Topic Tags: U.S Economy

It’s Always Darkest Before the Dawn

Diversification has been said to be the only free lunch in investments. Since the inception of the Lehman/Barclays/Bloomberg Aggregate index,¹ there have been only 18 of 187 quarters (9.6% frequency) with negative returns in both the bond and equity markets, as measured by the Aggregate and S&P 500 indices, respectively. Comparable results are seen in the monthly data: Of 561 months, only 83 times did both the fixed income and equity markets deliver a negative total return (15.2% frequency). Over the last 45+ years, there has never been a calendar year that recorded negative returns in both indices, though that looks likely to change this year.

This newsletter analyzes 2022’s equity and bond market performance and the importance of diversification and discipline amid such negative momentum.

Read > It’s Always Darkest Before the Dawn

¹Actual data goes back to 1986; backfilled data back to 1976

 

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.

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.

Print PDF > Fighting Fire With Oil

 

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.

A Tale of Two Markets

Leveraged loans have been the asset class of choice this year, with fixed income investors drawn to the floating-rate nature of these securities in a rising rate environment. Investors have piled into the asset class since the beginning of 2021 at the expense of other segments of the market, including high yield bonds. High yield bonds are typically the first to show signs of deterioration in stressed credit markets and tend to be subject to more volatile trading patterns. Below the surface, however, the overall quality of the loan market has deteriorated relative to high yield and changes at the issuer level have impacted the perceived safety of the asset class. Investors who have flocked to loans may need to pause and consider that it could be the loan market — not high yield — that signals trouble on the horizon.

This newsletter provides background on leveraged loans and analyzes historical and recent performance and flows, shifts in quality, and seniority and covenants.

Read > A Tale of Two 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.

Picking up the Pieces: Assessing the Economic Impact of Hurricane Ian

The 2022 hurricane season is the latest headwind in a challenging year for investors. Last week, Hurricane Ian made landfall in Florida as a powerful Category 4 hurricane, unleashing heavy rains, high sustained winds, and extensive flooding along the coast. While the full extent of damages and the ultimate impact on the U.S. economy will not be known for several months, preliminary estimates indicate that Hurricane Ian will rank among the top 10 costliest storms in U.S. history. Current estimates of Hurricane Ian’s total cost — including damages and lost economic activity — range widely from $65 billion to as much as $120 billion. While several industries across the southeastern United States have been negatively impacted, Hurricane Ian’s overall impact on U.S. GDP is expected to be limited. Recent analysis by EY Parthenon, Ernst and Young’s global consulting arm, projects GDP to be reduced by 30 basis points in Q3 and 10 basis points in Q4 as a result of the hurricane. Natural disasters tend to have short-term economic consequences, with lost economic output recovered over time as federal assistance and insurance payouts allow communities to rebuild. Reconstruction efforts can also provide a temporary boost to GDP. As with other sources of uncertainty, Marquette encourages investors to maintain discipline and stick to long-term strategic allocations to best weather the market’s storms.

Print PDF> Picking up the Pieces: Assessing the Economic Impact of Hurricane Ian

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.

Inflation: Expectations Matter

The announcement of another 75 basis point rate hike at last week’s FOMC meeting reaffirmed the Federal Reserve’s unwavering commitment to reducing inflation. One of the key variables the Fed watches to help it determine the path of rates is expected inflation. Inflation can become a self-fulfilling prophecy if consumers start pricing future inflation into their decision-making and businesses start making anticipatory adjustments to their prices and behavior. To combat this, the Fed strives to anchor expectations around a 2% target inflation rate. When long-term inflation forecasts deviate from that 2% target it means inflation expectations are not well-anchored, i.e., people believe that a short-term rise in inflation could lead to higher price levels longer-term.

Inflation expectations have moved further away from the 2% target over the course of 2022, something the Fed recognizes as a potential roadblock in navigating the current inflationary environment. Indeed, Fed Chair Jerome Powell stressed the importance of “expeditiously continuing to raise rates” to “ensure that longer-term inflation expectations remain well-anchored” at the June FOMC press conference.¹ With higher-than-anticipated August CPI figures, however — headline inflation of 8.3% and core inflation that reaccelerated to 6.3% — inflation expectations may remain higher for longer. Headline inflation is moving in the right direction, but core inflation, which remains well above Fed targets, tends to be stickier and may further complicate the Fed’s task. While there are no crystal balls, longer-term inflation expectations will continue to bear monitoring as investors search for potential indicators of a market bottom.

Print PDF > Inflation: Expectations Matter

¹ Lee, J., Powell, T., & Wessel, D. (2022, June 27). What are inflation expectations? Why do they matter? The Brookings Institute. Retrieved September 28, 2022.

 

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.

Livestream Videos: 2022 Investment Symposium

The presentations by our research team from Marquette’s 2022 Investment Symposium livestream on September 23rd are now available. Please feel free to reach out to any of the presenters should you have any questions.

View each talk in the player above — use the upper-right list icon to access a specific presentation.

 

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. Past performance is not indicative of future results. For full disclosure information, please refer to the end of each presentation. 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.

