Category: Chart of the Week

The Forgotten Man

While there has been no shortage of recent headlines dissecting the sorry state of the economy and markets, the average U.S. consumer is occasionally overlooked in that narrative. Year-to-date, the Federal Reserve has increased the federal funds rate by 300bps. As the Fed raises rates, the prime rate, or rate set by commercial banks, increases in tandem. For the average Joe, this means any interest rates that are not fixed increase as well, including credit card rates and adjustable mortgage rates. Consumers in the market for a home or vehicle also face higher fixed rates on new loans. This year, rates have reached highs not seen in years: mortgage rates — currently at 6.9% for a 30-year fixed loan — have not been this high since 2002, auto rates at 5.5% are the highest in more than 10 years, and credit card rates — at 16.3% — have never been this high in a data series dating back to 1994.

In an environment where the average consumer is already paying higher prices for fuel, food, and other staples due to soaring inflation, increasing credit card and auto loan rates add to the burden. While consumer spending has so far been fairly resilient to rising prices, the underlying dynamics are not sustainable. According to a Forbes survey from June 2022,¹ 67% of Americans have dipped into their savings for spending, with 31% either depleting their savings or using a significant portion of it. With all eyes on U.S. GDP, it is important to remember that consumer spending makes up 70% of the economy, and the health of the average Joe is what will determine our path from here.

Print PDF > The Forgotten Man

¹Forbes Advisor OnePoll survey, June 2022

 

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.

Fighting Fire with Oil

Lower oil prices, primarily via lower gasoline prices, were a key contributor to headline CPI moving off peak in July and August. Since late September, however, oil and gasoline prices have started to rise again. In early October, OPEC+ — comprised of the 13 OPEC members and 10 additional major oil-exporting countries, including Russia — agreed to steep oil production cuts, decreasing supply in an already stressed market. The total production cut is estimated to be around 2 million barrels per day (bpd), approximately 2% of global supply and the biggest production cut since the start of the COVID pandemic.

The move is expected to prop oil prices back up — as similar production cuts have done historically — after the commodity had fallen considerably over the last three months amid fears of a global recession, the stronger dollar, and higher interest rates. Higher energy prices would weigh on European countries, which are more heavily reliant on Russian oil and already facing recession, as well as the U.S. consumer, with oil accounting for roughly half of the retail price of gasoline. Earlier this year Federal Reserve Chair Jerome Powell quantified the impact of higher oil prices, noting every $10 per barrel increase in the price of crude raises inflation by 0.2% and sets back economic growth by 0.1%. The decision also adds to already heightened geopolitical tensions, with President Biden pursuing consequences for Saudi Arabia, the de facto leader of OPEC, following the announcement. This evolving situation is one more unknown variable to monitor as we look for macroeconomic clarity.

Print PDF > Fighting Fire With Oil

 

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.

Picking up the Pieces: Assessing the Economic Impact of Hurricane Ian

The 2022 hurricane season is the latest headwind in a challenging year for investors. Last week, Hurricane Ian made landfall in Florida as a powerful Category 4 hurricane, unleashing heavy rains, high sustained winds, and extensive flooding along the coast. While the full extent of damages and the ultimate impact on the U.S. economy will not be known for several months, preliminary estimates indicate that Hurricane Ian will rank among the top 10 costliest storms in U.S. history. Current estimates of Hurricane Ian’s total cost — including damages and lost economic activity — range widely from $65 billion to as much as $120 billion. While several industries across the southeastern United States have been negatively impacted, Hurricane Ian’s overall impact on U.S. GDP is expected to be limited. Recent analysis by EY Parthenon, Ernst and Young’s global consulting arm, projects GDP to be reduced by 30 basis points in Q3 and 10 basis points in Q4 as a result of the hurricane. Natural disasters tend to have short-term economic consequences, with lost economic output recovered over time as federal assistance and insurance payouts allow communities to rebuild. Reconstruction efforts can also provide a temporary boost to GDP. As with other sources of uncertainty, Marquette encourages investors to maintain discipline and stick to long-term strategic allocations to best weather the market’s storms.

Print PDF> Picking up the Pieces: Assessing the Economic Impact of Hurricane Ian

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.

Inflation: Expectations Matter

The announcement of another 75 basis point rate hike at last week’s FOMC meeting reaffirmed the Federal Reserve’s unwavering commitment to reducing inflation. One of the key variables the Fed watches to help it determine the path of rates is expected inflation. Inflation can become a self-fulfilling prophecy if consumers start pricing future inflation into their decision-making and businesses start making anticipatory adjustments to their prices and behavior. To combat this, the Fed strives to anchor expectations around a 2% target inflation rate. When long-term inflation forecasts deviate from that 2% target it means inflation expectations are not well-anchored, i.e., people believe that a short-term rise in inflation could lead to higher price levels longer-term.

