Mission Wealth Market UpdatesOngoing market updates provided by Mission Wealth's investment team.
8.4.21 Market Update
Despite some volatility associated with inflation concerns earlier in the year and more recently regarding the Delta variant, stocks have experienced strong gains in 2021 with the S&P 500 hitting multiple highs.
Economic re-opening and positive economic revisions, earnings strength, and ongoing accommodative policies have all helped drive stocks higher. On the other side of the ledger, bonds have stabilized over recent months after experiencing weakness through the beginning of the year, as inflation concerns moderated, driving bond yields lower which helped to underpin bond prices.
We consider strong earnings growth is likely to underpin the stock market. Indeed, current Analyst forecasts for second quarter S&P 500 earnings growth is around +65% from last year!
And earnings continue to surprise to the upside, leading to earnings expectations being revised higher. For instance, at the end of 2020, Analysts expected full year S&P 500 earnings for 2021 would be $167. They now expect earnings to be $191; that’s a 14.5% positive revision to their estimates! At the end of 2020 Analysts thought 2022 earnings per should would be $195; that’s subsequently been upgraded to $212!
Analysts forecast S&P 500 earnings growth of +58% in 2021. That is the strongest earnings growth in Decades.
Interestingly, even given the strength of the stock market, stock prices have not kept pace with earnings growth. While we expect ongoing appreciation in the stock market, albeit moderated from the growth experienced so far this year, we do anticipate stock price growth will trail earnings growth moving forward.
One implication of this dynamic will be to reduce valuation metrics, such as the P/E ratio. As earnings, or the “E” in P/E grow faster than prices, or the “P,” in P/E, multiples will naturally come down over time, alleviating some valuation concerns.
At the same time, announced corporate share buybacks are surging this year, led by several notable large-caps such as Apple, Google and Berkshire. As this chart depicts, share buybacks are on pace to set a record, with many big banks returning to the buyback market with the Fed’s approval in the second half of the year, which may help further underpin stock prices.
We’re also seeing some encouraging signs with Risk appetite normalizing from the elevated levels seen earlier in the year, which we believe is a constructive signal for the stock market, given the positive macro backdrop.
Importantly, risk appetite has decreased across all major asset classes.
Turning to bonds, bond prices have stabilized over recent months. As this chart highlights, Inflation expectations, as measured by 5 year and 10 year breakeven inflation rates, and while still elevated, have moderated after peaking in May.
This in turn drove bond yields lower and helped to stabilize the broad bond market, as measured by the U.S. Aggregate Bond Index.
4.4.21 Market Update
Stocks Continue to Rally
Stocks continue to rally despite a recent pick-up in volatility tied to inflationary concerns, stocks experienced a strong start to the year. While optimism regarding the economic growth outlook combined with positive vaccine progress helped to underpin stock market strength, a pro-cyclical rotation drove some disparity in performance across various industries and sectors. As a result, Value stocks broadly outperformed Growth stocks as companies set to benefit the most from re-opening outperformed, while many tech-oriented businesses that did particularly well in 2020 have underperformed recently.
Importantly, through the latter half of last year we were focused on reducing overweight exposures to Growth stocks in favor of Value stocks based on relative strength at the time.
Core Bonds Challenged
As a function of the improved economic outlook and massive expansionary policies, inflation concerns increased, driving bond yields higher which weighed on the broad bond market, as measured by the Bloomberg Barclays Aggregate Index.
Leading into 2021, we had anticipated a rising interest rate environment and had positioned our core fixed income allocations accordingly, with less duration risk (interest rate sensitivity) than the broad bond market and actively avoiding areas of the bond market most susceptible to interest rate changes, such as long-duration Treasuries in the 10 year – 30 year maturity range. We have also maintained dedicated allocations to actively managed bond funds and fixed income asset classes we consider may perform relatively well in a rising interest rate environment.
Measures of risk appetite remain elevated, though off highs. It’s important to note that risk appetite can stay elevated if supported by a positive macro backdrop, which we believe is currently in place. Interestingly, Risk Appetite has been driven more from bond price movements recently and less from stocks.
At the same time, Sentiment across major financial metrics is unsurprisingly tilting towards risk-on, though off levels one month ago.
While equity fund flows have remained consistently positive since the back half of 2020, we have yet to see a major liquidation of money market funds, despite historically low interest rates. These still elevated money market fund holdings may help underpin ongoing stock market demand on the back of continued accommodative polices.
A lot of clients are asking: Can Value stocks continue to Outperform Growth stocks?
Value stock earnings tend to be more highly correlated to economic growth than Growth stocks. As such, the current strong economic backdrop may act as a tailwind for Value stocks and Value stocks may continue to outperform until we return to more normalized economic growth rates.
Lastly, despite the recent relative strength, Value stocks still appear cheap vs. Growth stocks across almost every valuation metric.
