cvernon, Author at Marquette Associates

Office Space in Need of a Booster

As the Omicron variant continues to spread like wildfire across the globe, companies once again find themselves modifying plans for a return to in-person work. Although the market for U.S. office space started to show signs of stabilization during the second half of 2021, the new wave of Omicron cases has already started to impede the recovery across most industries. As a result, the office sector could potentially endure the most profound and longest lasting impact from the recent case surge among the four major core property types. Current remote work dynamics and incremental office supply are expected to exert additional upward pressure on vacancy rates, which increased during the third quarter of 2021 to 16.8%. While the emergence of virus variants and the prevalence of unvaccinated individuals may act as catalysts for permanent changes within the office sector, many companies are expected to opt for flexible work schedules in 2022 rather than leasing additional real estate. With businesses contemplating further vaccination requirements, as well as continued travel restrictions and virtual interactions, there now exists a widening gap between occupied and underutilized office space. To that point, net absorption rates, which serve to quantify the difference between leases and vacancies, have fallen by roughly 120 million square feet during the pandemic, representing the largest drop since the 2001 Technology Bubble.

Going forward, corporations and employees alike may be forced to navigate through a unique work environment on a permanent basis. While hybrid and remote working approaches will likely serve as headwinds for the demand for office space in the aggregate, institutional investors may be well-positioned to achieve portfolio alpha with long-term exposures to high-quality tenants, Class A properties, office conversions, and distressed low-occupancy buildings. As a firm, Marquette will remain focused on working with our clients to target markets with a compelling mix of talent, demographics, and tenants.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Credit Spreads Snap Back from Initial Omicron Surge

Given the positive news on the weakness of the Omicron variant and its susceptibility to at least some of the COVID-19 vaccines, credit spreads have generally retraced their widening since the first Omicron case in South Africa was reported to the World Health Organization on November 24th, 2021. Our chart this week compares high-yield spreads against two averages using the Bloomberg High Yield index. The lower dotted line is the average spread for the year-to-date period, with current spreads sitting just above of this figure. The higher dotted line is the since-inception average spread (excluding the extreme periods of 2008 and 2009), with today’s spreads still generally extremely tight compared to this long-term average despite the recent Omicron scare. While we assess only U.S. high yield corporate spreads, these are generally representative for investment grade bonds, bank loans, and emerging markets debt as well.

Omicron has quickly spread to at least 57 countries around the world thus far, but spreads tightened across the board last week as President Biden chose to institute stricter COVID-19 testing requirements for travelers entering the U.S. from abroad instead of implementing more lockdowns and broad mask mandates. Additionally, Moderna and Pfizer have been mobilizing to update their vaccines against the Omicron variant. However, the tail end of last week brought with it some widening pressure as Europe tightened its COVID-19 restrictions and the Consumer Price Index saw a 6.8% increase for the month of November on a year-over-year basis, topping the previous month’s 6.2%. This figure raised some concern that the Federal Reserve may accelerate its tapering and rate hike schedule.

Last week, the fully vaccinated rate remained at 60% for the U.S. and rose one point to 45% for the world. With still a long runway to go before herd immunity levels of 80% are reached, and since issuers remain risk-averse as evidenced by benign fundamentals ranging from generally low leverage to use of loan and bond issuance proceeds directed towards refinancings rather than LBOs, we may expect spreads to potentially tighten further. It is worth noting that this tightening may not be without potential dislocations along the way. As of this writing, spreads are very near all-time tights. Marquette will continue to monitor fixed income valuations, fundamentals, and technicals as we progress through the recovery from the pandemic.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Don’t Forget About Those Old 401(k) Accounts!

According to a recent study conducted by Capitalize, $1.35 trillion worth of assets were held in forgotten 401(k) accounts as of May 31st, 2021. This figure is based on estimates of 24.3 million retirement accounts with an average balance of $55,400 per account. Based on this study, it is evident that millions of participants are missing out on additional retirement savings each year their old accounts are left behind with previous employer plans, since holding multiple accounts often leads to investors incurring higher fees. To that point, Capitalize estimates that an individual could experience up to $700,000 in foregone retirement savings as a result of forgotten 401(k) accounts. As 2021 draws to a close, plans sponsors should look to begin the new year by helping employees consolidate retirement accounts, which could lead to cost savings and the accumulation of plan assets, by utilizing the following tactics:

Confirm participant data, including email and mailing addresses, is up to date to ensure communications will be received
Collaborate with the relationship manager of your retirement plan recordkeeper to develop a targeted participant communication strategy (email, hard copy mail, or onsite visits) that highlights the benefits of consolidating retirement accounts from previous employers
Ensure communications clearly explain the process for rolling over outside retirement assets
· Paperwork required to effectuate rollovers can be confusing to many participants, however, the majority of recordkeepers employ support teams available to assist individuals with transfers
· The phone numbers and email addresses of these support teams should be clearly identified in communications to participants

To increase the chances of success when it comes to participant rollovers, communication campaigns should be continued throughout the entire year

Finally, technological developments and the reporting capabilities of retirement plan recordkeepers will allow plan sponsors to measure the effectiveness of these campaigns. By the end of 2022, sponsors should review results related to the number of rollovers completed, the amount of assets gained, and the extent to which employees were actively engaged with the topic during the year. This may help plans delineate future goals and better understand the most effective ways to communicate to participants.

If this is of interest to your plan, please contact your Marquette consultant for additional information.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

‘Tis the Season for Consumer Spending?