Inflation expectations have moved further away from the 2% target over the course of 2022, something the Fed recognizes as a potential roadblock in navigating the current inflationary environment. Indeed, Fed Chair Jerome Powell stressed the importance of “expeditiously continuing to raise rates” to “ensure that longer-term inflation expectations remain well-anchored” at the June FOMC press conference.¹ With higher-than-anticipated August CPI figures, however — headline inflation of 8.3% and core inflation that reaccelerated to 6.3% — inflation expectations may remain higher for longer. Headline inflation is moving in the right direction, but core inflation, which remains well above Fed targets, tends to be stickier and may further complicate the Fed’s task. While there are no crystal balls, longer-term inflation expectations will continue to bear monitoring as investors search for potential indicators of a market bottom.

Print PDF > Inflation: Expectations Matter

¹ Lee, J., Powell, T., & Wessel, D. (2022, June 27). What are inflation expectations? Why do they matter? The Brookings Institute. Retrieved September 28, 2022.

 

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.

Midterm Madness

If inflation, rising rates, and a war in Europe were not enough to keep markets interesting this year, 2022 is also a midterm election year. Based on data over the last nine decades, midterm election years — while only marginally more volatile than non-election years overall — tend to exhibit a distinct performance pattern throughout the year. On average, returns during midterm years tend to be flat to slightly negative through the first three quarters as investor confidence is dampened by uncertainty around the outcome of the election. Historically, returns start to pick up as November draws near and tend to finish strongly, with fourth quarter returns in midterm years significantly stronger than non-midterm years. This holds true regardless of which party wins the House and Senate and whether or not there is a change of control, suggesting investors value predictability more so than a specific party controlling Congress. While each year is unique, and this analysis does not consider the deluge of other macroeconomics issues plaguing 2022, it is interesting historical context. Come November 6, there may be one less source of uncertainty in markets.

Print PDF > Midterm Madness

 

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.

Go Green or Go Home

Accelerating energy innovation is proving to be a key driver of decarbonizing the economy and mitigating climate change and may also expand the opportunity set for infrastructure-focused investors. President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law on August 16th, 2022. The legislation is projected to raise $737 billion in revenue, require total investments of $437 billion, and reduce the deficit by more than $300 billion.¹ The IRA bill aims to help offset long-term inflationary pressure via targeted spending in clean-energy renewables and decarbonization initiatives over the next decade-plus. In addition, the bill will utilize tax credits and government subsidies to encourage household and commercial renewable energy purchases, clean-energy manufacturing, and decarbonization of domestic industries. As private equity and infrastructure investors digest the impact of the new legislation, we expect electric utilities and clean hydrogen production to be key beneficiaries of an increase in capital deployment. Infrastructure-focused strategies can provide exposure to these tailwinds while being ESG-friendly and more broadly helping to diversify a portfolio, provide a hedge against inflation, and generate attractive long-term risk-adjusted returns.

Print PDF > Go Green or Go Home

¹ Inflation Reduction Act of 2022, Investopedia

This Exit Closed

Amid public market turbulence, venture capital exit activity and total exit value so far in 2022 are down significantly from peak 2021 levels. The venture-backed exit value in the U.S. came in just under $50 billion in the first half of the year. If this pace continues, 2022 is on track to come in at less than 15% of 2021 levels, returning to an exit value range last seen in 2017.

The number of acquisitions and buyouts as forms of exit are tracking close to 2021 numbers. Firms at the lower end of the market commonly use acquisitions and buyouts as exit strategies. This area of the market has also been more resilient against public market compares. Weakness in the IPO market — potentially on track for its worst year since Dealogic began tracking it in 1995 — is having the greatest impact on the decline in exit value. The IPO market has essentially shut down for venture capital-backed businesses. The familiar macroeconomic headwinds — high inflation, rising interest rates, and the risk of recession — have weighed on venture capital valuations alongside public market equities. Startups that were planning on an IPO are now forced to reevaluate their options. In the meantime, these companies have to rely on the strength of their balance sheets and the financial backing of sponsors. For companies still early in their life cycle and burning cash, liquidity may be a growing concern. Since valuations are down, VC managers are predicting 2022 could in theory be an attractive vintage year and entry point into the VC market. Partnering with VC managers who have experience investing through business cycles and periods of high and low valuations will prove to be important. Overall, with the outlook for the IPO market still uncertain, we are carefully monitoring the impact to the VC landscape and the potential impact to investors.

Print PDF > This Exit Closed

 

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.

Hawks and Doves: The Birds of Summer

Inflation, interest rates, and a possible recession are top of mind this summer. Last Friday at the widely-watched Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell signaled that the U.S. central bank will keep raising interest rates and leave them elevated in order to fight inflation. With the Fed not backing off its hawkish stance, concerns around what tighter monetary policy means for economic growth remain front and center.

