Topic Tags: International Economy

Signs of a Market Bottom: One Year Later

This month marked the somber one-year anniversary of the World Health Organization declaring COVID-19 a global pandemic. In addition to the immeasurable human suffering the disease has caused, the toll on both the financial markets and broader economy has also proven historic in magnitude. After the unprecedented market volatility in March 2020, two questions on many investors’ minds were if a market bottom had been reached and if a recession was underway. The S&P 500 hit an all-time high on February 19th, 2020, and subsequently experienced a fast and furious COVID-induced sell-off resulting in its March 23rd bear market trough. Although at that time, investors could not be certain this was the bottom as economic uncertainty remained high while the pandemic was still in its early stages. To help reason through the two questions noted above, we wrote “Signs of a Market Bottom?” which analyzed four broad categories in an attempt to identify markers of a trough: Technical Data, Valuation Data, Economic Indicators, and COVID-19 Data. This information was examined in the context of bear markets that coincided with recessions, which is an important distinction because one can exist without the other. Our analysis indicated that all but valuation data were useful in identifying a market trough.

Given that it has been over a year since the rapid peak–trough-bull market start, the purpose of this paper is to revisit the four aforementioned categories to see which, in hindsight, were relevant in identifying the 2020 market bottom.

Read > Signs of a Market Bottom: One Year Later

 

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.

Commodities: Cycle or Cyclical?

A commodities supercycle is generally defined as a sustained period of broad-based above-trend movement. In the first quarter of 2020, almost a decade of commodities price weakness was capped off with a more than 20% drop, and since then, prices have rebounded more than 40% to levels last seen in 2018, inspiring headlines debating whether this is the start of the next supercycle. Proponents argue reopening demand, a potential uptick in global growth and inflation, and a weaker U.S. dollar, among other factors, point to yes. Skeptics contend that an initial demand normalization complicated by temporary supply disruptions does not a supercycle make, at least yet. Commodity price movements can be especially volatile given lumpy physical market characteristics. Oil prices moving into sharply negative territory last April demonstrate exactly that. Whether this latest move is cyclical and temporary or structural and sustainable is still to be determined.

In this newsletter, we explore a few of the key factors that could support or suppress a sustained commodities bull market.

Read > Commodities: Cycle or Cyclical?

 

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 Latest Stimulus Mean for the Economy and Fixed Income Markets?

President Joe Biden signed the $1.9 trillion pandemic relief package yesterday amidst rising inflation and interest rates since the beginning of the year as the markets price in future growth. With Fed Chair Jerome Powell’s recent reaffirmation of the central bank’s accommodative monetary stimulus, continued vaccine rollout, a drop in COVID-19 cases and deaths, and Biden’s statement that the U.S. will have enough vaccines for every adult by the end of May, a key question on many investors’ minds is, “How much more inflation and rising interest rates could we expect in the road ahead?” This edition of Marquette Perspectives will attempt to answer that question by examining this relief aid in connection with vaccination progress and the economic recovery.

Read > What Does the Latest Stimulus Mean for the Economy and Fixed Income Markets?

 

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.

Prospects of Dollar Depreciation in the COVID Recovery & Impact on Asset Classes

As vaccine distribution continues in full force and the global economy’s recovery from the COVID pandemic gains momentum, investors are concerned about depreciation of the U.S. dollar and how this phenomenon might affect various asset classes within a portfolio.

In this paper, we examine the mechanics of dollar depreciation and its subsequent impact on traditional asset classes. We begin by exploring the macroeconomic factors that drive dollar strength or weakness and then examine the impact of dollar depreciation on the fixed income, U.S. equities, and non-U.S. equities asset classes both by covering the potential effects of a stronger or weaker dollar and by assessing historical performance.

Read > Prospects of Dollar Depreciation in the COVID Recovery & Impact on Asset Classes

 

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.

 

Should Investors Be Concerned About Stagflation?

