Topic Tags: Coronavirus Updates

Lockdowns Lead to Slowdown

COVID cases have been on the rise in China over the last ten weeks, surpassing February 2020 highs by 800%. The seven-day rolling average has moved from 110 new cases at the end of January 2022 to a high of 30,500 on April 21st. Since the beginning of the pandemic, China has operated with a zero-COVID policy, combining testing and tracing with the use of lockdowns to prevent the spread of the virus. These measures have resulted in an extremely low case count compared to the rest of the world. The country’s recent high near 30,000 is still well below the U.S. seven-day average peak of 800,000 in January 2022.

China’s aggressive use of lockdowns to control the spread of the virus has impacted the country’s economic activity. March’s Purchasing Managers Index (PMI) reading was 48.8, below the neutral 50 mark, indicating a contraction in economic activity. Several Chinese cities are feeling the pressures of the recent lockdown, including Shanghai, a key finance and manufacturing hub. Many investors expect Chinese authorities to step in with supportive policies to help the country navigate the current downturn. Ultimately, however, China may need to choose between two of its seemingly opposing agenda items — its zero-COVID policy and its 5.5% target growth rate — with the choice likely to have material implications for equity markets for the rest of 2022.

Print PDF > Lockdowns Lead to Slowdown

 

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.

2022 Market Preview Video

This video coincides with our 2022 Market Preview letter from Director of Research Greg Leonberger, FSA, EA, MAAA and provides analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2022.

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
Tanner Maupin, Research Associate
Colleen Flannery, Research Analyst, U.S. Equities
David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities
Nat Kellogg, CFA, President, Director of Manager Search
Josh Cabrera, CFA, Senior Research Analyst, Real Assets
Derek Schmidt, CFA, CAIA, Director of Private Equity
Brett Graffy, CAIA, Senior Research Analyst

Sign up for email alerts to be notified when we publish new research here.
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.

Office Space in Need of a Booster

As the Omicron variant continues to spread like wildfire across the globe, companies once again find themselves modifying plans for a return to in-person work. Although the market for U.S. office space started to show signs of stabilization during the second half of 2021, the new wave of Omicron cases has already started to impede the recovery across most industries. As a result, the office sector could potentially endure the most profound and longest lasting impact from the recent case surge among the four major core property types. Current remote work dynamics and incremental office supply are expected to exert additional upward pressure on vacancy rates, which increased during the third quarter of 2021 to 16.8%. While the emergence of virus variants and the prevalence of unvaccinated individuals may act as catalysts for permanent changes within the office sector, many companies are expected to opt for flexible work schedules in 2022 rather than leasing additional real estate. With businesses contemplating further vaccination requirements, as well as continued travel restrictions and virtual interactions, there now exists a widening gap between occupied and underutilized office space. To that point, net absorption rates, which serve to quantify the difference between leases and vacancies, have fallen by roughly 120 million square feet during the pandemic, representing the largest drop since the 2001 Technology Bubble.

Going forward, corporations and employees alike may be forced to navigate through a unique work environment on a permanent basis. While hybrid and remote working approaches will likely serve as headwinds for the demand for office space in the aggregate, institutional investors may be well-positioned to achieve portfolio alpha with long-term exposures to high-quality tenants, Class A properties, office conversions, and distressed low-occupancy buildings. As a firm, Marquette will remain focused on working with our clients to target markets with a compelling mix of talent, demographics, and tenants.

Print PDF > Office Space in Need of a Booster

 

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.

Credit Spreads Snap Back from Initial Omicron Surge

Given the positive news on the weakness of the Omicron variant and its susceptibility to at least some of the COVID-19 vaccines, credit spreads have generally retraced their widening since the first Omicron case in South Africa was reported to the World Health Organization on November 24th, 2021. Our chart this week compares high-yield spreads against two averages using the Bloomberg High Yield index. The lower dotted line is the average spread for the year-to-date period, with current spreads sitting just above of this figure. The higher dotted line is the since-inception average spread (excluding the extreme periods of 2008 and 2009), with today’s spreads still generally extremely tight compared to this long-term average despite the recent Omicron scare. While we assess only U.S. high yield corporate spreads, these are generally representative for investment grade bonds, bank loans, and emerging markets debt as well.

Omicron has quickly spread to at least 57 countries around the world thus far, but spreads tightened across the board last week as President Biden chose to institute stricter COVID-19 testing requirements for travelers entering the U.S. from abroad instead of implementing more lockdowns and broad mask mandates. Additionally, Moderna and Pfizer have been mobilizing to update their vaccines against the Omicron variant. However, the tail end of last week brought with it some widening pressure as Europe tightened its COVID-19 restrictions and the Consumer Price Index saw a 6.8% increase for the month of November on a year-over-year basis, topping the previous month’s 6.2%. This figure raised some concern that the Federal Reserve may accelerate its tapering and rate hike schedule.

