“Renew” Your Opinion on Policy Bets

During election season, investors are often tempted to position their portfolios based on expectations related to potential changes in government policy. That said, market dynamics in the wake of various political events can be confounding and notoriously difficult to forecast. There is perhaps no better example to support this statement than performance of the energy space over the last seven years.

When Donald Trump assumed the presidency in 2017, his administration sought to rescind many environmental regulations and attain energy independence via the use of fossil fuels. His term saw the approval of multiple controversial oil pipelines, a large expansion of oil and gas leasing, and support for energy development on federal land. Since coming to office in 2021, however, Joe Biden has aimed to reverse many of the energy policies of his predecessor, as well as promote an agenda focused on the reduction of greenhouse gas emissions and the development of renewable energy sources. Based on this information, many readers might have expected robust performance of traditional energy companies during the Trump presidency, as well as more challenged returns for clean energy stocks. The policies of the Biden administration, on the other hand, might have been expected to lead to a reversal of these dynamics. Readers may be surprised to learn, however, that the Energy sector of the S&P 500 Index returned -29.6% during Trump’s term in office, compared to 136.1% since Biden assumed office. Conversely, the S&P Global Clean Energy Index returned 305.9% in the four years of Trump’s presidency but has notched a -54.0% gain during the Biden term.

There are many factors that can help explain these and other surprising performance trends. First, markets tend to be forward-looking in nature, meaning current prices of financial assets usually reflect investor expectations of what is to come in the (sometimes distant) future. Additionally, exogenous shocks can roil securities markets and lead to dynamics that would have otherwise been unexpected based on prevailing conditions and the agendas of those in political office. For instance, the COVID-19 pandemic upended supply chains and the 2022 Russian invasion of Ukraine led to increases in the prices of certain commodities, and these developments were largely conducive to positive performance from traditional energy companies despite a renewables-focused U.S. president. Finally, there is the question of natural business and economic cycles, which have tended to ebb and flow regardless of which party controls the White House. All of this is to say that market timing around an election or any other major political event can be a most difficult exercise. Given the upcoming presidential election in the U.S., investors should remain diversified across the asset class spectrum in order to capture market gains and insulate their portfolios against losses, both of the expected and unexpected kind.

Airline Stocks: Just Plane Challenged

Although travelers have happily bid farewell to pandemic-related restrictions and returned to the skies en masse, airline stocks seem to have missed the memo on bouncing back to pre-COVID levels. To that point, the Dow Jones U.S. Airlines Index has returned roughly -35% since the start of the pandemic. This cumulative performance figure is despite a surge in the index in the wake of vaccine announcements in late 2020, as well as the fact that that this summer may be the busiest travel season the U.S. has ever seen. These dynamics can be observed in this week’s chart.

The dichotomy between booming travel numbers and lackluster airline stock performance can be attributed to several challenges facing the industry. Specifically, while increased passenger volumes boost revenues for major airlines, these businesses continue to grapple with profit margin pressures stemming from soaring operational costs. For instance, higher oil prices (now $80 per barrel compared to roughly $55 before the pandemic) have proved to be a significant headwind for airlines. Additionally, ongoing issues including pilot and crew shortages, escalating wages, operational inefficiencies, and higher maintenance expenses have further constrained airline profitability in recent time. Spending on corporate travel has also been somewhat tepid over the last few years as well, which has presented problems for airlines that offer premium upgrades such as business class seating.

In conclusion, the challenges faced by airlines will likely persist into the near future, though robust passenger volumes are certainly a cause for optimism. As it relates to investor exposure to these types of stocks in general, four major airlines (American, Delta, Southwest, and United) are constituents of the S&P 500 Index, and these carriers comprise roughly 0.2% of the benchmark. In other words, adequate diversification should mitigate the impacts of the headwinds described above at the portfolio level.

The Emergence of Argentinian Equities

Argentina has faced myriad economic headwinds in recent time, including hyperinflation, currency-related difficulties, and a series of defaults on its sovereign debt. As the country headed into a presidential election year in 2023, Javier Milei, a member of the Argentinian Libertarian Party, emerged as a front-runner in the race, as many viewed his laissez-faire approach to economic policy as having the potential to correct the nation’s trajectory. Milei ultimately won the presidential election and assumed office in December of last year.

