Topic Tags: U.S Economy

The VRP Opportunity From Here

Volatility Risk Premium (“VRP”) strategies have struggled this year. The market’s extreme moves led to losses for put writing strategies on the way down and losses for call writing strategies on the way back up. Obviously not to be ignored, but the last six month period has truly been an outlier event. Now with the dust seemingly settled, we assess the opportunity from here. With rates near lows and equity valuations near highs, VRP strategies screen favorably, offering a more independent return stream.

In this paper, we look at correlations between returns and multiples, showing the relative advantage of VRP strategies, as well as the outsized opportunity created by today’s elevated levels of uncertainty.

Read > The VRP Opportunity From Here

 

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.

IPO Market Is Heating Up Again

The IPO market in 2019 generated a record amount of exit value for venture capital investors as large and anxiously awaited IPOs from Uber, Lyft, Slack, Peloton, Smile Direct, Chewy, Pinterest, and Beyond Meat drove the market and dominated the headlines. Entering 2020 — a presidential election year — the markets braced for another round of anticipated IPOs expected to come before the election. However, following the COVID outbreak in Q1 and the resulting global pandemic during Q2, the IPO market ground to a halt. This disruption resulted in a significant backlog of companies waiting to come to the public markets.

In this newsletter, we look at the recent reversal of this IPO backlog with companies coming public at a feverish pace during the third quarter and take a look at further expectations for the remainder of the year.

Read > IPO Market Is Heating Up Again

 

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 Year of SPACs

If there is one corner of the financial market that has benefited from the pandemic, it is special purpose acquisition companies (SPACs). This atypical pathway to the public markets was once a niche strategy for small investment firms. Now, the strategy has become one of the hottest financial topics of 2020 after a massive uptick in the volume of these vehicles.

A record 82 special purpose acquisition corporations went public this year to raise a record $39 billion, far exceeding the $9.5 billion in gross proceeds for SPACs in 2019 or the $8.5 billion in 2018.

SPACs are vehicles that raise money in an IPO, and then place the funds in a trust while the sponsor searches for a business or multiple businesses to acquire. The companies then complete a merger and the target becomes a listed stock.

A private company going public via SPAC has a few advantages over a traditional IPO. Private companies can go public on a faster timeline and there is more certainty around a company’s valuation. Furthermore, the listing of a SPAC requires a much lower level of diligence than a similarly sized IPO since there are no financial statements to analyze. For a sponsor, raising a SPAC is similar to raising a closed-end fund, allowing for a shorter and more comfortable timeline during the fundraise. In addition, the reputation of SPACs has improved over the past decades as governance practices have been refined and made more shareholder-friendly.

The volatility and price declines earlier in 2020 made IPOs and direct listings impractical options for many private companies, which is where SPACs have stepped in. There has been a lot of talk particularly in the venture community not being satisfied with the IPO process. That has led to conversations about going the direct listing route, and now the SPAC route. There have been several companies that have gone the IPO route and set a price underwriters deemed reasonable, only to see the stock surge on the first day of trading, which ultimately results in money being left on the table. And with IPOs being inherently riskier, there was less incentive to take on more risk by going public during an election year and pandemic.

It is clear SPACs are here to stay, but it is uncertain whether they will continue at the same rapid pace as this year. While the population of companies that might combine with a SPAC is growing, it still represents a small subset of private companies, limiting the potential disruption of the traditional IPO process. While the momentum driving innovation around public listings is encouraging, SPACs will not provide a solution for every private business. That said, there is a two-year time period for a SPAC to acquire a business, guaranteeing they will remain around for at least the foreseeable future.

Print PDF > The Year of SPACs

 

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.

How Will the 2020 Election Affect the Markets?

The 2020 presidential election is fast approaching on November 3rd and key election issues pertaining to the economy will be viewed with respect to a backdrop of crisis and uncertainty more than ever. Curbing the spread of COVID-19 is at odds with reopening the economy while racial injustice remains a focal point. A potential Biden presidency and Democrat-controlled Senate could result in tax increases aimed at stimulating the economy through public projects and providing a social safety net. In contrast, a second term with Trump would likely mean more of the status quo in terms of keeping the 2017 tax cuts, further trade negotiations with China, and his attempt to nullify Obama’s Affordable Care Act.