The coronavirus pandemic has disrupted everyday life and caused a devastating impact on the global economy. At the peak of the outbreak, the U.S. unemployment rate reached 11.1% and real GDP growth fell by 9.0%, which marked the second worst economic crisis since the Great Depression. On the bright side, the COVID relief programs and expansionary economic policies projected an air of optimism; as of January 2021, the unemployment rate came down to 6.3% and real GDP growth has started to recover since cratering during the first half of 2020. However, these figures are still at concerning levels, and an emerging fear is that the magnitude of economic stimulus may create a surge in inflation, in spite of middling economic growth. This week’s chart examines the nature of stagflation and how the markets perform under this condition.

The term “stagflation” comes from “stagnation” and “inflation” and can be identified as a period of slow economic growth, high unemployment, and high inflation. An example of stagflation was in the 1970s as shown in the chart. The inflation and unemployment rates (blue and orange lines) stayed in a 10–15% range when the economic growth (purple line) was slow or negative. The typical cause of stagflation is an external shock that breaks the inverse relationship between the inflation and unemployment rate; the high inflation usually indicates that the demand for goods and services is high, the economy is expanding and unemployment is low. In this case, the supply shock of oil was the main contributing factor for driving prices higher, discouraging consumption, and resulting in a recession. Stagflation is not only detrimental to the economy but also difficult to address. For example, contractionary policies such as increasing interest rates to reduce inflation may make unemployment even worse.

As shown at the bottom of the chart, the U.S. stock, international stock, bond, real estate, and commodity markets held up well during stagflation in the 1970s. The S&P GSCI commodity index returned 54.3% per year and the other markets returned 25% to 28% per year. The international stock market outperformed the U.S. stock market. The commodity market performed best but highly fluctuated with a 0.72 correlation with inflation.

The economic crisis from the pandemic coupled with the aid to boost the economy may seem like a recipe for stagflation. However, impending stagflation is unlikely. The current inflation of 1.3% is well below the central bank’s 2% target, oil prices are stable, the personal consumption expenditure is down but has recovered to 96% of its pre-pandemic level, vaccines are becoming more accessible and IMF projections are generally positive (dotted lines). As the economy further re-opens later this year, the threat of stagflation should dissipate as attention turns toward renewed economic growth.

Print PDF > Should Investors Be Concerned About Stagflation?

 

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.

Bubble, Bubble, Toil, and Trouble

In Shakespeare’s Scottish play Macbeth, three witches prophesize the protagonist’s imminent rise and fall. This week, Deutsche Bank released its mid-January survey highlighting 627 global market professionals’ feelings of the market’s current state. The survey’s arguably most somber statistic showed that 89% of respondents believe there are currently bubbles in the financial markets. As seen in previous events, we know that bubbles have dire consequences for financial markets. In particular, U.S. tech stocks and Bitcoin were the two assets that respondents believe are the most likely bubbles waiting for a correction. As of January 19th, Bitcoin has soared over 320% and the Nasdaq index is up over 43% in the past year. Due to digital currencies’ nascency, particularly Bitcoin, it is almost impossible to glean any insight from past performance.

Moreover, much of Bitcoin’s future value will be driven by its overall acceptance by financial institutions and its finite supply. Alternatively, investors have decades of Nasdaq data and have experienced market bubbles such as the Dot-com Bubble and the Global Financial Crisis. If history is our guide, the Nasdaq’s current PE ratio of approximately 26 is mild relative to a P/E ratio of 70 seen in 2006 and a fraction of its peak of 175 witnessed in 2000.¹ While a P/E ratio is not a perfect gauge for market bubbles, neither is recent strong performance. Since 1975, of the ten years that the Nasdaq has eclipsed a 30% positive return, only two of the years was the index negative the following year, 1981 and 2000.

