Category: Chart of the Week

It’s Not Bad News for All Energy Stocks

With the steady stream of negative economic data, record-shattering unemployment figures, and ballooning government deficits, it has been hard to reconcile whether there is light at the end of the COVID-19 tunnel. This is coupled with the markets’ shrug-off of these gloomy figures, thus far, as we see daily green-shoots. The general expectation that we have a tough slog ahead until a vaccine is widely available has led some investors to “wait it out” on the sidelines.

This week’s chart brings attention to a flickering bright spot for investors, society, and the planet at large: the resiliency and relative outperformance of clean energy during this pandemic. The energy sector has been rocked by limited demand (due to the broad economic shutdown) and an oversupply of crude oil (caused by OPEC and Russia locking horns on price). And as shown, the global energy sector has careened downward, posting a YTD return of -37.1% through May 12th. However, if we include only those companies that embrace alternative energy, one can see that they not only have outperformed their oil-dependent peers but have also outpaced the broader market, posting -5.1% YTD return. These renewable energy and infrastructure producers are benefitting from increased demand, technological innovation, lower cost of capital, and potential expansion of tax credits (for wind and solar power), while not having their chief input dictated by oil price fluctuations.

While it would be irrational to believe that the world will unanimously cut oil consumption and usage immediately post pandemic, there are compelling arguments that our “new normal” will be more accepting of electric grid expansion and increased usage of renewable energy sources. In the U.S., we are likely still in the early innings of a multi-decade energy disruption, while developed countries within Europe and Canada are approaching the seventh inning stretch. The clean energy sector, which has been touted by the environmentally conscious crowd for years, is showing a level of resiliency that all investors should take note of.

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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.

Declining Jobless Claims When Unemployment is 14.7%?

New jobless claims fell from a peak of 6.9 million for the week ending March 27th to 3.2 million for the week ending May 1st (according to data released yesterday, May 7th), shown in the left chart. However, the measure remains at an extraordinarily high level due to the devastating impact of the COVID-19 pandemic. In contrast, the highest that claims reached during the Global Financial Crisis (“GFC”) was only 665,000 for the week ending March 27th, 2009. Since the middle of March this year when the nationwide lockdowns began, there have been 33 million new jobless claims in total. In just one and a half months, we are already closing in on the 50 million new claims that were processed in the two years spanning all of 2008 and 2009 for the GFC.

To pour more salt on the wound, jobless claims underestimate unemployment as the measure does not count individuals who are not working and have not yet filed a claim. In contrast, the unemployment rate is based on household surveys and counts those who are not working even if they have not filed an unemployment claim. The unemployment rate reached a shocking 14.7% at the end of April (data that was just released today, May 8th), also shown in the left chart. This rate, which translates to 20.5 million¹ American jobs lost in just the month of April alone, is not as high as the consensus forecast of 16% nor the 25% reached in 1933 during the Great Depression but is well above the 10% peak unemployment rate reached during the GFC in October of 2009. Yesterday the S&P 500 gained 1% while the 10-year Treasury fell from 0.72% to 0.63%; this morning the S&P 500 is up roughly 1% just after the opening bell.

From a bigger picture perspective, what is the outlook for the economy and employment? As new COVID-19 infections have started to decline in many regions of the developed world, we expect governments to continue experimenting with reopening. Further volatility is likely as there may be bouts of rising new infections followed by reclosures and resumed openings until governments, businesses, and households establish an interim balance for returning to workplaces, restaurants, and stores while still keeping the spread of the virus at bay. Meanwhile, vaccine, antiviral, and antibody development appears to be on a positive trajectory. The FDA approved Moderna’s coronavirus vaccine for Phase II trials yesterday, which means that there are two candidates now in Phase II, with Phase III potentially within reach in the second half of this year. Some of the other 70 vaccine candidates have also shown promise and are set to enter Phase I in the coming weeks. Moreover, government stimulus remains steadfast.

Nonetheless, the damage from the shelter-in-place orders to the U.S. consumer has been immediate and that rapidity has also been felt in the energy sector, shown in the sharp decline in active oil drilling rigs in the right chart. But U.S. corporations across the broader spectrum have generally held up well as many have strong balance sheets to sustain a prolonged recession. We are seeing the beginnings of more serious damage for U.S. corporations, however, as the Bloomberg bankruptcy index — a measure of both the number of and dollar amount of bankruptcies — is just starting to rise, also shown in the right chart. The recent bankruptcies of Neiman Marcus and J. Crew hint at more coronavirus casualties to come. Both companies filed for Chapter 11 restructuring, rather than Chapter 7 liquidation, so there may be potential for re-emergence depending on how long this coronavirus crisis lasts.

