U.S. Equity Archives — Page 21 of 36

Third Quarter Review of Asset Allocation: Risks and Opportunities

The third quarter saw mixed results for financial markets. Economic fundamentals generally remain strong but signs of deterioration are starting to emerge. Unemployment currently hovers around 3.5%, and inflation is near the Fed’s target of 2%. However, 3Q GDP growth was under 2% (though the 1.9% figure exceeded the 1.7% estimate), and the PMI index has been below 50 since August (a reading under 50 is indicative of contraction in the manufacturing sector). Overall, the most important global trends we see are the following:

The U.S.-China trade conflict continues to weigh heavily on both countries as talks remain ongoing;
The Federal Reserve (“Fed”) reversed course by cutting interest rates and further cuts are still possible;
The U.S. Treasury yield curve inverted briefly, which historically has signaled a recession over the subsequent 12–24 months;
Brexit negotiations were extended to January 31, 2020, therefore further perpetuating the uncertainty around the UK’s exit from the EU;
Negative interest rates continue to grow in prevalence around the world.

The impact of these shifting dynamics is explored further in this newsletter as we review third quarter performance and expectations going forward for each of the major asset classes.

Read > Third Quarter Review of Asset Allocation: Risks and Opportunities

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 Hidden Risk Within Passive Small-Cap

The rise of passive investing has been a multi-year trend among investors and currently accounts for nearly half of all assets within U.S. mutual funds and ETFs. The popularity of passive investing is not surprising given that the majority of actively managed funds charge higher fees and struggle to consistently beat their target benchmarks. However, the small-cap segment of the market bears watching, particularly among those investors that are passively invested.

This week’s Chart of the Week shows the percentage of companies over time within the Russell 2000 index that have no earnings. As of September 30, 2019, the percentage of companies within the Russell 2000 index with no earnings stands at 38%. This is one of the highest readings observed in nearly 25 years and is at levels typically not seen outside of recessionary periods.

Consistently strong passive inflows, a low interest rate environment, and general investor preference towards longer duration assets perceived to have recession-resistant, long-term secular growth drivers have helped to support companies with little to no earnings. This trend may eventually reverse and could bode well for active strategies that are structurally underweight this segment of small-cap. Regardless, it is important to acknowledge the growing trend and potential risk within the small-cap space.

Print PDF > The Hidden Risk Within Passive Small-Cap

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.

3Q 2019 Market Briefing

Live Webinar – Thursday, October 24, 2019 – 1:00-2:00 PM CT

Please join Marquette’s asset class analysts for a live webinar based on our 3Q 2019 Market Environment. This webinar series is designed to brief clients on the market as soon as possible after quarterly market data becomes available.

The overall U.S. economy will be discussed, along with fixed income, U.S./non-U.S. equity, hedge funds, private equity, real estate and infrastructure.

Featuring:
Greg Leonberger, FSA, EA, MAAA, Partner, Director of Research
Jeffrey Hoffmeyer, CFA, Lead Analyst, Asset Allocation
Ben Mohr, CFA, Director of Fixed Income
Samantha Grant, CFA, CAIA, Senior Research Analyst, U.S. Equities
David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities
Joe McGuane, CFA, Senior Research Analyst, Alternatives
Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets
Brett Graffy, CAIA, Research Analyst

Who should attend: Institutional investment stewards, private clients, investment managers

Live webinar attendees will be able to submit questions to the presenters and vote in audience polls during the event. Questions will be answered during the final 15 minutes of the webinar, as time allows.

If you are unable to attend the webinar live, you can also view it afterward on demand. Registrants will automatically receive a follow-up email shortly after the end of the webinar to notify them of webinar recording availability

The Yield Curve Inverted a Month Ago… Now What?

The U.S. Treasury yield curve briefly inverted a month ago, when the 10-year Treasury yield fell 4 basis points below the 2-year Treasury yield on August 27th. An inverted yield curve has historically signaled a recession to come, as was the case prior to the 2000 tech bubble and 2008 housing crisis. However, the stock markets in the U.S. have been resilient since this latest inversion. The S&P 500 is up 4.2% and the Russell 1000 is up 6.6% since August 27th. This is not surprising as historically there is roughly a 20-month lag between yield curve inversion and the start of a recession.

It should be noted, however, in this most recent case of inversion there is the additional — and unprecedented — phenomenon of yield-seeking from investors whose domestic yields are currently negative. Foreign countries currently own approximately $6.6 trillion of U.S. Treasuries. In fact, countries with negative interest rates such as Japan and Germany increased their U.S. Treasury holdings by 9.2% and 21%, respectively, over the last twelve months. Foreign holdings of U.S. Treasuries amount to roughly 30% of the total amount of U.S. Treasuries outstanding and as a result, the shape of the yield curve has been warped and therefore may be a less-reliable indicator for recessions. It is true that yield curve inversion typically signals a market’s pessimistic view of the economy. However, given the current demand dynamics from foreign investors, yield curve inversion may be less reliable of a recession prediction signal given the overall state of economic growth and consumer health.