Last week, the fully vaccinated rate remained at 60% for the U.S. and rose one point to 45% for the world. With still a long runway to go before herd immunity levels of 80% are reached, and since issuers remain risk-averse as evidenced by benign fundamentals ranging from generally low leverage to use of loan and bond issuance proceeds directed towards refinancings rather than LBOs, we may expect spreads to potentially tighten further. It is worth noting that this tightening may not be without potential dislocations along the way. As of this writing, spreads are very near all-time tights. Marquette will continue to monitor fixed income valuations, fundamentals, and technicals as we progress through the recovery from the pandemic.

Print PDF > Credit Spreads Snap Back from Initial Omicron Surge

 

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.

‘Tis the Season for Consumer Spending?

The COVID-19 pandemic resulted in significant changes to, among a plethora of other things, consumer behavior in the United States. As a result of the virus outbreak in early 2020, the personal savings rate of domestic consumers saw a dramatic increase to a record high of 26.0% in the second quarter of last year. This propensity for conservativism during times of economic hardship can clearly be seen in our chart this week. Direct relief payments made to individuals as part of the government’s massive stimulus program were among the primary contributors to increased personal savings rates, as consumers saw limited opportunities to spend while in lockdown. As time went on, many individuals used excess savings to pay down debt and invest in equity markets, which helped fuel historic levels of retail trading activity. Online retail sales also increased a few months into the pandemic in large part due to pent-up demand, as indicated by the 10.0% quarter-over-quarter change in personal consumption during the third quarter of 2020.

With the holiday season upon us, many investors are curious about the state of the American consumer in light of the challenges posed by the last two years. On one hand, consumer balance sheets remain relatively strong. At the end of the third quarter of 2021, the personal savings rate in the United States was roughly 9.6%, well above the figure recorded at the end of 2019 of 7.4%. This likely means that individuals have more cash at their disposal than in previous years. At the same time, there are several headwinds facing consumers that may persist into the new year. Higher costs due to inflationary pressures and supply chain difficulties have already impacted a significant number of Americans and may cause a drop in consumer confidence if these issues are persistent in nature. The Omicron variant and other strains of the COVID-19 virus may also lead to renewed calls for economic shutdowns, which could leave consumers with fewer spending options. Finally, it is important to note that while the personal savings rate rose overall for consumers during the first several months of the pandemic, increased rates of savings were disproportionately attributed to higher-income individuals and households. This could mean that a large subset of the population is ill-equipped to deal with rising costs and, as a result, unable to spend at levels consistent with history. Ultimately, only time will tell how the American consumer will respond to ongoing uncertainty and whether governments and policymakers will see a need to provide additional economic relief. In light of the dynamics at play and the headwinds currently facing consumers, investors should remain realistic and pragmatic about spending levels heading into the final month of 2021.

Print PDF > ‘Tis the Season for Consumer Spending?

 

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.

Holiday Supply Chain Woes Linger

Headlines continue to buzz with worries of supply network dysfunction that seem to span every link of the chain, from truckers and shippers to commodities and semi-conductors. Clearly, the delicate balance of supply and demand is off kilter. Supply chain disruptions began when global economies locked down amid the outbreak of COVID-19, and the problem has only been exacerbated by stop-and-start re-openings that have taken place in recent months.

This newsletter seeks to understand current supply chain dynamics and what they might mean for investors and consumers alike as we move into the holiday season. We cover the three-prong problem of prices, transport, and labor, which market participants will likely feel the squeeze tighter than others, how companies have continued to grow their margins, inflation considerations, and what to expect in the short and long term.

Read > Holiday Supply Chain Woes Linger

 

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 Holiday Party Guest List

Though the leaves have only started to change color, holiday party planning is in full swing. And while ample food and drink are necessary inputs for any type of holiday celebration, it’s the guests who ultimately make the party…or break it. In a way, this dynamic isn’t all that different from the markets — at any given time, the prevailing economic and market conditions will dictate investor returns. Given this analogy, we thought it could be fun to take a survey of the “attendees” in the current market environment and see if we can draw a connection with real-life examples along with what each guest means to the success of the party…and investor. Oh, and one caveat as we go — similar to actual party planning, sometimes we don’t want to invite someone, but we have to invite this person; circling back to the financial markets, we can’t control what forces exist in the markets, but we will do our best to determine those that will be merry and those that will not. Confused? Don’t worry, I am too, but we’ll figure this as we go through the invite list.

Highlights from this edition:

  • The Delta variant’s impact
  • Consumer spending
  • The credit and equity markets
  • The coming Federal Reserve taper
  • Earnings peak for equities
  • Labor market shortages
  • Commodity returns
  • Inflation concerns
  • The Evergrande debt crisis

Read > The Holiday Party Guest List

Watch our Q3 2021 Market Insights Video for an in-depth analysis of the third quarter’s performance by Marquette’s research team.

