Author: cvernon

Much Ado About Corona?

By now, you have all read the headlines and watched various news commentators detail the perils of the latest pneumonia outbreak, 2019 Novel Coronavirus (“nCov”), impacting China, nearby countries, and a few of their western trade partners. As of February 13th, confirmed cases in mainland China had reached over 60,000 patients, and as was broadcast on February 11th, the death total has surpassed 1,000. Even though these health figures are alarming, we have experienced similar outbreaks in the past and can take some comfort in knowing that eventual containment — and a vaccine — are in the works.

From a financial market’s standpoint, one common theme we are hearing from economists and portfolio managers is that, similar to the SARS outbreak of 2002–2003, the recent sharp, nCoV-driven market sell-off is temporary and the overall market impact will be minimal over the long-term. This chart of the week shows the short-term returns of the broader market — using the MSCI All Country World Index as the guidepost — during the SARS outbreak, as well as the current coronavirus. As shown in the chart, during the first three months of the SARS outbreak the MSCI ACWI posted a -2.9% return. However, six months after the initial SARS patient, the MSCI ACWI return was back in positive territory, up 2.8%.

While comparing SARS and nCoV makes sense from a regional and virus strain commonality, one must also consider the economic circumstances surrounding each outbreak. The supply chain connectivity between China and the broader world has advanced in leaps and bounds since 2003. The potential knock-on effects of an extended drop in Chinese factory productivity could slow, for instance, the technology supply chains for Apple, LG, Google, and more. Hence, economists are probably spot on that the market will rebound, but the details of the true impact on global growth are yet to be defined.

Print PDF > Much Ado About Corona?

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.

Is Manufacturing on the Rebound?

The ISM PMI index is a survey of manufacturers and measures the overall strength of the manufacturing sector. A measure over 50 indicates the sector is growing while over 43 suggests the economy overall is expanding. Over the last five months of 2019 this measure fell below 50, leading analysts and investors to wonder if we were in a manufacturing recession, driven by the U.S.-China trade dispute and slowing global growth. However, January’s reading came in at 50.9, beating expectations of 48.5 and recovering from an almost four year low. January’s surprise gain was met positively by stocks, bond yields, and dollar gains. The PMI had recently been held back by weak export markets and the trade war and it seems that news of the Phase One trade agreement between the U.S. and China supported manufacturing health; however, effects of the coronavirus nearly freezing parts of China’s economy and Boeing’s halted production straining producers will likely impact February’s number. So, while January’s reading was certainly a welcomed surprise, economists are now in “wait and see” mode to see how these risks play out in February.

Print PDF > Is Manufacturing on the Rebound?

 

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.

Another Way to Look at Spreads

Bond spreads¹ now appear tight based on the traditional method of calculating spreads² as positive momentum with the U.S.-China trade deal over the fourth quarter of 2019 culminated in the recent signing of the Phase One agreement.³ This week we examine another way of viewing spreads for an additional perspective on how tight spreads really are and, therefore, how rich bond valuations might truly be at the moment. The left chart shows investment grade bond spreads while the right chart shows high yield bond spreads. Both charts display the traditional way of calculating spreads — yield minus U.S. Treasury yield — in purple, with the dotted purple line representing the average spread. As we can see, today spreads for both investment grade and high yield are tighter than their respective averages using the traditional approach to calculating spreads.

The rationale for examining an alternative way of measuring spreads comes from the fact that the 10-year U.S. Treasury yield has fallen dramatically over time. In 1987 it was 9.1% whereas today it is 1.7%. A corporate bond yielding 10.1% in 1987 had a spread of 100bp (10.1% minus 9.1%), while a corporate bond yielding 2.7% today also has a 100bp spread (2.7% minus 1.7%). Since they both have the same spread, the traditional method of calculating spreads using subtraction would deem both to have the same value. Even though the 10.1% yield from 1987 produced a lot more yield than the current 2.7% value, a relative value comparison suggests a different conclusion.  In 1987, the ratio of high yield to the 10-yr Treasury was only 1.1x (10.1/9.1), whereas today it is 1.6x (2.7/1.7).

The teal lines in both charts show this alternate view of spreads, by taking the bond’s yield as a multiple of the U.S. Treasury yield. The teal dotted lines show the averages of the spreads using this alternate method. The results are surprising as they show that both investment grade and high yield spreads, using this approach, are actually wider today than their averages, which one might interpret as indicating that both investment grade and high yield are actually attractively priced at the moment and there is still room for further spread tightening.

