Category: Chart of the Week

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.

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.

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.

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.

Are Low Default Rates a Reason to Reach for Higher Yields?

As indicated in Moody’s 2018 Annual Defaults Report, recent default rates on corporate debt have been significantly below long-term historical averages. Is this as positive for forward returns as one would think?

This week’s chart of the week shows recent corporate default rates against the longer-term averages and the return/risk ratio. As expected, the default rates are lower across the board and especially so in the sub-investment grade space. B rated debt has the largest change in default rate at 9.3%, leaving the trailing 5-year default rate at nearly half of its longer-term average. Lower default rates have been great for returns, so what’s the risk?

Just as equity analysts extrapolate recent high company earnings growth into the future, the risk is that credit analysts extrapolate the unordinarily low default rate into the future. The recent economic environment has been hospitable for low default rates with steadily increasing corporate margins and an increased ability to pay down debt. As some investors move into more volatile and lower quality debt to chase the higher yield that these bonds offer, the return per unit of risk decreases because the default rate increases by more than the additional yield benefit. If default rates were to increase and revert to the mean, lower credit rating bonds would be hit especially hard.

However, active investment managers strive to mitigate some of these risks. They can tilt their portfolios to higher quality bonds or choose bonds that they believe are rated incorrectly by rating agencies, thus lowering their portfolio’s default rate. In total, the recent low default rates have been great for trailing returns, however the future environment is uncertain and the strategy of reaching for higher yield may not perform as it has in recent 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.

Hedge Fund Favorites Rebound to Start 2019

This week’s chart shows the performance of Goldman’s portfolio of hedge fund favorites, which draws from over 800 fundamental-driven hedge funds’ top 10 long equity holdings. This hedge fund index is constructed with approximately 50 holdings commonly held in the top 10 by fundamental hedge funds.

In the fourth quarter of 2018, top hedge fund holdings gave back all their first half gains and underperformed the S&P 500 for the year. These popular holdings were positively correlated with growth and momentum factors. They were also heavily weighted toward the technology sector which helped them outperform during the first half of 2018.

As the calendar flipped to 2019, hedge fund performance has rebounded strongly, finishing the quarter with the strongest performance since 2006. Sector weights to information technology, communication services, and consumer discretionary drove outperformance from the most widely held hedge fund names. This strong start to 2019 was much needed for hedge funds, as 2018 returns failed to meet investor expectations. Of course, this represents only one quarter of the year and investors will be following hedge fund performance closely for the remainder of 2019 to see if this pattern continues.

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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.

U.S. Equities Rally as Outflows Persist

This week’s chart looks at Morningstar fund flow data among the broad category groups of U.S. equity, international equity, taxable bond, and municipal bond. Since January 2018, U.S. equity funds saw cumulative net outflows totaling $123 billion, while international equities had positive cumulative inflows of $30 billion, taxable bonds had positive cumulative inflows of $97 billion, and municipal bonds had positive cumulative inflows of $32 billion. Negative fund flows within U.S. equities continue to persist in 2019 despite strong year-to-date gains.

The trend of U.S. equity outflows over the span of this bull market is nothing new but it is surprising to see fund outflows persist in the face of such a strong recovery off the December 2018 lows. As an example, the S&P 500 recently hit a record closing high of 2,945.83 on April 30th, surpassing the previous record closing high of 2,930.75 logged on September 20th, 2018. With the bull market turning ten years old on March 9th, a non-euphoric sentiment among investors may be a factor keeping this historically long bull market going.

What is driving this recent rally? In the past few months, investors have reacted to a significant reversal in monetary policy, better than expected first quarter earnings, a strong first quarter GDP, as well as continued increases in corporate stock buybacks. However, caution observed in fund flows may prove warranted with such items as a technical yield curve inversion, weakening profit margins, U.S.-China trade deal, Brexit, and upcoming 2020 elections weighing on investors’ minds.

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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.

IPOs Are Coming

This year has seen a burst of unicorn IPOs paving the way for Uber’s IPO later this year. While Lyft, Zoom, and Pinterest shared Uber’s unicorn status, they have had very different rides post-IPO in the stock market.

The market’s appetite for IPOs appears strong after a bumpy end to 2018, but one of the most recent unicorns to go public, Lyft, has struggled. After going public on March 28, the stock is down 22%, and 28% from its peak. Some analysts have pointed out that Lyft may have misled investors by claiming it held 39% of market share, as another survey reported 29%. Though the IPO ‘pop’ is well known, this is usually followed by a slow decline, so Lyft’s stock price behavior is not shocking. Zoom and Pinterest took note regardless, pricing their IPOs a bit more conservatively. Lyft priced its IPO at over a 30% premium compared to its last pre-IPO valuation, while Pinterest and Zoom went with about 2% and 17%, respectively.

Performance aside, 2019 is off to a strong start for IPOs with many more either expected or suspected including Uber, Beyond Meat, Airbnb, Slack, and Poshmark. The rest of the year should bring its share of further IPO excitement as more large, private companies seek to bring their investors liquidity and raise additional capital.

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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.

Global Central Banks React to Slowed Economic Momentum

In 2017 the global economy underwent a synchronized move upward and investors saw equities throughout the world generate double-digit returns. That momentum was lost in 2018 and most economic data points missed analysts’ expectations leading to downward revisions in GDP growth. As a result, several major central banks have taken steps to become more accommodative to help navigate the slowdown.

In the U.S., the Fed has put future rate hikes on pause and has communicated it will be patient on future adjustments. Based on Fed Funds futures, the market expects an eventual rate cut. In Europe, the ECB extended its no rate hike stance through the end of 2019. Additionally, the central bank announced its third targeted long-term refinancing operation aimed at avoiding a credit squeeze that could exacerbate the economic slowdown. In China, authorities organized a stimulus package including $298B in tax cuts to help boost domestic demand. Additionally, the country has reduced the bank reserve ratio from 17% at the start of 2018 to 13.5% as of 1Q19. Though still early, there has not been a marked improvement in global economic activity. However, markets have welcomed the more accommodative stances from these three key central banks and equity markets have rebounded from the tough 4Q 2018.

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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.