out our theme focus looking at stronger, we expect a positive cyclical and structural macro environment to prompt strong recovery in commodities for the second half of 2024. This asset class peaked in mid 22 along with global inflation rates and has struggled as the disinflation trend took hold around the globe. More recently, we have seen surprising production discipline from OPEC Plus and Central Bank Gold purchases both influencing year to date positive returns. We also believe that seasonality factors will add to this positive momentum. As the summer travel demand remains robust and weather related volatility provides potential asymmetric upside pressures.

In addition, July also marks the start of China's third plenum of the central committee, which is the top governing body of the communist party. Expectations for this gathering include infrastructure reforms and stimulus projects focused on power good improvements. We view this as another potential boost to demand in the short term, which further enhances our longer term views of global chronic underinvestment in the commodity space, which we do believe will continue to act as a structural talent. Speaking of long-term demand for commodities, all those chips that NVIDIA and other firms are producing require raw materials to make those chips get installed in machines that require power to run them and place into buildings that need copper wire to deliver that power. We've already seen a substantial increase in the demand for power from artificial intelligence related enterprises. Data centers, for example, have more than doubled their energy usage since 2019, and we only see that rising for me. In summary, while US stocks have been on a tear, thanks. A no small part in the videos outside influence. This also leaves the market vulnerable to height volatility. Given the concentration of big tech, we believe that longer term U.S. interest rates will remain higher on stubborn inflation, a resilient job market, increasing level of margin, west debt. And finally, we think commodities are due for a comeback due to seasonal factors, increased demand in China, and the structural tailwind of global under investment. As always, thanks for watching and for your continued support.

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