Category: Chart of the Week

Is Velocity Stifling Inflation Amid Record Growth of Money Supply?

Inflation has remained well below 3% in the United States for nearly a decade despite a record economic expansion and supportive monetary policy. Even after unprecedented alterations to the macroeconomic landscape in recent months, investors have not seen the significant price level increases that might have been expected in theory. This puzzling situation may be at least partially explained by the current relationship between money supply and velocity.

When it comes to economic relief efforts in the U.S. during 2020, no entity has been more active than the Federal Reserve, which has increasingly relied on open market operations with short-term interest rates near zero. Since the start of the pandemic, the Fed has purchased $3.5 trillion in Treasuries, corporate bonds, and mortgage-backed securities, and recently announced its intention to press forward with $120 billion per month in additional bond buying. The central bank’s balance sheet has now ballooned to over $7 trillion. As a result, M2 ­— a measure of the total money supply that includes narrow money, cash equivalents, and short-term deposits — spiked by roughly 25% in 2020, a record year-over-year growth figure.¹ The recent M2 surge has been accompanied by a decrease in the velocity of money, calculated as the ratio of quarterly nominal GDP to the quarterly average of M2 money stock. Put simply, velocity denotes the rate of turnover in the money supply and is a gauge of economic health, as higher velocity is usually associated with more robust economic activity. Since the beginning of 2020, money velocity has fallen by more than 20%, indicating a strong preference for saving vs. spending on the part of the American consumer since the outbreak of COVID-19.

The relationship between money supply and velocity has significant implications for security markets going forward, particularly as it relates to inflation. Investors have long been confounded by the absence of inflation in the U.S. since low interest rates and M2 growth should lead to higher price levels all else equal. Part of the reason for the lack of inflation could be lower levels of money velocity, which has largely declined since 2000 amid three significant recessions in the United States. The recent plunge in velocity may signal to central bankers that expansionary efforts could be continued in the near term without the risk of significant price level increases. As the economic recovery continues, however, velocity will necessarily rise, which could lead to interest rate hikes and the tapering of the Fed balance sheet to prevent runaway inflation. Investors should be cognizant of the possibility of restrictive monetary policy in the coming years as the world lifts itself out of recession.

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¹As measured on November 30, 2020

 

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.

Market Recovery: Superpower Showdown

Despite the enormous challenges of 2020, financial markets have rebounded. While baffling at face value, the contrast between market performance and the widespread suffering due to COVID-19 is more understandable in the context of markets as a representation of human ingenuity and resiliency. These two traits are perhaps most recognized in the world’s foremost economic superpowers: The United States and the People’s Republic of China. During the third week of March, both countries saw market drawdowns near 30%; most other equity indices across the world saw similar drops. Since the global market bottom, countries have been racing to make up these losses and charge ahead to new highs. As of December 11th, America’s recovery has been nearly a third stronger than China’s. Globally, the recovery has fallen in between these two world powers.

A dollar invested in American public equities on March 23rd would have grown to $1.72 as of last Friday, December 11th, as represented by the Russell 3000 (representing approximately 98% of the investable U.S. equity market¹). Over this same time span, a dollar invested in China would have driven an increase to $1.54, as represented by the MSCI China Index. This broad market index captures 85% of China’s equity universe and includes the variety of share classes available to both strictly domestic Chinese investors as well as foreign investors.² However, America’s strength in capital markets recovery does not reflect the country’s relative success in managing the virus. In the U.S., the fight drags on, while much of China has returned to business as usual.³ Broadly, capital markets as measured by the All Country World Index (ACWI) — which contains 85% of the global equity markets, including 23 developed countries and 26 developing countries² — has rebounded at a clip between that of the U.S. and China. The good news for investors is that equity markets — regardless of home country — have rebounded from the extreme drops seen in March and April.

As detailed in our previous Chart of the Week, “Main Street Won’t Look Like Wall Street for a While,” the real-world experience of many Americans is one of continued economic hardship. While this desperate situation may soon be addressed with additional stimulus, Americans and people around the globe can also find hope in the fact that markets are forward-looking and humans, by nature, are resilient and resourceful. As a testament to this, one needs to look no further than the rollout of the highly anticipated and historic COVID-19 vaccine, which saw its first doses administered in the U.S on Monday.⁴ The extreme market volatility and large sell-off early in the year and subsequent recovery have further underscored why a long-term investment perspective rooted in a fundamental confidence in continual technological and economic progress is the most effective mindset an investor can have.

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¹ FTSE Russell
² MSCI
³ China is back to normal — the US and Europe are not. Here’s how it succeeded
⁴ First Covid-19 Vaccine Given to U.S. Public

 

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.

Main Street Won’t Look Like Wall Street for a While

The month of November is often a positive one for equity markets, with the S&P 500 Index posting positive returns 62% of the time, and November 2020 was surely one for the record books. The Dow Jones Index, designed to serve as a proxy for the health of the broader U.S. economy, posted its best monthly return since 1987. Smaller companies also rallied in November as the Russell 2000 Index, which tracks U.S. small-capitalization stocks, set its first record high since 2018 and posted its strongest monthly return ever. That said, a stark contrast emerges when these milestones are viewed beside other economic indicators, particularly unemployment.

