Author: cvernon

Russell Indices Incorporate “Uber” Exciting IPOs

It’s that time of year again! The end of June brings longer summer days and the annual Russell index reconstitution. The Russell 1000’s constituent rebalancing this month also brings the inclusion of a few recent high-profile IPOs, most notably Uber, Lyft, Spotify, and Beyond Meat. This means all investors holding a passive allocation to the Russell 1000 will soon hold shares in these companies.

The Russell’s methodology weights constituent allocations based on the free-float market cap, which only includes shares readily available to trade. We show here estimated weightings of these newly IPO’d constituents alongside some well-known peers of similar weights. Notably, Microsoft has overtaken Apple as the largest index constituent. Uber, while likely the largest IPO of 2019, is still dwarfed by these two behemoths and will ultimately not become a massive component of the index’s roughly 1,000 constituents. Similarly, while the top few constituents seem to hold outsized portions of the index, the index’s performance is not dictated solely by them as they are significantly outnumbered by over 900 names which contribute to performance.

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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.

Are Americans Swimming in Debt Again?

The eleven-year recovery since the 2008 financial crisis has been good for most Americans, allowing many to pay off debt and build a solid footing again. However, as this market cycle is getting a bit long in the tooth, investors are rightly concerned about areas of fundamental deterioration and whether the next recession might be lurking around the corner.

This week’s chart looks at the total amount of consumer debt in the U.S. The chart shows the aggregate amount of mortgage debt, home equity lines of credit, auto loans, credit card debt and student loans among U.S. households. We can see that in total, the amount reached roughly $13 trillion at the peak of the 2008 crisis, fell to a trough of about $11 trillion in 2013, but has now surpassed 2008 levels to about $14 trillion today, with especially high growth in the total student loan amount.

While nominal numbers can be informative, finance is the study of ratios, which can be even more insightful. If we divide the total nominal consumer debt amount by the U.S. population at key dates, we determine that total consumer debt was $24.93 per person in 2003, reaching a peak of $41.68 per person in 2008, dropping to a trough of $35.27 per person in 2013, but again surpassing 2008 and reaching an all-time peak of $41.77 per person today. Should we be concerned? While per person levels of consumer debt are concerning, consumer debt to GDP levels would tell a different story. Dividing the same total nominal consumer debt as shown in the chart by nominal U.S. GDP, we have 0.6x in 2003, 0.9x in 2008, 0.7x in 2013 and back to 0.6x today.

The two leverage ratios suggest opposing conclusions. While the per person leverage ratio is showing that we are worse off today than in 2008, the GDP leverage ratio is showing that we are just fine, with a consumer debt-to-GDP ratio that is nowhere near 2008 and more akin to 2003. Bottom line, this is telling us that our GDP is growing at a faster rate than our population, due at least in part to advances in technology that have raised productivity levels. However, the per person leverage ratio is showing that each American on average now has more debt than ever before, even more than 2008 levels, which bears watching for its potential impact on overall growth in the coming years.

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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.

Bank Loans Position Paper

Bank loans represent a key strategic asset class for most institutional investors’ fixed income portfolios. Some of the critical benefits of bank loans include yield that is typically greater than that of core bonds, a floating rate and therefore very little interest rate risk, and a senior secured level in the debt capital structure of issuers such that default risk is minimized and recovery rates are maximized. This position paper covers the history of the asset class as well as some unique characteristics that make it a vital part of many institutional investors’ portfolios. We will also examine its historical returns and correlations with other asset classes, as well as its risks ranging from credit to liquidity risk and interest risk to reinvestment risk. We will conclude with an assessment of its recent valuations as well as how to access this asset class.

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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.

 

When the Experts Are Wrong

Since the end of October, the yield on the 10-year Treasury fell more than 1% and as of writing stands at 2.12%. The drop resulted in the yield curve inverting between the 3-month and 10-year maturities, and the 2-year yield is getting dangerously close to also surpassing the 10-year. This dramatic decline and inversion made investors nervous that a recession was on the horizon and caught most economists off-guard. In both 4Q and 1Q the 10-year yield ended lower than the average forecast from the Bloomberg consensus by about 0.4%. 2Q is on track to be even worse as the yield may fall below the forecasted low from the survey.

Towards the end of 2018, most believed the 10-year would rise thanks to continued growth and further rate hikes by the Fed. However, volatility and ongoing concerns about tariffs have pushed investors into safe-haven assets. This was further fueled by the weaker than expected job reports and most now believe the Fed will likely cut interest rates at least once before the end of the year. As a result, some institutions revised their forecasts for the remainder of 2019, going as low as 1.75% for the 10-year. That said, there is still a great deal of uncertainty and rates could just as easily rebound should we get more positive economic data, if the Fed chooses not to decrease rates, or if there is a resolution to the trade conflict. Overall, this serves as a reminder to investors that timing the market is an imperfect science and even experts can miss the mark by a wide margin. We continue to encourage clients to stick to their investment policies, invest for the long-term, and follow a disciplined rebalancing routine.

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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.

Tank on Empty? Proposed Tariffs on Mexico Will Heavily Impact the Auto Industry

On May 30th, President Trump announced via Twitter that the United States will impose a 5% tariff on all Mexican imports starting on June 10th. The White House added that this percentage could quickly escalate to 25% if Mexico fails to “reduce the number of illegal aliens” crossing border lines. This week’s chart displays the potential impact of these tariffs on the auto industry in both the United States and Mexico.