Despite the rise in bankruptcies, the gradual reopening of various economies coupled with encouraging vaccine progress and government stimulus has driven the equity markets higher since March, and spreads have generally tightened across fixed income sectors. All things considered, we expect volatility to remain elevated but equity and credit markets to continue their gradual recovery. However, we remain diligent about key risks, particularly a second wave of infections later this year and swelling U.S.-China tensions. Weekly jobless claims and the unemployment rate will likely remain high while rig counts remain low until the economy begins to open up more broadly. A current working paper by economists at the Federal Reserve Bank of San Francisco forecasts a worst-case scenario wherein if progress is not made and a burst of hiring later in 2020 and in 2021 does not materialize then double-digit unemployment may still be expected through 2021. However, they estimate that if the lockdowns are lifted and businesses hire from the large group of ready workers then by mid-next year the rate may fall back to the pre-pandemic 4%.² The bankruptcy index is a lagging indicator, however, and we would expect bankruptcies to continue to upsurge for the short to medium term even as employment, rig counts, and the markets progressively return to normal. At this point there appear to be more positive signs of a recovery than risks of worsening conditions, but much of this is predicated on further slowing of the outbreak.  Conditions are still rapidly changing and we will share updates on the market and economy as appropriate.

Print PDF > Declining Jobless Claims When Unemployment is 14.7%?

¹ This 20.5 million jobs lost figure is based on household surveys and is lower than the 33 million new jobless claims mentioned above because of any combination of the following: (1) the Paycheck Protection Program rehires as the government loans resulted in rehiring after claims were processed but before the April survey was taken, (2) standard survey error as the normal course of business from the Bureau of Labor Statistics, (3) individuals filing jobless claims while still employed.

² Petrosky-Nadeau, Nicolas, and Robert G. Valletta. May 2020. “Unemployment Paths in a Pandemic Economy,” Federal Reserve Bank of San Francisco Working Paper 2020-18. Available at https://doi.org/10.24148/wp2020-18.

 

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.

Coronavirus Vaccines in Progress

There are currently 70 coronavirus vaccines being developed by biotech companies around the world. These charts highlight two components of this process.

The left chart shows the clinical trial phases¹ in which these 70 coronavirus vaccine candidates currently reside, with the vaccine candidate from Hong Kong Stock Exchange-listed biopharmaceutical company CanSino Biologics in Phase II, vaccine candidates from NASDAQ-listed Moderna² and NASDAQ-listed Inovio in Phase I, and the rest of the 67 candidates yet to begin Phase I. Of these other 67, notable ones include vaccine candidates from NYSE-listed Pfizer, London Stock-Exchange-listed AstraZeneca, NYSE-listed Johnson & Johnson, Euronext Paris-listed Sanofi jointly with London Stock Exchange-listed GlaxoSmithKline, and Oxford University.

The right chart shows the amount that the U.S. government has invested in coronavirus research so far, with $917 million towards vaccines, $313 million towards therapies, and $24 million towards diagnostics. The $313 million towards therapies is broken out into $152 million for Johnson & Johnson to develop an antiviral drug and $99 million to Regeneron, $25 million to Roche and $37 million to several other biotech companies to develop antibodies. The antivirals and antibodies³ will be used for treating COVID-19 patients and tide us over until a vaccine that can prevent COVID-19 can be developed and distributed.

If a coronavirus vaccine candidate passes Phase III (see endnote), the FDA will review the detailed findings of each of the three phases and approve the treatment if the FDA’s standards are met. However, the process does not stop there. The final phase involves manufacturing, production, and distribution, which may take several months to several quarters. With estimates of late 2020 to mid-2021 for distribution of a coronavirus vaccine cited by investors and the media, the current process for developing, testing, and approving these 70 coronavirus vaccine candidates is certainly on an accelerated path.