Over the last several months, President Milei has enacted a series of unique and controversial economic policies aimed at making the nation’s currency more competitive, reigning in excessive inflation, and stabilizing Argentina’s economic footing. These policies include the devaluation of the Argentinian peso by more than 50% and the introduction of a crawling peg, which is designed to further depreciate the peso. Additional initiatives by the Milei government include lifting capital controls, slashing state subsidies, and scrapping hundreds of government jobs and regulations. This austerity program, while certainly creating its own set of complications for the Argentinian people, has been largely well received by investors. To that point, the MSCI Argentina Index has returned close to 200% on a cumulative basis over the last two years, which is far in excess of the cumulative returns of both the MSCI Emerging Markets and MSCI Frontier Emerging Markets indices in that time. This performance is a sign of investor optimism related to the country’s economic prospects under Milei’s leadership, and Argentina’s status as a world leader in lithium and copper reserves could provide additional support from market participants. Marquette will continue to monitor the progress made by Argentina on the economic front.

Sweet and High Up

Chocolate eggs and bunnies may have appeared more expensive to shoppers this Easter weekend, as the price of cocoa futures has surged by around 125% since the beginning of 2024. New York futures prices saw a roughly 50% increase in the month of March alone and now sit at an all-time high of just below $10,000 per metric ton. By comparison, copper futures prices sat at approximately $8,900 per metric ton as of this writing, meaning cocoa is currently more expensive than the bellwether industrial metal.

The drivers of this dramatic increase in cocoa prices involve difficulties faced by the two biggest growers of the commodity: Ivory Coast and Ghana. Specifically, both nations have seen production hampered by strong seasonal winds and a lack of rainfall, as well as a prevalent disease known as swollen shoot virus, which serves to kill cocoa trees and leads to a drop in yields. To make matters worse, the Ghana Cocoa Board, which depends on foreign financing to compensate domestic farmers, may soon lose access to a critical funding facility due to a lack of beans. Due to these challenges, experts currently expect cocoa production shortfalls ranging from 150,000 to 500,000 tons over the next few seasons.

As readers might imagine, these dynamics are creating turmoil within futures markets. Investors with short positions have been forced to either manage margin calls or purchase contracts to close out their shorts, which can exacerbate price action. Pain has not been limited to futures market participants, as consumers have been forced to stomach chocolate prices that have climbed by roughly 10% over the last year. Additionally, it is possible that more shelf price increases are on the way, as producers of chocolate often hedge their purchases of cocoa months in advance. All of this said, it is unlikely that these developments will have a material impact on capital markets broadly. In other words, a diversified portfolio is one of the best ways for investors to keep their returns sweet!

Where’s the (Affordable) Beef?

Readers who have recently shopped for Labor Day barbeque supplies may lament the fact that beef prices have climbed to extreme levels. This sharp increase in the cost of beef is in part thanks to an elevated price of corn, which, as the primary feed source for cattle, is a key input in the beef manufacturing process. Due to this relationship, the two prices have moved in a highly correlated matter over the last few decades, albeit with a lag. For instance, corn prices rose from roughly $2 per bushel in 2000 to over $8 per bushel in 2012 as ethanol usage became more prevalent during that time. Live cattle futures increased by roughly 70% over that same interval and kept climbing to nearly $1.70 per pound before tapering off in 2014.

The lagged nature of this relationship is attributable to beef market dynamics. Specifically, when corn prices increase, beef producers first try to pass these higher input costs on to consumers. However, this can only be accomplished to a limited extent before the margins of producers begin to come under pressure. At that point, farmers are forced to cull their herds to reduce the supply of beef, raise prices, and protect margins. Since it takes an extended period of time to rebuild herds, beef prices often moderate over several years after the initial reversion of input prices back to normal levels.

After the onset of the COVID-19 pandemic, corn prices skyrocketed due to various shocks, including a spike in demand from ethanol producers and a fertilizer shortage that increased production costs. The invasion of Ukraine further boosted the price of the commodity given the nation’s status as the fourth-largest corn exporter in the world, accounting for roughly 15% of the global corn trade. After increasing by more than 110% since the start of 2020, corn prices peaked in July of last year at roughly $8.20 per bushel. Perhaps unsurprisingly, these dynamics have led to a commensurate rise in the cost of beef in recent years, with prices rising from less than $1 per pound at the beginning of the pandemic to an all-time high of over $1.80 per pound today.