In the first quarter of 2019, the United States’ imports of motor vehicles and parts totaled $93.3B (bar chart). Out of this total, the United States imported a whopping $32.8B from Mexico, almost a third of all the United States’ imports in motor vehicles and parts. After Trump’s tweet, both the S&P 500 Index and the S&P 500 Consumer Discretionary sector fell sharply.

Looking at specific auto stocks (line chart), General Motors (GM) will likely struggle dealing with this tariff as GM is Mexico’s largest automaker and has 14 manufacturing plants located throughout the country. Ford could also struggle: approximately 10% of Ford’s vehicles sold in the United States last year were imported from Mexico. Overall, these tariffs are likely to raise auto prices and reduce profits of automakers, which is bad news for investors and consumers.

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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.

Sell in May and Go Away?

Global equity markets declined in May on a flurry of geopolitical news. As tensions persist, stocks are grasping to sustain their former rocket-like pace.

This newsletter details the recent trade and tariff announcements, their impact on the markets, and a look at what to expect in the remaining months of 2019.

Read > Sell in May and Go Away?

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.

Securing Retirement Through the SECURE Act

On May 23rd, with overwhelming bipartisan support, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) passed in the House with a 417–3 vote. The bill is the first major retirement legislation since 2006 and has 29 total changes or new provisions.

The bill will impact most workers from part-time employees to small business owners to more tenured employees. In this newsletter we have outlined some of the major changes outlined in the SECURE Act.

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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.

Has Supply Peaked for this Real Estate Cycle?

Deliveries of new supply (property stock) in the commercial real estate market appear to have peaked in 2018 across all major property sectors (apartment, industrial, office, and retail). Higher construction and labor costs, as well as positive net absorption (demand), particularly in the apartment sector, are keeping supply in check. These supply dynamics give us comfort that the next real estate slowdown will be less severe compared to the last two cycles when oversupply prior to a recession exacerbated the downturn.

Despite further moderation in returns, overall fundamentals (absorption, occupancy, fund flows) remain relatively healthy across the real estate sector. Real estate lenders are more risk aware and showing heightened levels of discipline in this cycle compared to the last cycle. Strong fundamentals coupled with tightened lender behavior and little to no expected interest rate increases in 2019 should lead to stable real estate pricing and cap rate spreads to U.S. Treasury yields. As a result, we expect total returns in the mid-single digits for core real estate with an emphasis on income growth (NOI) over appreciation.

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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.

BREXIT: Three Strikes and May Is Out

On Friday, May 24th, Prime Minister Theresa May somberly announced her plans to resign as the Conservative Party leader and head minister of the U.K. Parliament on June 7th. When David Cameron turned over the reins in 2016, post the referendum vote results, May pledged to uphold the decision of the populous and lead the United Kingdom out of the bloc. Yet, May’s best efforts to deliver a withdrawal agreement have come up short, and with growing pressure from her party and another no-confidence vote on the horizon, May bowed out in hopes that a new leader will break the Brexit deadlock.

Angst about the state of Brexit and May’s performance had been coming to a boil throughout the month. On May 3rd, local elections across England yielded an upsetting blow to the country’s two main political parties, the Conservatives and the Labours, which jointly lost 1,380 local seats in backlash from the political dysfunction surrounding the second Brexit extension. May’s push to resolve the impasse prior to EU elections led to numerous resignation calls by both Conservative and Labour party MPs, with members of PM May’s inner circle throwing in the towel.

In light of her resignation, how has the market responded? Who is competing to be Britain’s next PM? Where does this leave the state of Brexit? The purpose of this newsletter is to address these questions and to provide our outlook on how Brexit will shape international investing conversations for the remainder of the year.

Read > BREXIT: Three Strikes and May Is Out

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.

 

Upping the Trade Ante: The U.S. Increases Tariffs on China

On May 10th, the United States increased tariffs from 10% to 25% on $200 billion of Chinese imports after trade talks broke down. The increase was initially planned for January 1, 2019, but the U.S. delayed the tariffs in order to see if a resolution could be reached by May 1st. China retaliated on May 13th with an increase in tariffs on $60 billion on American goods, effective June 1st.

Since the announcement, U.S. and Chinese equity markets have been down 0.9% and 6.1% through May 17th. In particular, there are a number of companies and industries caught in trade crosshairs:

  • Apple: China accounts for almost 20% of Apple’s revenue and hundreds of its suppliers are located in China. Concurrently, Chinese consumers have been moving away from more expensive iPhones towards cheaper Chinese brands like Huawei.
  • Semiconductors: Intellectual property disputes were key to the breakdown in trade negotiations. Many semiconductors are made in China and are used in mobile devices. An increase in tariffs could raise prices for consumers, which may lead to higher inventories and lower investment in innovation.
  • Materials: China owns 90% of rare earth supplies, which are used in advanced technologies. These materials may be subject to future tariffs.

Fortunately, the United States has taken some steps to lessen the blow of tariffs. First, the Trump administration delayed making a final decision on whether to impose tariffs on auto imports from the European Union and Japan. Second, the administration reached a deal with Canada and Mexico to end U.S. and retaliatory tariffs on steel and aluminum. This removes a major roadblock in the possible passage of the USMCA trade agreement, which would replace NAFTA, by Congress. However, our trade with China is greater than our trade with Canada or Mexico.

Recently, consumer confidence hit a 15-year high, but the survey was taken before the May 8th trade announcement. While the Street is crossing its fingers that a deal can be reached by the G20 summit in late June, we are more concerned with how a prolonged dispute can affect business investment and eventually, consumer confidence.

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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.