Equity market strength through the third quarter continues to challenge the common expectation going into the year. Cumulatively through September 30, the slowdown many investors anticipated has been averted thus far as the strength in certain segments of the market has more than offset the weakness in others. Following the strength of value equities — with Energy the lone positive sector in 2022 — markets experienced a shift in leadership to begin 2023. Companies that were challenged by supply chain issues and wage pressures rebounded to begin the year, primarily within growth-oriented sectors including Communication Services, Information Technology, and Consumer Discretionary. Overall, markets were strong through the first nine months of the year, as the S&P 500 rose 13.1%. However, September — historically the worst month of the year for equity markets — saw a somewhat unsurprising pullback. As we enter the final quarter of the year, we feel it is important to examine the underlying market dynamics driving performance and highlight the risks of a narrow market as well as the opportunities available on the sidelines.
Category: Newsletter
The Implications of a Government Shutdown
The federal government will shut down if Congress is unable to pass funding legislation by October 1, and a bill appears increasingly unlikely amid contentious debates among lawmakers regarding levels of future spending. While some essential government employees (e.g., law enforcement personnel) will be unaffected and benefits like Medicare and Social Security will continue to be paid, other disruptions will likely arise as a result of a shutdown. This newsletter seeks to outline these disruptions and the potential implications of a prolonged stoppage on certain functions of the federal government.
Observations from Across the Pond
Marquette regularly sends a senior member of our research team abroad as part of ongoing manager sourcing and due diligence efforts. These trips include update meetings with investment managers with whom Marquette has existing relationships as well as on-site visits with potential new manager recommendations. The cadence of these trips was severely impacted by the COVID-19 pandemic, but with international travel now almost back to normal, Marquette sent Senior Research Analyst Evan Frazier on a whirlwind tour of Europe earlier this summer. Over the course of almost a week, Evan met with eight investment management firms across three cities.
In this newsletter, Evan shares the perspectives, as well as more anecdotal information, he gained while on the ground in Europe, including insights on the region’s economy, the corporate landscape, and the unique set of opportunities and challenges currently facing international markets.
Read > Observations from Across the Pond
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.
Fitch Downgrades U.S. Credit
Fitch Ratings unexpectedly downgraded the U.S. government’s credit rating one notch from AAA to AA+ on August 1, 2023. This is only the second downgrade in history, after S&P Global Ratings, then Standard & Poor’s, made the same adjustment shortly after the 2011 debt ceiling crisis; S&P has maintained the AA+ rating since. Moody’s — the third major U.S. rating agency — still has the U.S. at its highest Aaa rating. Fitch noted the downgrade reflects expected fiscal deterioration over the next three years, the country’s high and growing debt burden, and an erosion in governance over the last several years, marked by bipartisan standoffs and last-minute resolutions. The downgrade and timing have drawn criticism from the Biden administration and economists, citing economic strength and the minuscule risk of the U.S. actually missing any debt payments.
While in practice the downgrade will likely have minimal impact, with the U.S. government broadly considered one of the safest borrowers, markets are reacting. Treasuries initially rallied on the news, anticipating the same flight to quality seen in 2011, though that sentiment reversed this morning, with yields at one point breaching a key resistance level of 4.1% — a level last seen in November 2022. Also likely contributing to the move today is the Treasury Department’s announced plans to sell a higher-than-expected amount of longer-dated securities next week, as it works to replenish the Treasury General Account (reference Marquette’s recent newsletter for additional context). The U.S. dollar initially dipped on the news but has since rallied and is up on the day amid higher yields. U.S. equities, after a steep run, are down modestly today, with growth equities leading the group lower.
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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.
Emerging From the Depths: An Overview of the Emerging Market Debt Opportunity Set
Emerging market debt (EMD) has earned a checkered reputation at best from institutional investors. The asset class is large, complex, and comes with unique risks that can lead to “throwing the baby out with the bath water” when things go wrong. 2022 was a challenging year for investors across asset classes, and emerging markets headlines ranging from the meltdown in Chinese property developers to Russia’s invasion of Ukraine only complicated the investment case for EMD. That said, historically the asset class has tended to rebound strongly from drawdown events, and that has so far been the case this year.
This newsletter revisits the dynamics of emerging markets debt, reviews 2022 performance, and discusses the investment opportunity from here.
Read > Emerging From the Depths: An Overview of the Emerging Market Debt Opportunity Set
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.
Don’t Fight the Flows
While not as commonly dissected as earnings and multiples, liquidity is a key driver of equity markets. An influx of liquidity set up both the tech and real estate bubbles, which burst as that capital dried up, leading to severe market corrections in the early 2000s and in 2008. The easy credit environment that followed the Global Financial Crisis facilitated one of the longest and strongest bull markets in U.S. history. An unprecedented amount of stimulus injected into the financial system amid the COVID pandemic led to the sharpest stock market upturn on record. And now in 2023, amid an increase in liquidity and despite heightened macro uncertainties, a hawkish Fed, and a banking crisis, the S&P 500 is up 14%¹ nearing the end of the second quarter while the CBOE Volatility Index (VIX) has retreated to below-average levels.