In this newsletter, we assess the platforms of both Biden and Trump with a focus on Biden’s proposed tax policies and a perspective on how they are expected to affect the economy and markets. We next examine the historical effect of politics on the markets such as equity performance based on which party controls the White House, Senate, and House of Representatives. Lastly, we take a look at 2020 election expectations based on recent polls and markets.

Read > How Will the 2020 Election Affect the 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.

Resilience in U.S. States, Cities, Health Systems, and Universities: Municipal Asset Class Review & Outlook

To date during this COVID-19 pandemic, both U.S. municipal bond issuers as well as municipal bond strategies have proven to be resilient despite the mounting adversity brought on by the nationwide lockdowns and other social distancing guidelines. The broader market recovery has been relatively quick as the S&P 500 is now back to pre-COVID highs, corporate credit spreads are back to pre-COVID tights, and overall volatility has mostly stabilized. The rebound in the economy is proving to be slow, however — with recent signs of leveling off — and is not expected to fully rebound until a vaccine is approved and distributed.

In the following, we provide a quick review of how municipal bonds have weathered the crisis so far in 2020; an assessment of key valuation, fundamental, and technical indicators to formulate a thesis for investing in municipal bonds going forward; and perspectives on how specific segments of the asset class such as investment grade municipals vs. high yield municipals and select sectors of the municipal bond market such as healthcare and education are expected to fare during the balance of the recession and recovery.

Read > Resilience in U.S. States, Cities, Health Systems, and Universities: Municipal Asset Class Review & Outlook

 

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 Key Rebalancing Consideration: Drawdowns

In times of market turbulence, investments may sustain peak-to-trough declines known as drawdowns. The COVID-induced drawdown in March was no exception. Our chart this week illustrates the drawdown history for core bonds, bank loans, high yield bonds, and hard currency sovereign emerging markets debt (“EMD”) compared with the S&P 500. While past performance is not indicative of future returns, historical drawdown risk associated with past market volatility is a helpful metric to consider in the recovery from the current global health pandemic. As evident in the chart, each of the fixed income plus sectors¹ is correlated with the S&P 500, but the magnitude of plus sector drawdown risk is much less than the magnitude of equity drawdown risk — with one notable exception. In the 1990s EMD exhibited larger drawdowns than equity. At that time, EMD was very thinly traded, less mature, and more susceptible to dramatic swings.

While rebalancing from equity to fixed income plus sectors increases credit risk and introduces some drawdown risk, the magnitude of that drawdown risk from plus sectors is expected to be less than the expected drawdown risk from equity. As such, in this low Treasury yield environment, we recommend that investors consider both fixed income plus sectors and equity as ways to achieve greater total return potential and yield in portfolios. A diversified portfolio that takes advantage of the lower correlations between bank loans, high yield, EMD, and equities may benefit from greater efficiency and a higher Sharpe ratio in addition to the lower-magnitude drawdown risk from plus sectors.

Print PDF > A Key Rebalancing Consideration: Drawdowns

¹Bank loans, high yield bonds, and emerging markets debt.

 

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.

Is Now a Good Time for Equity Long/Short Strategies?

The investment landscape looks different post-COVID. Real interest rates have fallen into negative territory. The outlook for investment portfolios built on a fixed income allocation has meaningfully changed. The stock market is just off of new highs, increasingly disconnected from the underlying economy. Are equities unstoppable, or set up for a massive correction on any negative vaccine news or a pullback in stimulus? And how will the November election impact portfolios?

Clearly, there are many moving pieces for asset allocators trying to balance risk and return. Given the current environment, part of the solution may be an allocation to equity long/short hedge funds. Equity long/short strategies can improve portfolio diversification, help protect capital in periods of market weakness or heightened volatility, and increase overall risk-adjusted returns. In August, Hedge Fund Research noted that institutional investors were actively looking to increase exposure to hedge funds in the second half of the year as a direct result of the volatility of the first half. In this newsletter, we outline a few reasons why.

Read > Is Now a Good Time for Equity Long/Short Strategies?

 

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.

Do Presidents Play a Role in Equity Performance?

