Author: cvernon

The Holiday Party Guest List

Though the leaves have only started to change color, holiday party planning is in full swing. And while ample food and drink are necessary inputs for any type of holiday celebration, it’s the guests who ultimately make the party…or break it. In a way, this dynamic isn’t all that different from the markets — at any given time, the prevailing economic and market conditions will dictate investor returns. Given this analogy, we thought it could be fun to take a survey of the “attendees” in the current market environment and see if we can draw a connection with real-life examples along with what each guest means to the success of the party…and investor. Oh, and one caveat as we go — similar to actual party planning, sometimes we don’t want to invite someone, but we have to invite this person; circling back to the financial markets, we can’t control what forces exist in the markets, but we will do our best to determine those that will be merry and those that will not. Confused? Don’t worry, I am too, but we’ll figure this as we go through the invite list.

Highlights from this edition:

  • The Delta variant’s impact
  • Consumer spending
  • The credit and equity markets
  • The coming Federal Reserve taper
  • Earnings peak for equities
  • Labor market shortages
  • Commodity returns
  • Inflation concerns
  • The Evergrande debt crisis

Read > The Holiday Party Guest List

Watch our Q3 2021 Market Insights Video for an in-depth analysis of the third quarter’s performance by Marquette’s research team.

 

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.

Q3 2021 Market Insights Video

This video features an in-depth analysis of the third quarter’s performance by Marquette’s research team, reviewing general themes from the quarter and risks and opportunities to monitor through the end of the year. Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

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Back So Soon?

Over the past decade, U.S. private equity firms have returned to market sooner and sooner. The fundraising environment for these organizations remains attractive due in large part to strong performance and the persistent gap between private and public market valuations. Furthermore, the current robust dealmaking climate, both in terms of platform investments being made and potential add-on activity throughout the period during which portfolio companies are held, means that managers are both investing their funds more quickly and holding additional capital in reserve. These factors have resulted in more frequent fundraises.

This dynamic of accelerated capital deployment introduces incremental risks for private equity investors, including increased vintage year risk with the potential for greater return dispersion throughout an economic cycle. Moreover, more frequent fundraising could put stress on a private equity firm’s team, both with respect to the investment professionals leading deals and the operational resources executing value creation plans. Finally, more frequent fundraising, if not accompanied by shorter hold periods, will require private equity firms to return to the market more regularly with less realized performance, as potential gains stemming from recently deployed capital will be largely unrealized.

The trend of private equity firms deploying capital more quickly and returning to market sooner puts pressure on limited partners to continuously think strategically about portfolio construction. Thoughtful, consistent investment pacing that is supported by a robust go-forward pipeline of compelling fund opportunities will help to mitigate many of the aforementioned risks. Additionally, a deliberate approach will allow limited partners to prioritize opportunities in which they have the most conviction, gain access to those funds, and capture the outsized return potential of private equity investments.

Print PDF > Back So Soon?

 

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.

The Impact of the Delta Variant on the U.S. Economic Reopening

Thanks to a rollout of effective vaccines at the beginning of 2021, daily new cases of COVID-19 in the United States steadily declined from roughly 250,000 in January to 12,000 in July. That said, daily new infections then quickly reverted to over 80,000 in about one month. This uptick was mostly due to the outbreak of the Delta variant, a more contagious form of SARS-CoV-2 which now accounts for nearly all new cases in the U.S. With the nation now better prepared to combat the strain using both vaccinations and regulations including mask mandates, new daily cases of the Delta variant have since declined to around 54,000 in recent days. This week’s chart assesses the impact of the Delta variant on the domestic economic reopening by examining travel and dining trends using datasets from OpenTable — an online/mobile restaurant reservation service — and the Transportation Security Administration. To measure the scale of the economic slowdown caused by the coronavirus pandemic, the chart shows the percentage change in the number of restaurant diners and air travelers compared to pre-pandemic levels in 2019 (e.g., 10/10/21 vs. 10/10/19). Seated diners are individuals who dined at a sample of restaurants in the United States using OpenTable via online reservations, phone reservations, and walk-ins. Air travelers are those individuals who were screened by TSA agents at security checkpoints within airports in the U.S.

As can be inferred from the chart, both datasets clearly indicate a complete economic shutdown in March of 2020 following the onset of the pandemic. This was followed by an economic reopening several months later, represented by consistent upward trends in both data series leading up to June of 2021. When the Delta variant started circulating in July, seated diners and air travelers decreased by 20% and 30% in the following periods, respectively (compared to 2019 levels), marking a shift in the trends that had been exhibited in previous months. That said, both series picked back up shortly thereafter, reaching -4.8% and -18.4% in October, respectively (again, when compared to levels recorded in 2019), as daily new cases of the Delta variant have subsided. All of this is to say that the impact of the Delta variant on the U.S. economy pales in comparison to that of the original COVID-19 outbreak, as individuals and businesses alike seem better equipped to balance protection against the virus with economic activity. If daily new cases of the Delta variant continue to decline and the vaccination rate in the United States improves, the data indicate that a full economic reopening could take place in the foreseeable future.