Print > The Yield Curve Inverted A Month Ago… Now What?

The Infamous September

When it comes to timing the stock market, one oft-heard saying is “Sell in May and go away,” which “warns” investors to try to avoid the underperforming summer months and re-enter the market sometime in October. While this might be little more than an anomaly, it is true that over the last 40 years these months do tend to have weaker performance. Most notable in underperformance is September, the only month to average a loss in the S&P 500.

Given the volatility and global growth trends we’ve seen recently, a disappointing September would hardly be surprising. Pairing this historical weakness with the results of last year’s fourth quarter — when equities were down 13.5% — it is understandable that many investors are nervous about the remainder of the year. Fortunately, performance has been positive with equities up 2.6% month-to-date at the time of writing. But what’s far more important is that despite some concerning headlines, the S&P 500 is still up over 21% year-to-date. Even if we do see some losses this month and 4Q disappoints, investors are still on track for a profitable year in their domestic stock portfolio.

Print PDF > The Infamous September

Investing 101 Video Series

Our Investing 101 video series covers the fundamentals of investing. This series aims to create a knowledge base for trustees, staff, and other investors of the key terms and concepts that they encounter most frequently, with guidance provided by several of Marquette’s research analysts and directors.

The series covers:

Marquette encourages open dialogue with our consultants and research team. For more information, questions, or feedback, please send us an email.

Low Volatility Takes a Bite out of FAANG

FAANG stocks have underperformed the broad market over the past year, a stark change from their previous multi-year run of outperformance. More recently, this high-flying group has been negatively affected by a slowing global economy, the U.S.-China trade war, and antitrust investigations. On the other hand, low volatility equity strategies — heavily allocated to defensive sectors of the market such as utilities, REITs, and consumer staples — are benefiting from concern that we are late cycle, slowing global economic conditions, and falling interest rates. As investors seek to mitigate downside risk within equities, low volatility investments have been the recent winner.

This week’s Chart of the Week shows the growth of $100 for the S&P 500 Low Volatility index, the S&P 500 index, and the NYSE FANG+ index over the past year. As of August 23rd, the S&P 500 Low Volatility index had a trailing one-year return of +15.3%. Over this same time frame, the S&P 500 index returned a meager +1.7% while the NYSE FANG+ index fell by -12.4%.

The basic premise of low volatility investing is winning by not losing. A focus on lower beta, lower volatility stocks provides downside protection and helps with the power of compounding over time. The low volatility trade isn’t entirely a free lunch since popularity in this investment style has driven up valuations. Across defensive sectors, valuations are well above their long-term historical averages and trade at a premium to the broad market. As of July month-end, the S&P 500 Low Volatility index had a trailing P/E ratio of 23x compared to 21x for the S&P 500 index. While valuation levels for low volatility indices are certainly elevated and may have an impact on future price appreciation, their lower beta nature should act to mitigate downside risk relative to the broad market.

Print PDF > Low Volatility Takes a Bite out of FAANG

The Good Old Days

It may be tempting for some investors to “time” the market in order to enhance returns in times of market volatility or to avoid exposure on days of anticipated losses in the equity market. However, this strategy can prove detrimental to a portfolio that compounds over time.

This week’s Chart of the Week shows the cumulative effect of missing out on the 5 best days and 10 best days of return for the S&P 500. If $1 were invested in October of 1988 and simply left alone, the investor would have $20.88 as of August 22nd, 2019. However, if out of a sample of 7,771 days, solely the 5 and 10 best days of return were missed as a result of not being invested in the S&P 500, the investor would have $13.95 and $10.50, respectively. Investors may be tempted to time the market in the short-term but making a wrong timing decision can drastically impact returns as shown in the chart above. It is nearly impossible to predict how the market will react on any given day and attempting to move in and out of the market incurs trading costs as well as the risk of losing out on a few crucial days of return. Compounding returns also widen the gap between the lines over time and exponentially affects the dollar value of a portfolio. This illustrates the importance of staying invested, especially through periods of high volatility when large swings in returns are more common.

Print PDF > The Good Old Days

All is Not Lost for 2019

Given this week’s volatility driven by (brief) yield curve inversion, the ongoing U.S.-China trade dispute, disappointing economic data from Germany, and overall growing pessimism about future growth, investors’ growing concerns about portfolio returns are entirely justified. However, despite this week’s volatility and mostly negative news, almost all asset classes have delivered positive returns for the year, with the great majority of U.S. equity strategies up double digits. Furthermore, most fixed income strategies have profited from falling interest rates, as shown by positive returns from investment grade as well as below investment grade sectors. And for all the negative news out of the Eurozone and China, international equities — as represented by the ACWI ex-US index — are still up more than 6% through August 15th. While the rest of the year is likely to feature elevated volatility and lower returns, barring a major market correction most portfolios should remain in positive territory, despite what has transpired the first half of August. If nothing else, we encourage investors to take a long-term view of the markets and not overreact in times of market stress, as stepping back and taking a longer-term view of the markets indicates that 2019 has been a profitable year to date.

Print PDF > All is Not Lost for 2019

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