Author: cvernon

Why Will Yields Remain Low After COVID and What Can Investors Do About It?

As we head into the 2020 year-end holiday season on the heels of positive vaccine news and an all but formally concluded presidential election, investors are turning their attention to what the state of the world economy and financial markets might look like as we potentially return to normal in 2021 and beyond. One key question being asked is where interest rates and bond yields might be headed.

In this newsletter, we explore why we are in such an ultra-low yield environment as well as what key structural transformations need to take place for rates to meaningfully rise to higher levels. Last, we devise a recommended plan of action for how asset owners can address this persistent ultra-low yield environment — even after a COVID recovery — in order to achieve return or volatility targets.

Read > Why Will Yields Remain Low After COVID and What Can Investors Do
About It?

 

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 2020

While legislators have been focused on negotiating the next round of stimulus and dealing with the implications of the recent election cycle, the U.S. Department of Labor (DOL), as the primary regulator of the Employee Retirement Income Security Act (ERISA), has been fairly active with issuing proposed changes and final rules that may impact many of our defined contribution plan clients in the past several months.

This legislative update covers recent communications regarding private investments in defined contribution plans, proxy voting guidelines, ESG considerations (an update to an earlier Proposed Rule), and 2021 contribution limits.

Read > 4Q 2020 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.

 

The Dollar Returns to Trend (and Could Go Lower)

The dollar has enjoyed an impressive run during the last few years on the backs of trade restrictions, off-cycle expansionary fiscal policy, and muted inflation. That said, the currency has weakened in recent months, as the U.S. Dollar Index — which measures the strength of the greenback relative to a basket of several international currencies — has dropped nearly 10% since the end of March. The index is now nearing its 30-year average of 91.2.

The dollar could fall even further in the near term given the current landscape. While it is unclear exactly how President-elect Joe Biden will govern along the political spectrum, the new administration will almost certainly take a more dovish approach with respect to international trade. A de-escalation of Trump-era tariff wars would be a boon to emerging market equities, which could create trouble for the dollar. Additionally, the lack of additional fiscal stimulus in the United States after the passage of the CARES Act in March, coupled with unprecedented expansionary efforts by the Federal Reserve, is a harbinger of a weaker greenback. Even a new relief package that is more modest in size may not be enough to prevent a further slide in the dollar given the extraordinary scope of the Fed’s support and a sustained low interest rate environment.

It is important to remember that a declining dollar does not necessarily spell doom for the U.S. economy. Goods produced in the United States become more attractive to consumers when the domestic currency is weak, which can lead to job creation in the manufacturing sector and economic growth. Increased global demand for American goods can also lead to trade deficit reductions. If current trends continue, investors will have to weigh these benefits against the costs of a weakening greenback, which include inflation and subsequent increases in commodity prices, as well as lower relative returns for dollar-denominated assets. Now more than ever, allocators should stress the importance of international and style diversification.

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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.

Welcome to Lockdown 2.0

As the market and world-at-large were elated by Pfizer’s announcement of positive trial results for its COVID-19 vaccine this week, we all brace for a winter run of global lockdowns and extensive virus spread mitigation measures. In the last three weeks, a number of European countries have reimposed nationwide limitations. Notably, starting October 30th, France reinstituted its spring lockdown rules which restrict residents to their homes except for trips to buy essential goods, medical appointments, and one hour of physical activity. Germany’s “lockdown light” began on November 2nd, closing all bars, restaurants, and theaters and limiting access to retail shops, though schools remain open. And within the U.S., we have seen several states roll out pandemic constraints as well, including Illinois, Maryland, and Washington.

This chart provides a quick snapshot of COVID-19 case tallies as of November 12th. Soberingly, these figures are rising at a pace much faster than the initial wave. We have seen how the spring cases and restrictions hampered productivity and brought a few nations into recessionary territory. In October, the IMF released revised global GDP growth estimates that were mildly positive, reducing the estimate from -4.9% to -4.4% on the back of eased summer restrictions and an influx of fiscal stimulus. While it is expected that fiscal stimulus measures will continue and could dampen the economic blow, global growth will remain depressed for 2020 and into 2021 as we work through this second wave.

Print PDF > Welcome to Lockdown 2.0

 

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 the Biden Win Mean for Financial Markets?

On Saturday, November 7th, Joe Biden was declared the winner of the presidential election and will become the 46th president of the United States in January. Markets were surprisingly positive last week despite the uncertainty around results as multiple states were too close to call until all the votes had been tallied. While there is still pending litigation in certain states, it seems highly unlikely that these actions will reverse the election result. Thus, market participants have turned their attention to what the market can expect from a Biden-led White House coupled with a split Congress, while the coronavirus pandemic marches on.

In this newsletter, we tackle this question for each of the “traditional” asset classes: Fixed Income, U.S. Equities, and Non-U.S. Equities. The impact on alternative asset classes such as hedge funds, real assets, and private equity are more nuanced and will be covered in our 2021 market preview to be released in January.

Read > What Does the Biden Win Mean for Financial Markets?

 

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.