As was widely expected, the Federal Reserve (Fed) held rates steady this week. They reiterated a focus on inflation targeting around the 2% level. If history is a guide, ongoing easy monetary policies may act as a natural tailwind for stocks and are likely to cause interest rates on cash and short-term debt to remain low for the foreseeable future. With this backdrop, we continue to manage our duration profile within the portfolios, tilting away from certain fixed income and adding alternative debt investments where appropriate. Maintaining proper diversification is critical as markets can change unexpectedly.
Fed Indicates Rate Hike Unlikely Through 2023
As was widely expected, the Federal Reserve (Fed) held rates steady and made no changes to its asset-purchase plan at this week’s Federal Open Market Committee (FOMC) meeting for March. There were no notable changes to the meeting statement, though based on the Fed’s “dot plot” forecasts, the Fed did upgrade its expectation for economic growth to 6.5% for 2021 (from 4.2% previously). The Fed also positively revised its outlook for the labor market, forecasting an unemployment rate of 4.5% by the end of 2021 vs. the previous projection of 5.0%. At the same time, the Fed increased its expectations for inflation, believing it will be marginally higher than the Fed’s long-term target of 2% over the near-term. Despite these upgrades, it was notable that the “dot plot” forecast indicates the Fed is unlikely to raise the Fed funds rate through 2023.
Economic Projections of Fed Board members and Fed Bank presidents, March 2021
Inflation May Not Force the Fed’s Hand
Despite the Fed’s near-term outlook for elevated inflation, in commentary the Fed reiterated its focus on average inflation targeting, meaning the Fed’s target is symmetrical around 2% and thus may allow inflation marginally above this long-term goal for a period without reining it in with tighter policies; in many ways the opposite of what occurred for much of the last decade where the Fed allowed inflation marginally below its 2% level. This stance provides cover for the Fed to maintain easy monetary policies for longer and until they see the economy and labor market soundly back on firm ground.
Positive Tailwind for Stocks
If history is a guide, the Fed’s clear stance in continuing to help underpin the nascent economic recovery via ongoing easy monetary policies may act as a natural tailwind for stocks. The last time the Fed was this accommodative was in the aftermath of 2008; the correlation between the Fed’s balance sheet (as a proxy for expansionary monetary policy) and the S&P 500 was nearly 1 in the years that followed:
Interest Rate Implications
The Fed’s policies are likely to cause interest rates on cash and short-term debt to remain low for the foreseeable future. Any loans tied to the Fed funds rate are likely to stay low until the Fed raises rates. With that said, longer-term rates – while typically tied to monetary policy – are not directly controlled by the Fed and are subject to market-based pricing. We have witnessed an uptick in yields in the middle to longer end of the yield curve (i.e. Treasuries in the 5 year – 30 year range) as the market is increasingly factoring in a strong rebound in the economy and potential for associated inflationary pressures. In short, the market believes current dynamics will necessitate higher future interest rates and is pricing yields accordingly.
We believe longer maturing, longer duration bonds will be particularly challenged if interest rates at the medium to longer end of the curve continue to move higher. These are the bonds most susceptible to interest rate changes (think Treasuries in the 10 year – 30 year range). With this backdrop, we are closely managing our duration profile within our portfolios, positioning ourselves with a shorter duration (less interest rate risk) relative to the broad bond market. We are also tilting away from fixed income asset classes we believe will be the most impacted by interest rate changes, such as Treasuries and towards high quality corporate bonds and agency securities, where it makes sense. We also incorporate active fixed income funds and strategies that are not directly tied to interest rate movements, which we consider to be well positioned to navigate a rising interest rate environment.
Ultimately, we believe our broadly diversified portfolios are constructed to continue to meet the long-term financial goals of our clients.
Should you have any questions, please contact your Client Advisor.
Politics in Focus
We are closely monitoring political developments in Washington given today’s alarming headlines that the Capitol was breached by protestors.
Recent market attention has turned to the outcome of the two special election runoffs in Georgia. Democrat Raphael Warnock has been declared the winner in one runoff, defeating Republican Senator Kelly Loeffler. The Associated Press has also called Democrat John Ossoff the winner in the other race, narrowly defeating Republican David Perdue. Democrats now take a slim majority control in the Senate, along with control of the White House and the House of Representatives. Under a unified White House and Congress, the risks surrounding increased taxes and potential regulatory reform are elevated. However, meaningful changes seem unlikely – at least over the near-term – as many politicians may be hesitant to risk derailing the nascent economic recovery given the lingering economic headwinds from the coronavirus pandemic. Moreover, Democrats control the Senate with a razor thin margin and we anticipate potential pushback from centrists, particularly in light of the narrowed majority in the House. On the other hand, Democratic control is seen as a positive for more coronavirus relief and infrastructure stimulus. This outlook has been borne out in the Treasury market, where the 10-year Treasury is now trading above 1% for the first time since last March, reflecting an increase in the reflation narrative.