If the Deutsche Bank survey is correct, this might be the most well-forecasted bubble in financial history, and if we have learned anything from previous financial bubbles, we know they are tough to predict. Macbeth’s witches were able to predict the future down to the smallest details with powers not held by financial market harbingers. Regardless, surveys give investors powerful insight into the mood and sentiment of financial professionals, but it is up to them to plan accordingly. Much has been learned over the past year as 2020 will remain front of mind for investors for years to come. Since the market bottom in March, many asset classes have benefited from a swift and steady rally, posting strong gains in 2020. Furthermore, the market has felt disconnected from the overall economy, which continues to struggle with the fallout of the COVID pandemic and has caused investors to question, “How long can this continue?” Driven by record-low interest rates, investors allocating to risk assets should remain mindful of future return expectations and potential volatility at current valuation levels.

Print PDF > Bubble, Bubble, Toil, and Trouble

¹ Bloomberg

 

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.

2021 Market Preview

2020 was a year like no other and has left investors across the world wondering what the future looks like. Will vaccines prove effective in halting a pandemic that spread like wildfire across the globe? What will the impact of a new administration in Washington be on economies and markets? How much additional stimulus will be injected into the economy? And most broadly, will things ever get back to “normal”? While there are no easy answers to these questions, 2021 promises to be another volatile year, most especially until there has been sufficient roll-out and distribution of vaccines to contain the COVID-19 outbreak that continues to haunt economic growth across the globe.

Remarkably, 2020 ended up as a positive year for financial markets despite a massive sell-off in the equity and credit markets during February and March. Paradoxically, 2021 may be a less eventful year but at the same time a lower overall return environment, given that much of the optimism about economic re-openings and stimulus has already been priced into the markets. Nonetheless, there are a variety of factors worth monitoring over the next year which will directly impact market returns. Similar to past years, we offer our 2021 market preview newsletters for each of the primary asset classes we cover, with in-depth analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2021.

We hope these materials can assist you and your committees as you plan for the coming year and beyond. We have also produced a 2021 Market Preview video if you would like to hear a high-level summary of the market previews. Should you have any questions about anything related to these materials, please feel free to reach out to any of us for further assistance. Here’s to a return to normalcy in 2021!

U.S. Economy: Are Better Days Ahead?
by Brandon Von Feldt, CFA, Research Analyst

Fixed Income: Poised for Further Recovery with Undertones of Exuberance
by Ben Mohr, CFA, Director of Fixed Income

U.S. Equities: Birth of a New Market
by Samantha T. Grant, CFA, CAIA, Assistant Vice President,
Colleen Flannery, Research Analyst, U.S. Equities, and
Evan Frazier, CAIA, Research Analyst, U.S. Equities

Non-U.S. Equities: Constructive but Cautious
by David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities, and
Nicole Johnson-Barnes, CFA, Senior Research Analyst, Global Equities

Hedge Funds: Poised for Another Record Year?
by Joe McGuane, CFA, Senior Research Analyst, Alternatives
and Jessica Noviskis, CFA, Senior Research Analyst, Hedge Funds

Real Estate: Finding the New Normal
by Will DuPree, Senior Research Analyst, Real Assets

Infrastructure: An Evolving Opportunity Set, but an Essential Allocation
by Will DuPree, Senior Research Analyst, Real Assets

Private Equity: Both Quality and Growth Shine Brightly in 2020
by Derek Schmidt, CFA, CAIA, Director of Private Equity

Private Credit: Two Steps Forward, One Step Back
by Brett Graffy, CAIA, Research Analyst

Download the combined files > Traditional and Alternatives

 

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.

2021 Market Preview Video

This video coincides with our 2021 Market Preview newsletters and provides a high-level summary of each, including analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2021.

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.

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

Glass Half Full?