With market volatility already heightened due to the COVID-19 pandemic, the U.S. presidential election this year poses another layer of uncertainty that investors may view as added risk to their portfolios. In particular, there is inevitable speculation about how the market will react upon which candidate or political party wins the election. This week’s chart illustrates equity performance over the last nine presidents since 1969.

The question most asked is how the stock market will perform under Republican or Democratic leadership in the White House. Based on the data above,¹ the equity markets have averaged 14% annualized total returns when the president has been a Democrat and 8% when a Republican has been president. However, we caution that equity markets are subject to many market forces and most importantly, the sample size from this data set is not large enough to support these trends in a statistically significant manner. The good news is that regardless of political party, the stock market has averaged 10% a year over the time period shown in the chart.

As we look towards the November election, it is critical to understand the platforms of each candidate and how they can broadly impact the economy and by extension, equity markets. Understanding each candidate’s position on a variety of economic and social issues will inform the market’s likely reaction to the election results and help formulate expectations for investors. In the coming weeks, we will release a paper that examines these very topics in greater depth to establish baseline expectations of each candidate’s policies, market impact, and historical market performance of political party leadership in Washington across the White House, Senate, and House of Representatives. If nothing else, we know the election will be contentious and scrutinized, with market participants closely watching the ultimate result.

Print PDF > Do Presidents Play a Role in Equity Performance?

¹ For measuring equity performance, a total return index was used to account for shares that pay dividends and represent more accurate performance by reinvesting dividends back into the index.

 

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.

We’ve Come So Far, but Maybe It Was Too Fast

It had been smooth sailing in equity markets since the first quarter’s bear market. The S&P 500 index eclipsed the February 19th all-time high and in August the volatility index grazed lows not seen since the beginning of the year. However, over the past week, equity markets have been in turmoil with the S&P 500 falling nearly 7.0% and the NASDAQ 100 falling into correction territory, declining 10.9% in the last three trading days.¹ The turmoil has been concentrated in the most unlikely place: growth stocks.

In this newsletter, we provide a recap of recent volatility in the U.S. equity markets and assess the sources of ongoing investor uncertainty.

Read > We’ve Come So Far, but Maybe It Was Too Fast

 

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: A Closer Look at Sector Performance

The S&P 500 hit its Covid-induced trough on March 23rd, closing at 2237 points. Since then, it’s more than made up its losses, setting new records in the process. As detailed in a May Chart of the Week, “There’s FAAMG and Everyone Else”, technology companies have driven this recovery, spurred by a variety of increased demand attributable to remote work and schooling, online shopping, and virtual socialization, among others.

Despite technology companies grabbing the headlines, not all are classified as Information Technology by the GICS® sector classification system used by Standard & Poor’s, as one might assume. For example, the top five constituents within the S&P 500 in order are Microsoft, Apple, Amazon, Facebook, and Google parent Alphabet (FAAMG stocks), only two of which are classified as Information Technology (Microsoft & Apple). Amazon is Consumer Discretionary because of its retail focus, while Alphabet and Facebook are Communication Services. Amazon as a Consumer Discretionary stock helps explain the sector’s on par performance with Information Technology since the market bottom. Its stock price increased by 81% from March 23rd through August 31st, while Apple’s recovery over this same timespan was +131% with Facebook (+98%) not far behind.

Financials has been one of the weaker performing sectors in the recovery, as banks and other financial services companies have seen their bottom line potential shrink with Fed rate cuts. This only added to the struggle that these traditionally value-oriented firms have had keeping up with their new economy, growth-oriented counterparts. Berkshire Hathaway is the only Financials company in the top ten of the S&P, and the conglomerate’s lackluster recovery (+34% through this time period) resembles the sector as a whole. Visa is also a top ten index constituent; however, it’s classified as Information Technology. It has seen a moderate recovery of +56% over the noted timeframe.

As shown in the chart, the S&P 500 sits near the middle in recovery performance when compared to individual sectors. The S&P 500 ex-Information Technology isn’t far behind, which is surprising at face value but more understandable after considering that some tech behemoths fall into other sector classifications. As technology continues its ever expanding importance in the economy and daily life, it’s safe to assume that products and services based on technology, but outside the realm of traditional IT, will continue to grow in size and relevance.

Print PDF > Market Recovery A Closer Look at Sector Performance

 

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.