Topic Tags: U.S Economy

Coronavirus and the U.S. Economy: Assessing the Impact

Over the last month, the world has been gripped by fears of the coronavirus and its eventual toll on the global economy. Most economists expect global economic growth to reaccelerate in the second half of the year after the virus peaks. We agree that most of the negative effects will most likely be felt in the first half of 2020.

Since January and February Chinese economic data will not be released for a few weeks, we thought it would make sense to review the current state of the economy in the United States. The table above shows leading indicators for the U.S. economy. Green denotes a healthy measure and red denotes a deteriorating measure. Some of the more stable measures over the past few years have been the 50-year low unemployment rate and inflation, which has been stable at 2%. The more volatile measures have been stock market valuations, the purchasing manufacturer’s index (“PMI”; a gauge of domestic manufacturing activity), and corporate earnings growth. Let’s start with PMI first since stock market valuation and earnings growth are more intertwined. PMIs have been under pressure since the start of the U.S.-China trade war in 2018. In January 2020, PMIs traced their way back into expansionary territory (i.e., above 50), but the coronavirus fallout may cast a cloud over manufacturing in the coming months.

What about the U.S. equity market? Last year, corporate earnings growth was virtually flat in an expensive stock market. Since then, stock market valuations¹ have come off their 2019 high but are still above the 10-year historical average of 16 times forward earnings. We believe meaningfully positive corporate earnings growth will be needed to support such an above-average market valuation. The most obvious way to ensure that is to have a strong U.S. consumer. Consumer confidence has steadily increased throughout this business cycle and right now consumers are as confident as they have ever been. Since the U.S. consumer drives two-thirds of the economy, we will be closely monitoring the consumer for weakening sentiment through measures like retail sales, revolving debt defaults, overall debt level, and other telling data. While we expect some metrics to potentially soften due to the coronavirus, we expect most to be positive by year-end. Ultimately, much like SARS and MERS, the virus’s bark will be much worse than its bite on the U.S. economy and equity market.

Print PDF > Coronavirus and the U.S. Economy: Assessing the Impact

¹ As measured by forward P/E
² FactSet Expected Earnings Growth for 2020

 

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.

Much Ado About Corona?

By now, you have all read the headlines and watched various news commentators detail the perils of the latest pneumonia outbreak, 2019 Novel Coronavirus (“nCov”), impacting China, nearby countries, and a few of their western trade partners. As of February 13th, confirmed cases in mainland China had reached over 60,000 patients, and as was broadcast on February 11th, the death total has surpassed 1,000. Even though these health figures are alarming, we have experienced similar outbreaks in the past and can take some comfort in knowing that eventual containment — and a vaccine — are in the works.

From a financial market’s standpoint, one common theme we are hearing from economists and portfolio managers is that, similar to the SARS outbreak of 2002–2003, the recent sharp, nCoV-driven market sell-off is temporary and the overall market impact will be minimal over the long-term. This chart of the week shows the short-term returns of the broader market — using the MSCI All Country World Index as the guidepost — during the SARS outbreak, as well as the current coronavirus. As shown in the chart, during the first three months of the SARS outbreak the MSCI ACWI posted a -2.9% return. However, six months after the initial SARS patient, the MSCI ACWI return was back in positive territory, up 2.8%.

While comparing SARS and nCoV makes sense from a regional and virus strain commonality, one must also consider the economic circumstances surrounding each outbreak. The supply chain connectivity between China and the broader world has advanced in leaps and bounds since 2003. The potential knock-on effects of an extended drop in Chinese factory productivity could slow, for instance, the technology supply chains for Apple, LG, Google, and more. Hence, economists are probably spot on that the market will rebound, but the details of the true impact on global growth are yet to be defined.

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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.

Is Manufacturing on the Rebound?

The ISM PMI index is a survey of manufacturers and measures the overall strength of the manufacturing sector. A measure over 50 indicates the sector is growing while over 43 suggests the economy overall is expanding. Over the last five months of 2019 this measure fell below 50, leading analysts and investors to wonder if we were in a manufacturing recession, driven by the U.S.-China trade dispute and slowing global growth. However, January’s reading came in at 50.9, beating expectations of 48.5 and recovering from an almost four year low. January’s surprise gain was met positively by stocks, bond yields, and dollar gains. The PMI had recently been held back by weak export markets and the trade war and it seems that news of the Phase One trade agreement between the U.S. and China supported manufacturing health; however, effects of the coronavirus nearly freezing parts of China’s economy and Boeing’s halted production straining producers will likely impact February’s number. So, while January’s reading was certainly a welcomed surprise, economists are now in “wait and see” mode to see how these risks play out in February.