Down 54.4% from the April 2020 peak, U.S. national unemployment came in at 6.7% for November. This is exceptionally positive news considering the recent figure is only 0.6% above its 15-year average. However, this aggregated unemployment measure does not highlight the significant disparity plaguing the broader employment landscape.

According to the Bureau of Labor Statistics, the labor market can be divided into 22 unique occupation groups, many of which have been hit harder by the COVID-19-induced recession than others. For example — and perhaps not surprisingly — the four groups most affected by the pandemic include those on the frontlines of human interaction, such as Personal Care & Service, Food Preparation & Serving, Transport & Material Moving, and Building Grounds & Cleaning. While it is clear from the chart that these occupations tend to have a slightly higher rate of unemployment than the national figure, the average November unemployment rate for these groups was a significant 10.7%, coming in 4% higher than the current national level and 2.9% higher than the long-term average of the same groups. Conversely, occupation groups including Healthcare Practitioners, Legal, Computer & Mathematical, and Architecture & Engineering have escaped COVID-19 largely unscathed. These groups posted an average rate of 2.4% unemployment in November, which is 4.4% below the current national level and, in fact, 0.2% lower than their own long-term average. The gravity of this disparity takes on new meaning when viewed through the lens of workforce concentration and wealth generation. The least affected occupation groups employ 11.6% of the workforce, while the most affected groups have nearly double the employee base, at 23.0%. To make matters worse, this larger workforce earns substantially less than their COVID-sheltered peers. According to 2019 data, the most affected groups earned a median annual income of $27,800, which is just over the poverty line for a family of four and $12,000 less than the median income for all occupation groups. On the other hand, for those occupation groups nearing full employment, the median worker earned an annual income of $79,900 in 2019, more than two times the national median.

Ultimately, no two recessions are the same, but perspective can be gleaned by looking to the past. Since 1950, the average U.S. unemployment rate has been a low 5.8%, despite 10 unique bear market corrections during that time. However, the subsequent decline from a spike in unemployment can be slow and long. Looking back to the Global Financial Crisis, U.S. unemployment peaked at 10% in October 2009 and took just over six years to recover back to pre-crisis levels. However, unlike other recessions we have seen in recent memory, this one seems to have a discernible cure: a COVID-19 vaccine. With national distribution beginning before the end of the year, many analysts are expecting the economy to return to ‘normal’ by mid-2021. An unprecedented level of stimulus has already been injected into the economy and an additional highly anticipated package expected to arrive early next year are added reasons for optimism. Taken together, there is hope that current unemployment figures will revert to typical levels at a pace not seen in history.

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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.

Is Growth Conceding?

The market’s continued rally following the U.S. election has been a welcome relief, even more so for value investors. Since major media outlets called the presidential race for now President-elect Biden on November 7th, the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index by 6.6%, and at one point by more than 10%. It has been the strongest value run since the dot-com bubble burst in 2001. The Monday following the result, November 9th, was the best single day for value over growth ever.

Presidential elections and other regime changes can often spark a rotation within the market. In this case, in addition to expectations for additional stimulus post the election, the delayed election results lined up with Pfizer’s announcement — and the peer announcements that followed — that its COVID-19 vaccine candidate was found to be more than 90% effective. Stocks generally, but in particular, more cyclical businesses and industries most impacted by the pandemic, rallied and have continued to gain momentum. Banks are up 20% and Energy stocks more than 30%. Technology and Healthcare have lagged despite the Republican gains in Congress that subsequently reduced the risk of sweeping regulatory changes.

The question now is whether value can maintain this momentum. Interestingly, the move is reminiscent of the period following the 2016 election. From the election on November 8th, 2016 to a peak in mid-December, value had outpaced growth by 5%. Financials, along with Energy and Basic Materials, led at that point as well, though for different reasons, set to benefit from expected regulatory rollbacks, tax cuts, and protectionist trade policies. Technology unsurprisingly lagged following Trump’s attacks on Tech bellwethers throughout his campaign. But the high expectations fizzled as Trump’s agenda hit roadblocks. In 2016, value’s advantage lasted roughly a month, with growth back on top by mid-March 2017. Only time will tell how market dynamics will play out this time. Relative to growth, value is trading at some of the most attractive valuations ever. But several of the same trends that led to growth’s dominance over the last decade, and certainly this year, are also arguably stronger than ever.

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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.

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.

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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.

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.

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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.

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.

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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.

ESG AUM Continues to Grow

Over the past five years, there has been a substantial increase in assets under management (“AUM”) for ESG (environmental, social, and corporate governance) mandated funds, as investors are placing greater emphasis on environmental and social issues while realizing that performance is not a tradeoff for sustainable investments. Since 2015, there has been a 147.5% increase in AUM for ESG-mandated funds, specifically looking at U.S. Equity, U.S. Fixed Income, Global Equity, and Global Fixed Income.

Going forward, we expect to see a larger increase in ESG investing as the COVID crisis further unfolds against the backdrop of other significant environmental and social issues. The recent inflows into ESG funds are a combination of new funds and the restructuring of old non-ESG funds. During the first half of 2020, over 20 new ESG funds have been launched in the U.S., making it the sixth consecutive year of 20+ new launches, and the U.S. is expected to set a new record by the end of the year. Clearly this is a trend that is gaining momentum across the investment universe and bears watching in future years. For more information on sustainable investing, reference our Sustainable Investing Video Series.

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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.