Predicting the ultimate success of any singular vaccine is utterly difficult, but with 70 diverse candidates the likelihood that at least one successful vaccine will survive the trial by fire is greater than if only a limited number of vaccines were in development. The 70 vaccine candidates all work differently but have a common trait in that they feature a delivery mechanism for the actual coronavirus spike protein, usually a weakened version of another virus. For example, Oxford University’s vaccine is based on a weakened version of the adenovirus (also known as the common cold virus) from chimpanzees. The genes of the spike protein from the actual coronavirus are spliced into this weakened virus that is altered so that it cannot replicate in humans. This modified virus serves as the vaccine that is injected into the person. Once in cells, this modified virus manufactures the coronavirus spike protein that then prompts the immune system to create antibodies that subsequently fight off the modified virus. The person then is expected to be immune to coronavirus, because if the actual coronavirus were to enter this person’s cells, his or her immune system would be triggered to produce the antibodies to eradicate any virus with this spike protein.

With vaccine development now front and center in terms of a solution to the pandemic-induced recession, our hope is that this evaluation of vaccine progress and the mechanics might be useful for clients vis-à-vis portfolio perspectives, expectations, and decisions in the quarters to come.

Print PDF > Coronavirus Vaccines in Progress

¹ For those not familiar with medical treatment clinical trials, the following summarizes each phase’s timeframe and focus:
Phase I typically lasts several months to a year. Its focus is on whether the drug is safe enough to check for efficacy. Serious side effects will be monitored. Because of the small number of human test subjects — usually 20 to 100 volunteers for Phase I — rare side effects may not be uncovered until phases II or III.
Phase II typically lasts two years. Its focus is on whether the drug has any efficacy. Usually 100 to 300 patients are divided into two or three groups for a controlled experiment by testing the new treatment against other treatments.
Phase III typically lasts several years. Its focus is on the degree of the drug’s therapeutic effect. Usually Phase III involves 300 to 3,000 patients in order to achieve rigorous statistical significance in assessing final levels of efficacy and safety.
² On April 27, 2020, Moderna submitted the application for Phase II, which is expected to start this quarter, and they expect Phase III to start in the fall.
³ Recently Gilead’s antiviral remdesivir was hailed by National Institute of Allergy and Infectious Disease Director Dr. Anthony Fauci as a promising drug that can block COVID-19. In the latest trials, remsdesivir helped patients recover in 11 days versus 15 days with a placebo. Only 8% of patients died taking remdesivir versus 11% of patients who took the placebo. Currently there are several trials to test if remdesivir could stop COVID-19 from replicating. Marquette will continue to monitor remdesivir and other antivirals, as well as the antibody and vaccine candidates, in their progress.

 

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.

Taking Cues From the Market

Amid today’s extraordinary levels of uncertainty and speculation, we welcome anything that can offer some sense of visibility. Earnings season tends to be just that, giving public companies a platform to formally update the market on their recent performance and future outlook. While guidance in this environment is not what it normally is, the market’s reaction to what is said offers insightful perspective into the thought process of active participants.

During the first two weeks of earnings season, we heard from companies across sectors, representing almost a quarter of the S&P 500 Index’s market capitalization. For this analysis, we focus on the change to consensus current fiscal year (FY1) EPS estimates. This should not only capture actual results reported, but the outlook for the rest of the year. For companies that have already reported, estimates have come down more than 20%, with an initial modest revision going into earnings and a larger cut post the report.

On average, stocks were flat across sectors despite these major cuts to earnings expectations. Certain sectors particularly stand out — FY1 EPS expectations for Energy stocks came down an additional 42% after earnings reports and stocks were up 1% in response while Consumer Discretionary expectations were cut an additional 33% and stocks rose 6% on the news. While there are nuances not captured by these averages, from a high level it implies company results and outlooks were roughly in line with buy-side expectations — in some cases better — refuting one of the oft-cited catalysts for a correction to the rebound that some argue has gone too far too fast.

We do not claim to know where the market is headed from here, but early signs from earnings season give us reasons to be optimistic that, for now, the bottom is in.

Print PDF > Taking Cues From the 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.

Why Did the Price of Oil Turn Negative?

The price of oil as measured by the May WTI futures contract (gray line) fell to negative territory for the first time in history on Monday, plunging to -$40 before expiring at a positive price on Tuesday. Decreased demand for oil due to travel restrictions has caused an abnormal situation where in the short term, oil producers were willing to pay buyers to take their oil as they had limited storage space. Since physical delivery occurs on these future contracts, some were at risk of having purchased oil with no place to put it. However, when we look at the further dated June WTI futures contract (green line), the price change has not been as dramatic and remains in positive territory.