Looking back to the late 1970s — the last time we saw inflation rising near this pace — a series of rate hikes preceded the 1980 recession and the subsequent ’81–’82 recession. The early 1990s saw an 8-month recession stemming from the restrictive monetary policy of the late ‘80s paired with the 1990 oil price shock. Rates were subsequently increased, though to lower highs, before being cut amid the bursting of the Dot-Com Bubble and then again during the Global Financial Crisis. While the Great Recession was officially over by June 2009, rates were kept near zero until 2015. With only modest rate increases through 2018 followed by a reversal in 2019, rates were quickly slashed to near zero again in early 2020 during the shortest recession on record. This year, to address escalating inflation, the Fed has raised rates by 2.25% over a roughly four-month period — the quickest pace in decades. While rate hikes may have started to weigh on demand, inflation remains near 40-year highs, and more needs to be done to restore price stability. The degree of economic slowdown and impact to the employment market as a consequence of rising rates is one of the biggest unknowns and biggest drivers of markets today. While examining history can add context, inflation dynamics are complex and nuanced, and many have never seen these levels of price increases. Overall, uncertainty in markets remains, with all eyes on the Fed, the September FOMC meeting, and the evolving impact on the U.S. consumer.

Print PDF > Hawks and Doves: The Birds of Summer

 

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.

Geopolitics: The Final Frontier

Geopolitical risk has shifted center stage as evolving international dynamics have driven asset allocators to reassess risk exposures and market opportunities. While the Russia-Ukraine conflict has dominated headlines, a number of recent events in the Asia-Pacific region have also led to heightened volatility, directly impacting global markets.

China-Taiwan: Tensions have escalated following House Speaker Pelosi’s visit to Taiwan, with the Fourth Taiwan Strait Crisis now in its fourth week. Taiwan seems to be at the center of a series of ongoing territorial disputes within the first island chain. China’s growing influence and military footprint within the first island chain could create considerable headwinds for investors as trade relations and global supply chains are forced to adapt.

Xinjiang: The situation in Xinjiang continues to draw western criticism, with the U.S., Canada, U.K., and E.U. imposing sanctions on Chinese officials — further stressing diplomatic and economic relations in the wake of the recent Sino-American trade war.

China-India: At the same time, the Sino-Indian border disputes have been ongoing since May 2020, and violent flare-ups persist as one of the most apparent obstacles for Indian and Chinese markets and the BRICS alliance. Developments in Sino-Indian relations could be significant as an increase in trade between China and India would likely generate tailwinds for emerging markets.

Myanmar and Sri Lanka: The conflicts in Myanmar and Sri Lanka may also have broad implications for emerging markets. Myanmar’s internal conflict presents economic and humanitarian issues for neighboring states. China recently announced the China-Myanmar Economic Corridor (CMEC) Plus initiative. While improved stability and infrastructure could bolster global investment, parallels may be drawn to Sri Lanka, where economic conditions deteriorated due to unproductive and unsustainable sovereign debt — approximately 10% of which was Chinese-owned infrastructure loans. Facing default, Sri Lanka relinquished control of Hambantota International Port and 15,000 acres of adjacent land in a 99-year lease to China Merchants Port, a Chinese state-owned enterprise. On August 19th, a Chinese surveillance vessel docked in Sri Lanka reigniting western concerns that Chinese-owned emerging market debt could be leveraged to expand its military footprint.

Taken together, China’s relations with Taiwan, India, and Myanmar and the situation in Xinjiang are additional macro factors that allocators should understand and consider as they evaluate different investment opportunities and risks.

Print PDF > Geopolitics: The Final Frontier

 

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.

Movin’ Out (Of Their Parents’ Basement)

A previous Chart of the Week published in April entitled “Buy Land, They’re Not Making It Anymore” discussed the fundamentals driving the domestic housing market, including an increase in home valuations and a decrease in the number of new homes built in the United States over the last decade. Data released this week by Anytime Estimate serves to shed additional light on current housing dynamics. One of the most noteworthy aspects of this report is that millennials accounted for roughly two-thirds of first-time buyers in a survey of more than 700 respondents who purchased a home since the start of 2021. Generally speaking, this is good news for the housing market and pushes back against the notion that individuals in this age demographic have avoided home ownership because they prefer to rent. The bad news, according to the Anytime Estimate survey, is that 72% of buyers since 2021 have regrets about their home purchase, with over one-fifth of all buyers indicating complete dissatisfaction with the process and result. To that point, over 25% of respondents claimed they either spent too much money on their home or bought the home too quickly, not giving the purchase adequate consideration. Additional regrets include buying a “fixer-upper” that requires extensive maintenance (24% of respondents), feeling pressured to make an offer (21% of respondents), and purchasing the home sight unseen (17% of respondents).

Regrets notwithstanding (and jokes about millennials thinking buying a home was as easy as purchasing a slice of avocado toast aside), the results of this survey are largely encouraging. Homes tend to be beneficial investments, so recent purchases could allow millennials to build significant wealth over the coming decades. Additionally, many of these first-time buyers have reason to feel good about their purchases given the fact that they likely financed their homes at record low-interest rates. In recent months, the housing market in the U.S. has cooled substantially, which is evident by a buildup in inventories and a pullback in housing starts. This pullback may serve as a welcome respite for interested buyers in the near term. Marquette will continue to monitor dynamics within the market for housing with the conviction that real estate acts as a strong value-add for investors with long time horizons.

Print PDF > Movin’ Out (Of Their Parents’ Basement)

 

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.