Print PDF > Is Manufacturing on the Rebound?

 

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.

Will the Spread of Coronavirus Drive a Risk-Off Market?

Global markets have come under pressure as the number of coronavirus cases grows. Through January 27th, the S&P 500 is down 3% from its mid-January peak when the U.S.-China phase one trade deal was signed. The 10-year Treasury yield has fallen from 1.85% to 1.61% over this same period, as bond spreads widened and the dollar strengthened.

This newsletter summarizes recent market activity and potential implications of the spread of coronavirus, which originated in Wuhan, China. For long-term investors, this outbreak is likely nothing but noise; however, future news about the coronavirus could impact markets in the short-term.

Download PDF > Will the Spread of Coronavirus Drive a Risk-Off Market?

 

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.

2020 Market Preview

2019 was certainly a profitable year for investors as traditional and alternative asset classes delivered positive returns.  As we enter 2020, there are a litany of questions facing global markets ranging from the U.S. election to trade disputes to global monetary policy, all of which will undoubtedly influence investment returns. The following newsletters examine the primary asset classes we cover for our clients, with in-depth analysis of last year’s performance and more importantly, trends, themes, and projections to watch for in 2020.

We hope these materials can assist you and your committees as you plan for the coming year, and please feel free to reach out to any of us should you have further questions about the articles. We have also produced a 2020 Market Preview video if you would like to hear a high-level summary of the market previews. Here’s to another positive year from the markets in 2020!

U.S. Economy: Signs of Slowing?
by Greg Leonberger, FSA, EA, MAAA, Partner, Director of Research

Fixed Income: The New Roaring Twenties — Will It Be Different This Time?
by Ben Mohr, CFA, Director of Fixed Income

U.S. Equities: Climbing the Wall of Worry
by Robert Britenbach, CFA, CIPM Research Analyst, U.S. Equities

Non-U.S. Equities: Big Expectations, Little Wiggle Room
by David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities
and Nicole Johnson-Barnes, CFA, Research Analyst

Real Estate: What Will Happen Next?
by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Infrastructure: The Energy Revolution Is Driving the Future of Infrastructure
by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Hedge Funds: Rising Geopolitical Risks and a U.S. Election Could Lead to Tempered Expectations
by Joe McGuane, CFA, Senior Research Analyst, Alternatives

Private Equity: As Asset Class Grows, Continues to Deliver for Investors
by Derek Schmidt, CFA, CAIA, Director of Private Equity

Private Credit: An Asset Class Coming Into Its Own
by Brett Graffy, CAIA, Research Analyst

To read the above files in one combined document > 2020 Market Preview

 

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.

2020 Market Preview Video

This video coincides with our annual Market Preview newsletters and includes a recap of 2019’s performance and what investors can expect heading into 2020. 2019 was certainly a profitable year for investors as traditional and alternative asset classes delivered positive returns. As we enter 2020, there are a litany of questions facing global markets ranging from the U.S. election to trade disputes to global monetary policy, all of which will undoubtedly influence investment returns.

This video is part of our Market Insights series, a quarterly presentation designed to brief clients on the market as soon as possible after quarterly market data becomes available. Members of our research team discuss the overall U.S. economy, along with fixed income, U.S. and non-U.S. equity, hedge funds, private equity, real estate, and infrastructure.

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

Despite Political Tensions, 2020 off to a Great Start

This week’s chart shows the cumulative S&P 500 return and 10-year Treasury yields through January 21st. The S&P 500 is up over 3% year-to-date despite impeachment proceedings and geopolitical tensions with Iran. We investigate why equity markets have remained strong through a seemingly difficult start to an election year.

Impeachment proceedings allege that Trump interfered in the coming 2020 election by holding back millions of dollars of military aid to Ukraine in exchange for them launching an investigation into Joe Biden. The market seems relatively unphased, however, as Republicans control a majority in the Senate of 53 to 47. A two-thirds majority (67 senators) is required to convict Trump and remove him from office. This seems unlikely as evidence remains thin and he retains backing from the Republican party.

Iran has been another point of conflict early this year as the U.S. killed Qassem Soleimani as a result of his alleged targeting of U.S. embassies. Iran then responded by firing missiles at U.S. targets in Iraq. It is widely viewed that Iran is looking to avoid a head-on conflict with the U.S. as economic sanctions are harming the Iranian economy. As the direct conflict seems to have abated and Iran’s economy is struggling, the market seems to view this as a non-event.