The COVID-19 pandemic resulted in significant changes to, among a plethora of other things, consumer behavior in the United States. As a result of the virus outbreak in early 2020, the personal savings rate of domestic consumers saw a dramatic increase to a record high of 26.0% in the second quarter of last year. This propensity for conservativism during times of economic hardship can clearly be seen in our chart this week. Direct relief payments made to individuals as part of the government’s massive stimulus program were among the primary contributors to increased personal savings rates, as consumers saw limited opportunities to spend while in lockdown. As time went on, many individuals used excess savings to pay down debt and invest in equity markets, which helped fuel historic levels of retail trading activity. Online retail sales also increased a few months into the pandemic in large part due to pent-up demand, as indicated by the 10.0% quarter-over-quarter change in personal consumption during the third quarter of 2020.

With the holiday season upon us, many investors are curious about the state of the American consumer in light of the challenges posed by the last two years. On one hand, consumer balance sheets remain relatively strong. At the end of the third quarter of 2021, the personal savings rate in the United States was roughly 9.6%, well above the figure recorded at the end of 2019 of 7.4%. This likely means that individuals have more cash at their disposal than in previous years. At the same time, there are several headwinds facing consumers that may persist into the new year. Higher costs due to inflationary pressures and supply chain difficulties have already impacted a significant number of Americans and may cause a drop in consumer confidence if these issues are persistent in nature. The Omicron variant and other strains of the COVID-19 virus may also lead to renewed calls for economic shutdowns, which could leave consumers with fewer spending options. Finally, it is important to note that while the personal savings rate rose overall for consumers during the first several months of the pandemic, increased rates of savings were disproportionately attributed to higher-income individuals and households. This could mean that a large subset of the population is ill-equipped to deal with rising costs and, as a result, unable to spend at levels consistent with history. Ultimately, only time will tell how the American consumer will respond to ongoing uncertainty and whether governments and policymakers will see a need to provide additional economic relief. In light of the dynamics at play and the headwinds currently facing consumers, investors should remain realistic and pragmatic about spending levels heading into the final month of 2021.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

In Context Video: Is the 60/40 Portfolio Dead Forever?

In this video, the authors of our recent white paper discuss the 60/40 model portfolio — a long-time approach to portfolio construction that generally consists of a 60% allocation to equities and a 40% allocation to fixed income. From the decades of success the 60/40 portfolio has experienced (and why) to skepticism about its future viability in light of the current low interest rate and expensive equity market environment and how organizations may still be able to meet their return targets, we seek to answer if the 60/40 portfolio’s efficiency is a thing of the past.

Marquette’s In Context series brings our latest research to your screen, with discussion led by the authors behind Marquette’s papers and newsletters. From current events and trends to portfolio strategy and the broader economic landscape, we explore the questions investors are asking with consideration and the context you need to know.

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For more information, questions, or feedback, please send us an email.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

Bulls on Parade: What’s Driving the 2021 Digital Asset Rally?

The first bitcoin futures ETF — the ProShares Bitcoin Strategy ETF — was approved on October 15th, making it easier for investors to access the most well-known cryptocurrency. Not surprisingly, Bitcoin’s network value (the market capitalization) surged on the announcement, reaching $1.13T (equating to $61,571 per coin). However, this was not the first time Bitcoin’s capitalization crossed $1T: as the orange line in the chart shows, Bitcoin’s total value has crossed this threshold several times since 2020, with significant volatility along the way.

Certainly, the ProShares ETF approval has provided more access to investors, and the October run-up can at least be partially attributed to this new channel. However, there also appears to be an evolving demand dynamic in terms of investor type, which could create broader acceptance of cryptocurrency as an asset class in the coming years. We can examine this trend by looking at the types of transactions on the bitcoin network to see what has changed over the last five years.

Illustrated in blue and on the left axis is bitcoin’s daily exchange-to-network flow ratio: this measures bitcoin transfers on open exchanges (both inflows and outflows) as a percent of total network transfers. The total network is a classic ledger of accounts, the blockchain technology which serves as the foundation for all cryptocurrencies; transfers are debits and credits to and from accounts. Transfers are classified as either open exchange (retail investors), or over the counter (i.e., wholesale, OTC — more akin to institutional investors). As the ratios in blue approximate open exchange flows, the remaining network transfers approximate OTC flows. Overlaying exchange flows and network value propounds the degree to which exchanges drive or do not drive asset appreciation. To that point, the data illustrated above suggests three points:

Historically, retail participants via open exchanges drove Bitcoin demand. Daily exchange-to-network flows surged from mid-2017 through mid-2020, averaging ~35.2%, with a high of 99.4%.
Around August 2020, the drivers of demand shifted. Daily exchange-to-network flows decreased and have sustained five-year lows, averaging ~15.4% in 2021, with a low of 0.8%.
OTC transfers correspond with the 2021 rally, averaging ~84.6% of network transfers. Although it is not definitive, this implies institutional wholesale transfers are the dominant driver of Bitcoin’s value appreciation through 2021.

Taking this analysis a step further, it appears that more institutional money is driving demand for bitcoin. In the past, the infancy of the asset class coupled with the radical volatility of returns was enough to frighten most institutional investors off. If the trend suggested by this chart continues, however, bitcoin and other cryptocurrencies may become a more common holding across institutional portfolios.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Defined Contribution Plan Legislative Update – 4Q 2021

This legislative update covers Congress’ continued negotiation of retirement legislation with the hope of finalizing Secure Act 2.0 early next year; as it stands, there are two legislative bills proposed by the House and Senate. We also review updates from the Department of Labor on a proposed rule entitled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights that would allow plan participants to consider environmental, social, and governance (ESG) factors when selecting investments and exercising shareholder rights; recent cybersecurity guidance from the Department of Labor; an upcoming review and report by the Government Accountability Office for Congress on Target Date Funds; and 2022 contribution limits issued by the IRS.

Read > 4Q21 DC Legislative Update

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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