Midterm Madness

If inflation, rising rates, and a war in Europe were not enough to keep markets interesting this year, 2022 is also a midterm election year. Based on data over the last nine decades, midterm election years — while only marginally more volatile than non-election years overall — tend to exhibit a distinct performance pattern throughout the year. On average, returns during midterm years tend to be flat to slightly negative through the first three quarters as investor confidence is dampened by uncertainty around the outcome of the election. Historically, returns start to pick up as November draws near and tend to finish strongly, with fourth quarter returns in midterm years significantly stronger than non-midterm years. This holds true regardless of which party wins the House and Senate and whether or not there is a change of control, suggesting investors value predictability more so than a specific party controlling Congress. While each year is unique, and this analysis does not consider the deluge of other macroeconomics issues plaguing 2022, it is interesting historical context. Come November 6, there may be one less source of uncertainty in markets.

Print PDF > Midterm Madness

 

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.

Go Green or Go Home

Accelerating energy innovation is proving to be a key driver of decarbonizing the economy and mitigating climate change and may also expand the opportunity set for infrastructure-focused investors. President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law on August 16th, 2022. The legislation is projected to raise $737 billion in revenue, require total investments of $437 billion, and reduce the deficit by more than $300 billion.¹ The IRA bill aims to help offset long-term inflationary pressure via targeted spending in clean-energy renewables and decarbonization initiatives over the next decade-plus. In addition, the bill will utilize tax credits and government subsidies to encourage household and commercial renewable energy purchases, clean-energy manufacturing, and decarbonization of domestic industries. As private equity and infrastructure investors digest the impact of the new legislation, we expect electric utilities and clean hydrogen production to be key beneficiaries of an increase in capital deployment. Infrastructure-focused strategies can provide exposure to these tailwinds while being ESG-friendly and more broadly helping to diversify a portfolio, provide a hedge against inflation, and generate attractive long-term risk-adjusted returns.

Print PDF > Go Green or Go Home

¹ Inflation Reduction Act of 2022, Investopedia

Hawks and Doves: The Birds of Summer

Inflation, interest rates, and a possible recession are top of mind this summer. Last Friday at the widely-watched Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell signaled that the U.S. central bank will keep raising interest rates and leave them elevated in order to fight inflation. With the Fed not backing off its hawkish stance, concerns around what tighter monetary policy means for economic growth remain front and center.

Looking back to the late 1970s — the last time we saw inflation rising near this pace — a series of rate hikes preceded the 1980 recession and the subsequent ’81–’82 recession. The early 1990s saw an 8-month recession stemming from the restrictive monetary policy of the late ‘80s paired with the 1990 oil price shock. Rates were subsequently increased, though to lower highs, before being cut amid the bursting of the Dot-Com Bubble and then again during the Global Financial Crisis. While the Great Recession was officially over by June 2009, rates were kept near zero until 2015. With only modest rate increases through 2018 followed by a reversal in 2019, rates were quickly slashed to near zero again in early 2020 during the shortest recession on record. This year, to address escalating inflation, the Fed has raised rates by 2.25% over a roughly four-month period — the quickest pace in decades. While rate hikes may have started to weigh on demand, inflation remains near 40-year highs, and more needs to be done to restore price stability. The degree of economic slowdown and impact to the employment market as a consequence of rising rates is one of the biggest unknowns and biggest drivers of markets today. While examining history can add context, inflation dynamics are complex and nuanced, and many have never seen these levels of price increases. Overall, uncertainty in markets remains, with all eyes on the Fed, the September FOMC meeting, and the evolving impact on the U.S. consumer.

Print PDF > Hawks and Doves: The Birds of Summer

 

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.

Movin’ Out (Of Their Parents’ Basement)

A previous Chart of the Week published in April entitled “Buy Land, They’re Not Making It Anymore” discussed the fundamentals driving the domestic housing market, including an increase in home valuations and a decrease in the number of new homes built in the United States over the last decade. Data released this week by Anytime Estimate serves to shed additional light on current housing dynamics. One of the most noteworthy aspects of this report is that millennials accounted for roughly two-thirds of first-time buyers in a survey of more than 700 respondents who purchased a home since the start of 2021. Generally speaking, this is good news for the housing market and pushes back against the notion that individuals in this age demographic have avoided home ownership because they prefer to rent. The bad news, according to the Anytime Estimate survey, is that 72% of buyers since 2021 have regrets about their home purchase, with over one-fifth of all buyers indicating complete dissatisfaction with the process and result. To that point, over 25% of respondents claimed they either spent too much money on their home or bought the home too quickly, not giving the purchase adequate consideration. Additional regrets include buying a “fixer-upper” that requires extensive maintenance (24% of respondents), feeling pressured to make an offer (21% of respondents), and purchasing the home sight unseen (17% of respondents).

Regrets notwithstanding (and jokes about millennials thinking buying a home was as easy as purchasing a slice of avocado toast aside), the results of this survey are largely encouraging. Homes tend to be beneficial investments, so recent purchases could allow millennials to build significant wealth over the coming decades. Additionally, many of these first-time buyers have reason to feel good about their purchases given the fact that they likely financed their homes at record low-interest rates. In recent months, the housing market in the U.S. has cooled substantially, which is evident by a buildup in inventories and a pullback in housing starts. This pullback may serve as a welcome respite for interested buyers in the near term. Marquette will continue to monitor dynamics within the market for housing with the conviction that real estate acts as a strong value-add for investors with long time horizons.

Print PDF > Movin’ Out (Of Their Parents’ Basement)

 

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.