Demand has significantly weakened for oil, and supply cuts have been coming too late which are driving the price down. Price volatility is expected to be extremely high in the near term as gasoline and jet fuel are simply sitting in storage. Oil prices need to be around roughly $20 a barrel for United States domiciled companies to break even. Smaller energy companies with high debt burdens whose revenues are tied to the price of oil are unable to sustain low prices for long and are at risk of bankruptcy and laying off employees, further adding to the economic stress caused by the coronavirus. Such negative outcomes will also weigh on the equity and bond markets — as seen earlier this week — so the price of oil is clearly another economic variable that will be closely monitored through this pandemic.

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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.

Was March 23rd the Market Bottom?

The S&P 500 hit its recent peak on February 19th, 2020. Just sixteen trading days later it entered bear market territory and by March 23rd, the S&P 500 was down 33.2% from its all-time high. The intensity and speed of the sell-off surpassed both 1987 and 1929, two infamous years in investment history. Since March 23rd, the S&P 500 has rallied 27.4% through April 14th prompting the question: have we already seen the market bottom?

Identifying a market bottom is a near impossible task, one that is much easier with hindsight. Most bear markets see stocks rally 10% or more before falling back down and hitting a new bottom. The Global Financial Crisis produced five such bounces before finding its floor in March 2009. Near the turn of the century, the Tech Bubble produced three “false” rallies. Based on these data points, history would tell us that there are still further losses ahead. However, every bear market is unique and this one certainly fits that bill. Given the speed of the decline, might we see a faster recovery? The answer to that question is likely predicated on how well the spread of COVID-19 is controlled and whether we see a second wave of infections.

Print PDF > Was March 23rd the Market Bottom?

 

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 Have the Last Two Downturns Taught Us About Private Equity?

While each economic downturn is certainly unique, we can look back over the Dot-Com Crisis and the Global Financial Crisis to see how private equity markets performed relative to public equity markets. In both cases, the private equity market1 bottomed 3–6 months later than public markets (due to the lag in reporting), but with a less significant trough. Returns within private equity markets also recovered more quickly as they recovered 1.5–2 years sooner than public markets and generated significant relative outperformance.

The lack of liquidity combined with lagged and overall less frequent reporting works to most investors’ advantages in volatile markets as there is a “smoothing” effect that often generates less fear and the lack of liquidity limits the ability to sell at what may be the worst time for value creation. Quarterly valuations are provided on a 2–3 month lag which provides the benefit of future knowledge on where markets are headed. Perhaps most critical for investors to understand is that throughout an economic downturn — such as the one we are currently experiencing — private equity portfolio allocations will likely rise due to this lag in reporting, but these levels are temporary as markets are correlated to some degree. Unfortunately, some investors look at this temporarily higher allocation (which are predominantly due to the denominator effect) and choose to reduce their private equity program investment; often these liquidations are done at a significant discount. Historically, selling or pulling back on investing has been a big mistake as these investors have missed out on four of the best vintages over the last 25 years.

The primary concern in this downturn is that with a significant portion of the U.S. economy essentially closed, many small businesses do not have sufficient liquidity to weather substantial losses of revenue. However, we would caution that performance will vary by industry and geography as some businesses are operating at relatively high levels in this environment and should be positioned to accelerate as the economy returns to a more normal state. Across the private equity asset class, investor allocations are also higher as reflected by the strong fundraising in recent years, which means the industry is well capitalized to support many businesses throughout this downturn. This significant “dry powder” that private equity firms have at their disposal is likely to be deployed to support existing portfolio companies as well as towards new opportunities that arise from a less competitive landscape as many less well-capitalized businesses will inevitability fail throughout this downturn.

The previous two downturns proved private equity is not immune to public equity market corrections, but the asset class has historically recovered quickly and resumed its place as a return-enhancing component of investor portfolios. Although the denominator effect may drive private equity allocations above intended targets in the context of an overall portfolio, these differences are only temporary in nature and private equity investors are best served to maintain their allocations rather than selling at a steep discount in the secondary market. From a long-term perspective, making consistent allocations and maintaining exposure has best served portfolio returns, and we do not expect that pattern to change in the current downturn.

Print PDF > What Have the Last Two Downturns Taught Us About Private Equity?