¹Through June 27, 2023
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.
Out of Office: Where Real Estate Markets Stand Today
Commercial real estate is increasingly being dubbed the next shoe to drop as markets assess the fallout from the regional banking turmoil. Amid higher rates and tighter credit conditions, private real estate is now facing the same repricing dynamics that hit the equity and bond markets last year, and while further write downs are expected, the headlines are likely overblown. Fundamental and financing issues are largely concentrated within the office sector — which will likely see a correction over a longer time period but be manageable for most core real estate funds — while other sectors, including industrial and multifamily, are actually set to benefit over the next few years.
This newsletter analyzes the current commercial real estate investment landscape including valuations, fundamentals, debt markets, and private real estate returns.
Read > Out of Office: Where Real Estate Markets Stand Today
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.
Down to the Wire: An Update on the 2023 U.S. Debt Ceiling Crisis
In February of this year, Marquette published a Perspectives piece entitled Is the Sky Falling? that detailed the history of the United States debt ceiling, as well as the early innings of negotiations surrounding its possible increase or suspension given the fact that the $31.4 trillion limit was reached on January 19. In the months since, the Treasury Department has been forced to resort to “extraordinary measures” in order to prevent the U.S. from defaulting on its obligations, including suspending sales of state and local government series Treasury securities. Those measures, however, will likely be exhausted in the very near future according to the nonpartisan Congressional Budget Office (perhaps as early as June), at which point the federal government will ultimately be unable to pay its obligations fully and, as a result, have to delay making payments for some activities and/or default on its debt obligations. This is commonly referred to as the x-date. It is worth pointing out that a number of large Wall Street firms have brought their forecasts of this date forward in recent days.
This newsletter analyzes potential repercussions of a U.S. default and options for a resolution of the debt limit impasse in Congress.
Read > Down to the Wire: An Update on the 2023 U.S. Debt Ceiling Crisis
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.
Here to Stay? Fixed Income Opportunities Persist Despite First Quarter Volatility
Going into 2023, one of the primary headlines was the return of “income” to the fixed income asset class. Largely as a result of Fed policy in 2022, yields increased significantly over the course of the year, thus finally offering meaningful income to bond investors. At long last, fixed income could provide all three of its staples to portfolios: diversification, liquidity, AND income. With the Federal Reserve committed to further hikes during the first half of the year, expectations were that the opportunity set would last well into the year.
However, bank failures and the associated fear of contagion have been known to not only fuel volatility in equity and credit markets but send investors to the safety of Treasuries. This dynamic naturally drives prices higher and yields lower as investors look to insulate their portfolios from large drawdowns. That said, the Silicon Valley Bank shutdown coupled with other nervousness around regional banks and then the eventual absorption of Credit Suisse by UBS has not had a significant impact on the outlook for fixed income as of quarter end. After trading inside of 2% since 2020, the yield on the Bloomberg aggregate index closed the first quarter at 4.40%, slightly lower than the December 31, 2022 figure of 4.68% but well ahead of its near-zero value in the years leading up to 2022.
This newsletter analyzes recent market dynamics and the current environment and outlook for fixed income.
Read > Here to Stay? Fixed Income Opportunities Persist Despite First Quarter Volatility
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.
Update on Silicon Valley Bank and the Impact on Markets
Silicon Valley Bank (SVB), the 16th largest bank in the U.S. by assets as of year-end 2022, was shuttered by regulators last Friday, March 10. This is the country’s first material bank insolvency since the Global Financial Crisis (GFC) and the second-largest bank failure in U.S. history, behind only the government takeover of Washington Mutual in 2008. The bank’s collapse came as a surprise to markets — both S&P and Moody’s had an investment-grade rating (BBB) on the borrower and equity markets showed few signs of foreseen stress. Additionally, earlier last week, smaller Silvergate Bank announced it would voluntarily liquidate, and over the weekend, Signature Bank was seized by New York regulators, marking the U.S.’s third-largest bank failure.
Over the weekend, the Treasury, Federal Reserve, and FDIC came together to shore up confidence in the U.S. banking system. Via joint statement, the consortium announced that all depositors at SVB and Signature Bank would be made whole, easing concerns that deposits over the FDIC-insured limit of $250,000 would be at risk, and introduced a new $25 billion bank funding program, the Bank Term Funding Program, to make additional funds available to banks at more favorable terms, to hopefully prevent a repeat of the events that led to SVB’s demise. Both initiatives will come at no cost to the U.S. taxpayer. While the measures should help corporations, consumers, and markets breathe a sigh of relief — there was fear over the weekend that SVB clients would not be able to pay employees, which could lead to a downward economic spiral — concerns about possible systemic risk and broader implications for the economy remain.
This newsletter summarizes the impact of SVB’s failure on the markets, including potential for contagion, SVB exposure across asset classes, and expectations regarding Fed tightening from here.
Read > Update on Silicon Valley Bank and the Impact on Markets