While there may be some justification behind this novel view of spreads, one key rebuttal is that the broader market does not view spreads using this approach. We would recommend that investors take into consideration both methods when assessing bond valuations as well as where we are in the broader market cycle to inform asset allocation decisions.

Print PDF > Another Way to Look at Spreads

¹ Bond spreads are used as an industry standard for assessing bond valuations.
² The traditional method of calculating bond spreads is the yield of the bond, for example, an investment grade corporate bond or a high yield corporate bond, minus the U.S. Treasury yield. If the spread is tight then the bond is richly priced, if the spread is wide then the bond is cheaply priced.
³ Concern over this past week’s global spread of the coronavirus widened spreads slightly but spreads still remain tight overall based on traditional calculations.

 

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 the Spread of Coronavirus Drive a Risk-Off Market?

Global markets have come under pressure as the number of coronavirus cases grows. Through January 27th, the S&P 500 is down 3% from its mid-January peak when the U.S.-China phase one trade deal was signed. The 10-year Treasury yield has fallen from 1.85% to 1.61% over this same period, as bond spreads widened and the dollar strengthened.

This newsletter summarizes recent market activity and potential implications of the spread of coronavirus, which originated in Wuhan, China. For long-term investors, this outbreak is likely nothing but noise; however, future news about the coronavirus could impact markets in the short-term.

Download PDF > Will the Spread of Coronavirus Drive a Risk-Off Market?

 

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.

2020 Market Preview

2019 was certainly a profitable year for investors as traditional and alternative asset classes delivered positive returns.  As we enter 2020, there are a litany of questions facing global markets ranging from the U.S. election to trade disputes to global monetary policy, all of which will undoubtedly influence investment returns. The following newsletters examine the primary asset classes we cover for our clients, with in-depth analysis of last year’s performance and more importantly, trends, themes, and projections to watch for in 2020.

We hope these materials can assist you and your committees as you plan for the coming year, and please feel free to reach out to any of us should you have further questions about the articles. We have also produced a 2020 Market Preview video if you would like to hear a high-level summary of the market previews. Here’s to another positive year from the markets in 2020!

U.S. Economy: Signs of Slowing?
by Greg Leonberger, FSA, EA, MAAA, Partner, Director of Research

Fixed Income: The New Roaring Twenties — Will It Be Different This Time?
by Ben Mohr, CFA, Director of Fixed Income

U.S. Equities: Climbing the Wall of Worry
by Robert Britenbach, CFA, CIPM Research Analyst, U.S. Equities

Non-U.S. Equities: Big Expectations, Little Wiggle Room
by David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities
and Nicole Johnson-Barnes, CFA, Research Analyst

Real Estate: What Will Happen Next?
by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Infrastructure: The Energy Revolution Is Driving the Future of Infrastructure
by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Hedge Funds: Rising Geopolitical Risks and a U.S. Election Could Lead to Tempered Expectations
by Joe McGuane, CFA, Senior Research Analyst, Alternatives

Private Equity: As Asset Class Grows, Continues to Deliver for Investors
by Derek Schmidt, CFA, CAIA, Director of Private Equity

Private Credit: An Asset Class Coming Into Its Own
by Brett Graffy, CAIA, Research Analyst

To read the above files in one combined document > 2020 Market Preview

 

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.

2020 Market Preview Video

This video coincides with our annual Market Preview newsletters and includes a recap of 2019’s performance and what investors can expect heading into 2020. 2019 was certainly a profitable year for investors as traditional and alternative asset classes delivered positive returns. As we enter 2020, there are a litany of questions facing global markets ranging from the U.S. election to trade disputes to global monetary policy, all of which will undoubtedly influence investment returns.

This video is part of our Market Insights series, a quarterly presentation designed to brief clients on the market as soon as possible after quarterly market data becomes available. Members of our research team discuss the overall U.S. economy, along with fixed income, U.S. and non-U.S. equity, hedge funds, private equity, real estate, and infrastructure.

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

Despite Political Tensions, 2020 off to a Great Start

This week’s chart shows the cumulative S&P 500 return and 10-year Treasury yields through January 21st. The S&P 500 is up over 3% year-to-date despite impeachment proceedings and geopolitical tensions with Iran. We investigate why equity markets have remained strong through a seemingly difficult start to an election year.