Print PDF > The Impact of the Delta Variant on the U.S. Economic Reopening

 

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.

What Are the Ramifications of a Debt Ceiling Breach?

With an agreement finally showing promise to resolve the U.S. government’s potential and impending debt ceiling breach, investors are assessing how this development might affect underlying portfolios. The debt ceiling is the maximum level that the U.S. government is permitted to borrow. This threshold was set by Congress over 100 years ago to make sure government borrowing does not reach excessive levels. Historically, every time the ceiling has been close to being breached, Congress has legislated a higher debt limit. However, the current situation is especially concerning given how close to the deadline we are and how contentious this issue is in Congress right now.

This newsletter examines the key issues of the debt ceiling, important dates both past and present, and the potential impact of a breach.

Read > What Are the Ramifications of a Debt Ceiling Breach?

 

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.

Commodities: The Full Story

The first three quarters of 2021 have seen positive performance from a variety of asset classes ranging from U.S. and international equities to bank loans, which have exhibited returns close to their 10-year averages. However, one segment of the market that has experienced strong, aberrational performance on a year-to-date basis is commodities. Through the end of September, the S&P GSCI, a broad-based index that includes futures contracts on physical commodities, has returned 38.3% since the beginning of the year, far in excess of its long-term average. Recent performance for the asset class has largely been driven by surging demand for raw materials amid economic reopenings, coupled with pandemic-fueled supply chain dislocations, which caused the prices of many commodities to skyrocket. For instance, both lumber and copper experienced all-time highs during the first half of 2021, while agricultural commodity prices reached a 7-year peak earlier in the year as a result of strong demand for meat. Oil consumption also hit a seasonally adjusted high in July of 2021, which led to a 50% increase in the price of crude futures from the year prior. As the global economy continues to reopen, labor shortages, supply chain bottlenecks, and strong demand for raw materials will likely persist, meaning that positive performance from commodities may continue into 2022.

As investors assess the prospects of the commodities space going forward, it is important to keep historical context in mind. To that point, our chart this week examines both the 10-year annualized returns and standard deviations for eleven different asset classes to better understand the long-term performance profiles of each one. As displayed in the chart, the real estate space, as measured by the NCREIF index, has posted strong returns in the last decade as well as a low standard deviation (though the illiquid nature of the asset class may lead to some volatility smoothing). Equities have tended to exhibit higher levels of return and standard deviation than fixed income, while Small Cap indices have notched both higher returns and volatility than their larger peers across the geography spectrum. Interestingly, each of the asset classes profiled in the chart has yielded positive performance in the last 10 years with the exception of one: commodities. For the 10-year period ending September 30th, 2021, the S&P GSCI posted an annualized return of -4.8%. Additionally, the index has experienced an annualized standard deviation of 21.4% during that same period, which is again the most extreme of any of the asset classes in the chart above. Put simply, commodities have exhibited both the lowest returns and highest levels of risk of any major asset class in the last 10 years. As investors assess recent strong performance from the space and look to the future, it is crucial to avoid recency bias and keep history in mind. Prudence dictates a diversified approach to asset allocation in order to hedge uncertainty and achieve optimal risk-adjusted returns.

Print PDF > Commodities: The Full Story

 

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.

China: Evergrande and Another Move Down

In August we released our newsletter China: From Leader to Laggard, in which we reviewed how China transformed from a top-performing country to a bottom-performing country between 2020 and 2021. We noted that increased regulation was a key reason for this change as new government policies have spooked investors. We highlighted that China has gone through these periods of regulatory change in the past and opined that the market would continue to be jittery over the next six to twelve months before recalibrating to the new environment.

Since then, Chinese equities have continued to fall as global investors focused their attention on Evergrande Group (Evergrande), a Chinese property developer. In this newsletter, we provide a synopsis of the Evergrande story and discuss the market risks.

Read > China: Evergrande and Another Move Down

 

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.

Build Back Better Act: Proposed Tax Changes by the House Ways & Means Committee Legislative Update

The House Ways and Means Committee released 881 pages of a proposed bill that would make changes to the tax code impacting income, estate, and gift taxes on September 14th, 2021. The bill will most likely see some changes to reach a majority vote in the Senate, but even with some revisions to the current proposal, major tax reform is expected in 2022. In this legislative update, we provide a summary of potential tax code changes based on the most recently available information.