 

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 Unprecedented Surge in Initial Weekly Jobless Claims Due to COVID-19

As mentioned in last week’s chart, the number of Americans filing for unemployment over the past few weeks overwhelmed the system and created a backlog of claims that were unable to be processed right away. This week’s data updates that picture and shows another colossal jump in claims: over 6 million people filed for unemployment last week.

In this chart, we focus on 2020 data to show the scale of these numbers. Claims between the week of March 23rd and the week of March 16th more than doubled, and the jump from 2020’s weekly average before the pandemic set in to last week is more than 30 times higher.

The data from last week shows that the backlog of claims had an overwhelming effect. Businesses have been suffering and this has caused unemployment numbers over the past two weeks alone to total nearly 10 million Americans. As companies continue to lay off Americans as a result of stay-at-home orders and COVID-19 concerns, the initial unemployment claims have skyrocketed. Congress also passed a stimulus package that increased the incentive for people to see the process of filing for unemployment through, including unemployment benefit extensions and expansions in paid benefits. With the projected timeline for when businesses will be able to re-open being pushed further and further out, the hope is that COVID-19 cases will slow and companies will be able to take full advantage of increased consumer demand.

Print PDF > Another Unprecedented Surge in Initial Weekly Jobless Claims Due to 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.

What Does the Coronavirus Pandemic Mean for Future Real Estate Returns?

This week’s chart examines forward-looking returns for private real estate based on historical spreads to the 10-Year Treasury Yield and the NCREIF-ODCE Index (proxy for core private real estate). Real estate valuations (spread-to-Treasuries) are currently above 300 bps as a result of COVID-19. Spreads of this magnitude have only been seen four times, each of which has been followed by strong 3- and 5-year returns. For example, during the Global Financial Crisis, real estate spreads-to-Treasuries surpassed 300 bps in the fourth quarter of 2009 which were followed by 12.2% and 12.4% returns for the NCREIF-ODCE Index in the subsequent 3 and 5-year periods, respectively.

Though the impacts from COVID-19 have not yet been fully felt in the private real estate market, it is clear that challenges lie ahead, particularly in the sectors that have been hit the hardest. For example, assets with short lease durations and heavier operating business components, such as hospitality (daily), and co-working office (monthly), as well as assets that rely on foot traffic, such as entertainment, food & beverage, and destination retail will be more affected by the pandemic. Further complicating matters, the lack of transaction volume, comparable sales, leases, and loan originations have made it nearly impossible for appraisers to adjust valuations at this point in time.

Beyond the aforementioned troubled sectors, the impacts from COVID-19 will ultimately vary by property type, geography, and risk profile. The following table highlights the potential near-term and long-term impacts of each property sector:

Impacts of Coronavirus Pandemic on Real Estate Property Sectors table

While global growth is being impacted in the near-term, we still expect a recovery to take hold once the disruption fades; we still maintain the view that the recovery is delayed, not derailed. However, the true impact of this on real estate returns will not be known for a while. Although longer-term forward-looking returns appear promising at this point, there is a relatively high degree of uncertainty because the ultimate impact on the aforementioned sectors (which should be the biggest headwind for real estate) will remain unknown until the coronavirus outbreak is contained and the economy begins to function at a normal level again.

Print PDF > What Does the Coronavirus Pandemic Mean for Future Real Estate Returns?

 

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.

Initial Weekly Jobless Claims Surge Due to COVID-19

This special second edition Chart of the Week shows weekly initial jobless claims going back to 2007. Last week’s number came in at an unprecedented 3.3 million people, a near 12x increase from the previous week and 5x the previous largest jump in unemployment. Perhaps more alarming is that this number might not tell the whole story of the unemployment picture.

Ten states saw more than 100,000 people file for unemployment this week; however, due to low staffing and budgets, many claims could not be properly processed and included in the data. Granted, the number is likely higher as multiple states — Illinois included — have issued a stay-at-home order for non-essential employees due to COVID-19. The restaurant, airline, retail, and hotel industries have been hit especially hard with many Americans depending on a stimulus package to tide them over until the virus can be effectively tamed. Many small businesses have been forced to let employees go as they have been unable to generate cash flow.

On a more positive note, Amazon, CVS, and Walmart have been looking to hire thousands of employees as they receive increased demand from customers looking to purchase more goods as a result of being at home. If the virus is contained, the hope is that jobs will pick back up and companies will re-hire relatively quickly, though the question on when that might happen is one that is yet to be answered.

Print PDF > Initial Weekly Jobless Claims Surge Due to 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.