Impeachment proceedings allege that Trump interfered in the coming 2020 election by holding back millions of dollars of military aid to Ukraine in exchange for them launching an investigation into Joe Biden. The market seems relatively unphased, however, as Republicans control a majority in the Senate of 53 to 47. A two-thirds majority (67 senators) is required to convict Trump and remove him from office. This seems unlikely as evidence remains thin and he retains backing from the Republican party.

Iran has been another point of conflict early this year as the U.S. killed Qassem Soleimani as a result of his alleged targeting of U.S. embassies. Iran then responded by firing missiles at U.S. targets in Iraq. It is widely viewed that Iran is looking to avoid a head-on conflict with the U.S. as economic sanctions are harming the Iranian economy. As the direct conflict seems to have abated and Iran’s economy is struggling, the market seems to view this as a non-event.

Rates have remained low and the economy is growing. Though there seems to have been a few bumps in the road, the S&P 500 continues to march higher. Uncertainties remain, however, as a surprise verdict from the impeachment trials or newly discovered coronavirus could upset the markets moving forward. Going forward, investors will look for positive earnings and economic growth — both domestically and abroad — to support further equity market gains in 2020.

Print PDF > Despite Political Tensions, 2020 off to a Great Start

 

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.

Illinois Pension Consolidation Act

On December 18th, 2019, Governor Pritzker officially signed Public Act 101-0610 into law, which then took effect on January 1st, 2020. A large portion of this new law (the “Pension Consolidation Act”) requires all 649 Illinois suburban and downstate police and firefighters pension funds — previously established as prescribed by Articles 3 and 4, respectively, of the Illinois Pension Code — to consolidate their assets into two new statewide funds: one for all police pension funds and one for all firefighter pension funds.

This legislative update covers the background and reasoning for consolidating these public safety pension funds, lays out the established timeline for the consolidation process, and details the ongoing responsibilities, requirements, and structure of both current local boards and the transition and permanent boards for the newly established funds.

Read > Illinois Pension Consolidation Act Legislative Update

While there is still some uncertainty regarding the implementation and timing of the transition, Marquette will continue to monitor new announcements closely and provide regular updates to our Article 3 and 4 pension fund clients as details emerge. Also included in this update are several key points we consider of utmost importance as the transition boards begin implementing the Act, including governance, infrastructure, personnel, a transition plan, and implementation. We are prepared to work with the consolidated funds, auditors, and any other necessary service providers to ensure our clients experience a transition that is as seamless as possible.

For further information or questions, please contact your consultant.

 

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. Information contained herein should not be construed as legal advice.

Will 2020 Earnings Expectations Hold Up?

Despite poor earnings growth in 2019, global equities had a strong year, generating double-digit returns. The MSCI World Index, a developed global equity benchmark, and the MSCI Emerging Markets (EM) Index returned 28.4% and 18.4%, respectively. Paradoxically, however, earnings growth was negative for both indices in 2019. Why were equity returns so strong while earnings growth was so weak? One key reason was investor reaction to central bank activity.

Throughout most of the world, central banks took accommodative actions in response to slowed economic growth. The developed markets central bank policy rate dropped from 1.96% to 1.39% between 2018 and 2019. Emerging countries also acted as China, Brazil, Indonesia, Mexico, Russia, Turkey, and the Philippines all deployed interest rate cuts. This central bank activity boosted investor optimism leading to strong returns in anticipation of better economic and earnings data in the year ahead.

Looking forward, 2020 earnings growth estimates range from 8% to 14%. In a typical year, estimates are revised downward as analysts begin the year with a more optimistic view. In fact, at this time last year, 2019 estimates ranged between 5% and 8%. Will the 2020 expectations hold up as we move through the year? We think markets are betting that they will and that a significant miss, similar to 2019, is likely to lead to disappointing returns in the year ahead.

Print PDF > Will 2020 Earnings Expectations Hold Up?

 

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.

Institutional Retirement Plans Legislative Update — SECURE Act

As speculated in Marquette’s recent  4Q 2019 DC Legislative Update, Congress passed sweeping retirement savings reform by tacking the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) onto its year-end spending bills. On December 17th and 19th, the House and Senate respectively passed the SECURE Act (“the Act”) with the goal of enhancing retirement readiness for Americans. This update outlines a summary of the Act’s provisions impacting our defined contribution (DC) and defined benefit (DB) plan clients.

Read > Institutional Retirement Plans Legislative Update — SECURE Act

As always, your consultant will be able to address any specific questions you may have regarding these changes. A similar summary targeting individual investors can be found here.

 

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.