Read > Build Back Better Act: Proposed Tax Changes by the House Ways and Means Committee 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.

What Does Fed Tapering Mean for U.S. Yields?

Last week, Federal Reserve Chair Jerome Powell indicated the potential tapering of bond purchases at some point in the future aimed at weaning the U.S. economy off the large-scale monetary stimulus that has been necessary during the COVID-19 pandemic. As exhibited by the current forward rates displayed in this week’s chart, the forecasted Fed tapering may result in gradual increases in the 10-year U.S. Treasury yield in the coming months. Since yields move opposite prices, the Fed’s expected Treasury-buying reduction is leading the Treasury forward market to anticipate prices to potentially decline with the lowered demand and yields to rise. Likewise, as the U.S. economy gradually recovers from the pandemic, the Treasury forward market might also be pricing in reduced Treasury purchases from the broader market as investors switch to riskier growth assets such as credit or equities. That said, these actions will likely cause fewer disruptions in the markets than those taken at the onset of the Taper Tantrum, which began roughly eight years ago. Investors were caught off guard when Fed policymakers announced the potential reduction of asset purchases in 2013, which led to a bond sell-off fueled by widespread fears of future price declines. These sales drove down the prices of fixed income securities significantly, causing the 10-year Treasury yield to skyrocket in a very short period of time. In addition to current forward rates, this week’s chart also illustrates this dramatic increase in the 10-year Treasury yield during the Taper Tantrum, including a surge from 1.70% to 2.61% within a three-month window. This movement is in stark contrast with current market expectations, which project the 10-year Treasury yield to increase from 1.50% to only 1.68% over the next nine months.

Although there are ongoing concerns surrounding COVID-19 and the possibility of contagion from a fallout in the Chinese real estate sector that may hamper markets in the near term, investors seem to be reacting to forecasted Fed tapering more favorably than they have in the past. This may be due to the belief that strong economic growth can support the Fed’s gradual pullback of monetary stimulus. It is also possible that the Fed has simply done a better job telegraphing future actions this time around and investors are comfortable with the gradual nature of the forecasted tapering program. It should additionally be noted that tapering will not start immediately, as policymakers are only looking to reduce support when they think the economy can sustain itself as conditions normalize.

Print PDF > What Does Fed Tapering Mean for U.S. Yields?

 

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.

Taking the PEPP Out of the Eurozone’s Recovery?

Amid concerns over the Delta variant and signs of a sharp slowdown in the global economic rebound, many central banks have signaled that they will keep monetary policy loose over the near-to-medium term. U.S. Federal Reserve Chairman Jerome Powell, at the annual Jackson Hole summit on August 25th, maintained that rate hikes were not imminent. Though, on the spending front, Powell did indicate tapering bond purchases may be on the horizon, as long as economic progress continues. We expect to hear a similar narrative at this Thursday’s European Central Bank meeting, with a subtle caveat. Given how well the European economy has rebounded, the ECB is expected to slow the pace of their €1.85 trillion asset-buying program — the Pandemic Emergency Purchase Programme (PEPP) — in the fourth quarter.

The chart above shows monthly net bond purchases made under the PEPP since its inception in March 2020. There was a substantial injection in the first four months of the pandemic, which then decreased as the first wave waned and lockdown measures relaxed. Bond purchases remained at or below €70 billion for the next seven months. However, in response to rising bond yields, the ECB increased PEPP purchases in March 2021 and has kept them at a higher pace since. At the coming meeting, ECB officials are likely to agree to trim PEPP bond purchases to roughly €60 billion per month for the remainder of 2021, a 25% drop from the current pace of €80 billion per month.

What impact will this modest tightening have on the European Union’s economic recovery? The pan-European market benchmark, the STOXX 600 Index, posted its seventh straight month of gains in August, the longest winning streak since 2013, on the back of strong corporate earnings, lower unemployment, an adult population that is 70% fully vaccinated, and continued accommodative fiscal measures. We expect ECB hawks to argue for the need to curtail the current inflation trajectory, citing its potential to outpace expectations given supply chain bottlenecks and resurgent household demand. Inflation, as measured by the Eurozone HCIP, was 3% at August month-end, above the ECB’s 2% target. On the contrary, more dovish members will likely be more concerned with ramping up the existing ongoing asset purchase program once PEPP ends. As COVID-19 variants test the need for further abatement measures and restrictions in Europe and around the world, central banks are under increased scrutiny. Monetary policy decisions, particularly the pace of tapering and rate increases, will have lasting effects on global markets for the remainder of 2021 and the next several years.

Print PDF > Taking the PEPP Out of the Eurozone’s Recovery?

 

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.