Rates have remained low and the economy is growing. Though there seems to have been a few bumps in the road, the S&P 500 continues to march higher. Uncertainties remain, however, as a surprise verdict from the impeachment trials or newly discovered coronavirus could upset the markets moving forward. Going forward, investors will look for positive earnings and economic growth — both domestically and abroad — to support further equity market gains in 2020.

Print PDF > Despite Political Tensions, 2020 off to a Great Start

 

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 Next Decade Look Like for Private Equity Investors?

For U.S. private equity investors, it has been a spectacular decade. Through September 2019, EV/ EBITDA¹ multiples, a standard for measuring private equity investment value, stood at 12.8x, just below the 2014 high of 12.9x. This figure marks an 82% increase from 2009, during which the U.S. economy was emerging from the Global Financial Crisis. In addition to revenue growth and EBITDA margin expansion, increasing multiples is a driver of private equity value creation and the most publicized metric on the state of the market.

A decade of increasing multiples has benefited private equity investors and managers. As investors saw the value of their private equity allocations grow, they rewarded managers with increasing amounts of capital. In 2019, global private equity raised $595 billion,² the second-largest sum ever.  A decades’ worth of prolific fundraising, like 2017’s record total of $628 billion, has created substantial amounts of dry powder, or uninvested capital. Today, private equity managers are sitting on $1.43 trillion of dry powder, waiting for investment opportunities to emerge.

These record-setting figures beg investors to ask very important questions regarding the next decade of private equity. Regardless of the past decade, we continue to see a tremendous amount of value in the private equity asset class as a return enhancer and diversifier for portfolios. Undoubtedly, investor scrutiny will increase as the asset class becomes more competitive, and manager differentiation will be paramount.

Print PDF > What Does the Next Decade Look Like for Private Equity Investors?

¹ Enterprise value / earnings before interest, taxes, depreciation, and amortization
² Cummings, C. “Fundraising Stumbled in 2019 From Decade’s Record Pace,”  9 Jan. 2020. The Wall Street Journal.

 

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.

Will the Good News Continue for U.S. Equities?

Domestic equity returns have surprised investors to the upside this year. The S&P 500 is up ~24% and the S&P has posted 26 new highs in 2019. Over the past 10 years, the S&P has recorded 233 new highs and a 481% cumulative return. The chart shows that many of the market highs were backloaded into the second half of the current recovery as economic growth and investor confidence increased. The S&P 500 did not reach its post-recession peak until 2013: four years after the financial crisis. During those four years, market volatility was elevated, but steadily decreasing.

2019’s market environment has been very different from 2009. The first contrast is valuations. In March 2009, the S&P 500 traded at 11.2 times forward earnings and today it trades at 19.2 times forward earnings, higher than its 10-year average of 16 times. Second, while market volatility on average has decreased by 50% since 2009, volatility (measured by the VIX index) ­— as shown by the orange diamond — remains elevated since 2017’s lows. Lastly, geopolitical risk has predominantly shifted from Europe and its sovereign debt crisis to the U.S.-China trade war, the latter of which is still not resolved. Luckily, U.S. businesses and especially U.S. consumers have proved resilient through these stressors. If the status quo continues into 2020, we can only hope for more of the same: positive equity returns albeit with higher market volatility and geopolitical risks.

Print PDF > Will the Good News Continue for U.S. Equities?

 

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 an Election Year Mean for Equity Investors?

Prior to each presidential election, there is inevitable talk about market reactions to candidates and how policy changes could impact investors. As shown in the table, election years tend to exhibit more muted returns (as measured by the S&P 500 index) and greater volatility compared to the years leading into the presidential election. Year-to-date, 2019 has continued the Year 3 trend of strong performance, but if history is any indication, the 2020 outlook is less optimistic.

When it comes to Republicans vs. Democrats, political pundits often try to show one is better than the other for equity market returns. The reality, however, is that there isn’t enough of a sample size to draw any meaningful conclusions about parties, given the number of combinations of who controls the Presidency, Senate, and House of Representatives. Even in the case of 2016 with Trump’s unexpected win, markets initially sold off but quickly rebounded to their previous levels. No matter the candidate or the policy, markets care most about clarity and dislike uncertainty. As a result, we are expecting greater volatility over the next 12 months as we head into the 2020 presidential election. While the election will certainly not be the sole driver of market volatility, it will undoubtedly contribute to further uncertainty over the coming months.

Print PDF > What Does an Election Year Mean for Equity 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.