 

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 Impact of the Delta Variant on the U.S. Economic Reopening

Thanks to a rollout of effective vaccines at the beginning of 2021, daily new cases of COVID-19 in the United States steadily declined from roughly 250,000 in January to 12,000 in July. That said, daily new infections then quickly reverted to over 80,000 in about one month. This uptick was mostly due to the outbreak of the Delta variant, a more contagious form of SARS-CoV-2 which now accounts for nearly all new cases in the U.S. With the nation now better prepared to combat the strain using both vaccinations and regulations including mask mandates, new daily cases of the Delta variant have since declined to around 54,000 in recent days. This week’s chart assesses the impact of the Delta variant on the domestic economic reopening by examining travel and dining trends using datasets from OpenTable — an online/mobile restaurant reservation service — and the Transportation Security Administration. To measure the scale of the economic slowdown caused by the coronavirus pandemic, the chart shows the percentage change in the number of restaurant diners and air travelers compared to pre-pandemic levels in 2019 (e.g., 10/10/21 vs. 10/10/19). Seated diners are individuals who dined at a sample of restaurants in the United States using OpenTable via online reservations, phone reservations, and walk-ins. Air travelers are those individuals who were screened by TSA agents at security checkpoints within airports in the U.S.

As can be inferred from the chart, both datasets clearly indicate a complete economic shutdown in March of 2020 following the onset of the pandemic. This was followed by an economic reopening several months later, represented by consistent upward trends in both data series leading up to June of 2021. When the Delta variant started circulating in July, seated diners and air travelers decreased by 20% and 30% in the following periods, respectively (compared to 2019 levels), marking a shift in the trends that had been exhibited in previous months. That said, both series picked back up shortly thereafter, reaching -4.8% and -18.4% in October, respectively (again, when compared to levels recorded in 2019), as daily new cases of the Delta variant have subsided. All of this is to say that the impact of the Delta variant on the U.S. economy pales in comparison to that of the original COVID-19 outbreak, as individuals and businesses alike seem better equipped to balance protection against the virus with economic activity. If daily new cases of the Delta variant continue to decline and the vaccination rate in the United States improves, the data indicate that a full economic reopening could take place in the foreseeable future.

Print PDF > The Impact of the Delta Variant on the U.S. Economic Reopening

 

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.

Multifamily Matters

Amid ongoing vaccination progress and an improving U.S. economy, we are seeing a recovery across property sectors – those that were most impacted by the pandemic as well as those that proved relatively resilient, like the multifamily sector. Apartment landlords have greater flexibility to adjust rents at a faster pace than other core sectors, allowing the group to better adjust to landscape changes accelerated by the COVID pandemic and near-term inflationary trends. This, in turn, gives investors the opportunity to position their portfolios to capitalize on these relative advantages.

Already, overall apartment occupied stock has increased to a level 20% above the prior 2000 peak. This demand has driven up effective multifamily rent growth, as seen in the chart above. While expected to moderate from here, national apartment rent growth is forecasted to stay above recent levels, increasing an average of 4.7% and 4.5% in 2021 and 2022, respectively1, driven by ongoing economic expansion and an expected hiring boom. The U.S. economy is expected to add an estimated 12 million new jobs between 2021 and 2023, particularly impacting demand across sunbelt regions and tech hubs, where suburban rentals have outperformed and urban core sub-sectors have rebounded. ² On an ongoing basis, flexible work from home policies will impact where people prefer to live, likely pushing the demand for additional living space and driving effective rents across unit types.

From here, with the added uncertainty brought on by COVID-19 variants, we may see multifamily demand and rent continue upward, or we may see the sector lose momentum from increasing supply or the downstream effects of the recent end to the eviction moratorium. Ultimately, we will continue to look for the best risk/reward opportunities in the evolving real estate space, helping our clients maneuver through the changing dynamics.

1 Real Page, CBRE-EA, Clarion Partners Investment Research, Q2 2021. Note: U.S. apartment rent growth forecast is provided by RealPage as of July 2021

² Moody’s Analytics, CBRE-EA, S&P CoreLogic Case-Shiller National Home Price Index, Clarion Partners Investment Research, August 2021

Print PDF > Multifamily Matters

 

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 Labor Shortage Mean for Inflation?

Employers have faced a number of challenges throughout the COVID-19 pandemic — most recently, a labor shortage. As of the end of June, the Bureau of Labor Statistics reported a record high of more than 10 million job openings (including either newly created or unoccupied positions where an employer is taking specific actions to fill those positions), and as of the end of July, 8.7 million people looking for employment (people who are without work, currently available for work and seeking work), creating a disconnect in the labor market.

While this is not the first time job openings have exceeded the number of people looking for work, the imbalance is more meaningful now as companies attempt to fulfill pent-up demand caused by the pandemic with sharply less labor availability. To help combat this shortage, states have started to cut unemployment benefits, though these actions so far seem to have had minimal effect. Employers must now find a way to incentivize workers to apply to openings and accept offers. This is likely to put upward pressure not only on wages but on consumer prices. In order to protect profitability, companies will have to pass on the additional costs to the consumer, adding to inflationary pressures. While many signs point to higher inflation being transitory, the labor shortage — which could continue even after extra unemployment benefits expire, given demographic trends and a shift toward the gig economy — could be a longer-term issue. We will continue to monitor inflation, its underlying drivers, and the potential impacts to our clients’ portfolios carefully.

Print PDF > What Does the Labor Shortage Mean for Inflation?

 

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.