The good news is that it does appear that corn prices have started to moderate, falling by roughly 42% since last summer. That said, it will likely take a few years for beef prices to fully reverse course due to the factors detailed above. Until that time, grillmasters everywhere may need to find more cost-effective ingredients to use during their cookouts.

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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.

2023 Market Preview Video

This video is a recording of a live webinar held January 19 by Marquette’s research team, featuring in-depth analysis of the final months of 2022 and a look ahead at risks and opportunities to monitor in the year ahead. Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Jessica Noviskis, CFA, Associate Director
Frank Valle, CFA, CAIA, Senior Research Analyst
Catherine Hillier, Research Analyst
David Hernandez, CFA, Associate Director
Chad Sheaffer, CFA, CAIA, Research Analyst
Josh Cabrera, CFA, Senior Research Analyst
Hayley McCollum, Associate Research Analyst
Brett Graffy, CAIA, Associate Director

Download > 2023 Market Preview Report with 100+ additional charts and data, organized by asset class

Read > 2023 Market Preview: Trail Guide to 2023 Asset Class Performance

 

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For more information, questions, or feedback, please send us an email.

 

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. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

Fueling Some Relief into the New Year

Last summer, gasoline prices retreating was one of the first bright spots at the macroeconomic level. Since then, CPI has generally followed suit, correcting from a peak of 9.1% year-over-year in June to 7.1% in November. Gasoline prices are broadly a product of global supply and demand, with many economic variables at play. As a notable component of the CPI basket, it is no surprise that the price of gasoline usually moves in line with inflation, however, historically, the correlation between the two has increased during times of economic turbulence. Correlations spiked during the Global Financial Crisis in 2008, the oil price shock in 2014, and again in 2020 when COVID hit and oil futures plunged into negative territory. Correlation remained high heading into 2023, with gasoline prices turning deflationary year-over-year. Inflation is expected to continue lower from here as the Fed prioritizes price stability via higher rates. While heightened macro uncertainty remains, and other factors including weather and refinery operations can impact prices for consumers at the pump, experts generally expect overall lower gasoline prices as well, with the EIA forecasting a 12% drop in the average price per gallon in 2023 from 2022. To the extent historically higher correlations hold, the consumer should continue to benefit from some relief when refueling.

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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 Real Game of Thrones: Evolving Geopolitical Dynamics and the Potential Impact for Global Investors

Following the Saudi-led OPEC+ announcement that the bloc will cut oil production by 2 million barrels per day, reports emerged that Saudi Arabia will soon join the BRICS alliance and deepen economic cooperation with China. Despite recent tensions with the U.S., the Kingdom’s preeminent role in the Belt and Road Initiative and potential admission to the BRICS alliance could drive global infrastructure development, technology research, and capital market expansion across global markets, potentially benefiting investors with long-term global and emerging market exposure.

This newsletter summarizes the Belt and Road Initiative (BRI) and BRICS Alliance, provides a brief history of Saudi-U.S. relations, and analyzes the Kingdom’s Vision 2030 efforts to diversify Saudi Arabia’s economy, ultimately concluding with the outlook and risks for investors.

Read > The Real Game of Thrones: Evolving Geopolitical Dynamics and the Potential Impact for Global Investors

 

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.

Q3 2022 Market Insights Video

This video is a recording of a live webinar held October 27th by Marquette’s research team, featuring in-depth analysis of the third quarter of 2022 and risks and opportunities to monitor in the coming months. Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, Director of Research, Managing Partner
Jessica Noviskis, CFA, Associate Director
James Torgerson, Research Analyst
Catherine Hillier, Research Analyst
Evan Frazier, CFA, CAIA, Senior Research Analyst
Chad Sheaffer, CFA, CAIA, Research Analyst
Josh Cabrera, CFA, Senior Research Analyst
Brett Graffy, CAIA, Associate Director

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.
For more information, questions, or feedback, please send us an email.

 

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. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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.

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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.