Early Voter Turnout

Of the many reasons the 2020 election may make history, expected record voter turnout is perhaps the best. By October 22nd, early votes via mail-in ballots and early in-person voting had already surpassed all early voting done in the 2016 general election. Based on last night’s latest estimates, almost 100 million have already voted nationwide, more than 70% of 2016’s high water mark of almost 139 million. Key battleground states Texas, Florida, North Carolina, Georgia, and Nevada have already collected more than 90% of 2016’s total vote.

For states that compare ballots to a voter’s party registration, 45% of early voters have been Democrat and 31% Republican, with the remainder registered with a minor party or without party affiliation. Polls generally report that Republicans are more likely to vote in person on Election Day, so early takeaways are limited.

As we anxiously await election results tonight and over the following days (hopefully not weeks), we can at least be celebratory about how many citizens have performed their civic duty in this election.

Please follow Marquette Research for additional election updates in the coming days, including our take on impacts across asset classes.

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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.

Record Growth During Third Quarter, but Will It Continue?

In this week’s chart of the week, we look at the estimated growth of Gross Domestic Product (GDP) — the value of all goods and services produced across the economy — for the third quarter of 2020. GDP increased at a seasonally adjusted annual rate of 33.1% according to the “advance“ estimate released by the Bureau of Economic Analysis. This increase is the largest on record, following a record decline (-31.4%) in the second quarter as COVID-19 severely disrupted business activity across the country. The increase was driven by increases in personal consumption expenditures, private inventory investment, exports, nonresidential fixed investment, and residential fixed investment; detractors were decreases in federal, state, and local government spending. The actual quarter-on-quarter rate of expansion, without annualization, was 7.4%.

Economists expect the economy to expand throughout the fourth quarter though much more slowly compared to the third quarter. Rising COVID-19 cases across certain parts of the country could plunge the economy into turmoil again if states are forced to put tighter restrictions back in place, likely slowing consumption and ultimately, GDP growth. Mitigating factors to these trends are potential vaccine approval and distribution, as well as additional stimulus from the U.S. government. Fourth quarter GDP will undoubtedly hinge on how these themes play out and bear watching over the coming months.

Print PDF > Record Growth During Third Quarter, but Will It Continue?

 

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.

Equities Falter Amid Uncertainty

October has been a tale of two months for equity market participants. While the first half of the month saw solid performance from risk assets, major equity indices have struggled in recent days as investors continue to grapple with political, economic, and public health uncertainty.

In this newsletter, we put the recent volatility and pullback into context, with an update on the resurgence of new coronavirus cases and global responses to the pandemic and a look at expectations for the coming months.

Read > Equities Falter Amid Uncertainty

 

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.

Third Quarter Review of Asset Allocation: Risks and Opportunities

The third quarter of 2020 featured a major rebound in economic data amid an intense battle for the presidency and an uncertain future for COVID-19 cases as some states are seeing higher positivity rates. GDP growth for the quarter is expected to come in at +35.2% YoY, higher than analyst expectations, which helped to propel equity markets higher during the quarter. In addition, the unemployment rate dropped to 7.9% but is expected to remain elevated until additional clarity regarding COVID-19 becomes available. Below are some highlights from the quarter:

  • Biden is favored over Trump in the election race, as mail-in ballots and virtual town halls instead of debates have proven that this election will be unlike any before it.
  • The country has widely reopened, though concerns in some larger states of increased positivity rates have caused some rollbacks ahead of the winter season.
  • A vaccine is in the works and anticipated to be ready by April 2021, with widespread vaccinations likely around mid-2021.
  • Schools have moved to a hybrid model of in-person and online classes, causing logistical problems for parents as many balance jobs and at-home learning.

The election is sure to bring additional volatility through the end of the year. Biden and Trump have vastly different tax plans and a Democratic sweep could drive a sell-off in equity markets. Economic data is still pending through 3Q, though most forecasts show large rebounds in data as states reopened from COVID-19 closures. Big questions regarding vaccines and if the winter will see a resurgence in coronavirus cases remain. We analyze what all of this means for each asset class in the remainder of this newsletter.

Read > Third Quarter Review of Asset Allocation: Risks and Opportunities

 

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.

Will a Vaccine Be the End of COVID-19?

Simmering in the background of the presidential race and stimulus talks remains a crucial step towards fully re-opening the country: vaccine progress. Many experts view the development of a vaccine as the key to finally ending the battle against COVID-19. With a commercially available vaccine anticipated as early as April of 2021, it seemed that we were drawing nearer to the end of restrictions on large gatherings. People would be able to attend sporting events, weddings, and graduations again in a return to more normal life. However, in a startling recent poll of over 34,000 people regarding their interest in receiving a government-approved vaccine, over half said that they would not or are not sure that they would want to receive the vaccine.

The stark difference in responses seems to correlate with education level, as shown in the charts above. There is a significant increase in wanting to receive the vaccine on behalf of people whose education includes a college degree. For education levels below college, the results were much more mixed about receptivity to a vaccine. The most commonly cited reservations were accessibility (cost, wait time, proximity of distribution center/medical office) and effectiveness. Although this was just one poll, it appears that the release of a vaccine may not completely stem the pandemic unless there is a dramatic reversal in vaccine sentiment over the coming months.

Print PDF > Will a Vaccine Be the End of COVID-19?

 

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.