As we are beginning to see a possible finish line on the COVID-19 front, there is an expectation in the market that vaccine-assisted re-openings globally will bring about a return to pre-pandemic economic productivity levels. The “Great Lockdown” of 2020 caused many countries around the world to enter a deep recession, which, like former hard resets, has impacted societal behaviors (i.e., social distancing) and reframed business operations and outlooks (i.e., increased safety measures and focus on supply chain). It is fair to say that some industries and segments of the market may have been permanently changed by the pandemic, be it in a positive or negative manner. While we welcome the return to normalcy — or even the new normal — it is important for investors to be mindful of a few things with respect to this economic reversal: 1) the market has largely priced in this turnaround story, 2) continued accommodative monetary policy and large fiscal stimulus packages are providing the support to restart the economic engine, and 3) any hiccups in national inoculation plans and vaccine distribution could sidetrack progress.

Hence, our glass is half full when it comes to sustaining global growth expectations in 2021. As shown in today’s chart, the IMF’s estimate of the global GDP growth rate is expected to come in at -4.4% for 2020. This is a less severe contraction than estimated in June 2020, which showed a more dire COVID-19 impact on economic activity. For 2021, the global GDP growth rate is projected to lampoon to +5.2%, due to a wide negative output gap and a gradually immunized workforce. Of note, China is the only country expected to post a positive GDP growth rate for 2020 and 2021, as it continues to show leadership in restoring and maintaining economic activity. As 2021 plays out, the actual growth numbers across the globe versus what has been projected will be followed and reported upon closely and will undoubtedly have an impact on financial markets. Among vaccine roll-out, efficacy, a new administration in Washington, and a host of other geopolitical factors, global GDP bears watching, especially the first half of the year.

Print PDF > Glass Half Full?

 

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.

Market Recovery: Superpower Showdown

Despite the enormous challenges of 2020, financial markets have rebounded. While baffling at face value, the contrast between market performance and the widespread suffering due to COVID-19 is more understandable in the context of markets as a representation of human ingenuity and resiliency. These two traits are perhaps most recognized in the world’s foremost economic superpowers: The United States and the People’s Republic of China. During the third week of March, both countries saw market drawdowns near 30%; most other equity indices across the world saw similar drops. Since the global market bottom, countries have been racing to make up these losses and charge ahead to new highs. As of December 11th, America’s recovery has been nearly a third stronger than China’s. Globally, the recovery has fallen in between these two world powers.

A dollar invested in American public equities on March 23rd would have grown to $1.72 as of last Friday, December 11th, as represented by the Russell 3000 (representing approximately 98% of the investable U.S. equity market¹). Over this same time span, a dollar invested in China would have driven an increase to $1.54, as represented by the MSCI China Index. This broad market index captures 85% of China’s equity universe and includes the variety of share classes available to both strictly domestic Chinese investors as well as foreign investors.² However, America’s strength in capital markets recovery does not reflect the country’s relative success in managing the virus. In the U.S., the fight drags on, while much of China has returned to business as usual.³ Broadly, capital markets as measured by the All Country World Index (ACWI) — which contains 85% of the global equity markets, including 23 developed countries and 26 developing countries² — has rebounded at a clip between that of the U.S. and China. The good news for investors is that equity markets — regardless of home country — have rebounded from the extreme drops seen in March and April.

As detailed in our previous Chart of the Week, “Main Street Won’t Look Like Wall Street for a While,” the real-world experience of many Americans is one of continued economic hardship. While this desperate situation may soon be addressed with additional stimulus, Americans and people around the globe can also find hope in the fact that markets are forward-looking and humans, by nature, are resilient and resourceful. As a testament to this, one needs to look no further than the rollout of the highly anticipated and historic COVID-19 vaccine, which saw its first doses administered in the U.S on Monday.⁴ The extreme market volatility and large sell-off early in the year and subsequent recovery have further underscored why a long-term investment perspective rooted in a fundamental confidence in continual technological and economic progress is the most effective mindset an investor can have.

Print PDF > Market Recovery: Superpower Showdown

¹ FTSE Russell
² MSCI
³ China is back to normal — the US and Europe are not. Here’s how it succeeded
⁴ First Covid-19 Vaccine Given to U.S. Public

 

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.