Elsewhere in politics, the Congressional count of the electoral college votes was interrupted by protests at the Capitol, with protestors entering the Capitol building itself. Both chambers remain in recess and the process has come to a standstill. The headline caused markets to sell down and retrace from session highs, though the S&P still finished in positive territory on Wednesday, up +0.6%.
2020 in Review
2020 was an unforgettable year – largely for all the wrong reasons. COVID-19 impacted every facet of our daily lives and is likely to have a lasting impact on our global economy. Many parts of the economy effectively hit a brick wall earlier in the year, as social distancing policies ground activity to a halt for many businesses. It’s unlikely our economy will fully recover until a vaccine is widely distributed and available to the broader population, which will allow restrictions to be lifted and businesses across all sectors to begin running on all cylinders again. While we hope to reach herd immunity in the second half of 2021, it will take some time to bring unemployment back to pre-COVID levels. At the same time, we anticipate inflation will continue to run below the Fed’s long-term target of 2% for the foreseeable future. With this backdrop, we expect continued accommodative monetary policy and fiscal stimulus to support the economy in the years ahead and despite significant near-term uncertainties, we believe we are in the early stages of a new economic growth cycle.
2020 ended up being a strong year for the stock market. The S&P 500 closed the year at a record level, and global stocks returned over 16% (as measured by MSCI ACWI Index). However there was also a lot of dispersion in performance across equities, with growth stocks outperforming value and dividend-focused stocks, particularly in the first half of the year. U.S. stocks outperformed international markets, while many sectors struggled, notably energy, public REITs, and financials, to name just a few.
2020 certainly wasn’t a smooth ride: volatility was elevated throughout the year and we experienced the fastest bear market in history as the economic impact of the coronavirus and related social distancing policies took hold in March. This was followed by trillions of dollars in government aid and unprecedented market support from the Federal Reserve. Had 2020’s headlines been known ahead of time, most people would assume it would be a horrible year for the stock market. The market strength really underscores the importance of maintaining investment discipline in the face of market uncertainties, not overreacting to dire headlines but rather rebalancing systematically and sticking to a long-term financial plan and diversified asset allocation. In March and April of 2020 we were broadly adding to stock exposures and tax-loss harvesting across many client accounts, which in turn helped overall portfolio performance as the stock market rallied through the remainder of the year.
Bonds Anchor Portfolios
Core bonds held steady through the market volatility and helped to anchor portfolios at the height of the crisis. Yields fell, with the benchmark 10-year U.S. Treasury yield ending the year at 0.92%, down from 1.92% at the start of the year. As such, the broad US bond market returned 7.5% for the year (as measured by the Bloomberg Barclays Aggregate Bond Index), while high quality municipal bonds returned 5.1%. The relative strength in bonds, particularly at the height of the crisis, provided us with rebalancing opportunities: in following our disciplined approach we were broadly selling core bonds on strength to buy equities on weakness.
We continue to remain disciplined and focused on long-term fundamentals. Despite significant uncertainties still surrounding the economy and financial markets, we do believe we are in the very early stages of a new economic expansion and longer term growth potential exists. With this backdrop, volatility may stay elevated for some time, but any short-term market weakness may provide us with additional rebalancing opportunities. We expect 2021 to be a positive year for global markets and we continue to maintain balanced exposure across all major asset classes including areas of the market that have been out of favor and may be trading at more attractive valuations. Generating strong income across core bonds in a low interest rate environment will remain challenging, so we continue to source yield across institutional income based strategies. We believe our diversified portfolios are well designed to navigate both the near-term market environment, and ultimately achieve the long-term financial goals of our clients.
We continue to monitor developments closely. Should you have any questions, please contact your Client Advisor.
11.6.20 Market Update
Election Dominates Headlines, Stocks Rally
Stocks were flat on Friday, though soundly positive over the course of the week despite election uncertainty dominating headlines. As of writing, the Presidential election remains undecided, though Biden appears to have a slight lead in many of the outstanding states yet to be called. Regardless of who ultimately wins the Presidential election, a divided Congress – and by extension, ongoing political gridlock – is the most likely outcome, as Republicans are expected to maintain a slim control in the Senate, while Democrats are likely to maintain control of the House, albeit with a smaller majority. We believe a divided Congress largely removes any substantial near-term legislative risks or potential tax reform. At the same time, any additional fiscal package may be smaller than one under a unified Congress and may necessitate a continuation in easy monetary policies by the Fed.
Markets reacted positively to this outlook, with the S&P 500 returning +7.3% over the course of the week, while international stocks rallied +7.6% and emerging market stocks were up +7.2%. Amongst the leading sectors were healthcare companies, as any potential healthcare reform has largely been taken off the table under a divided Congress. Bond yields retraced somewhat during the week, with the benchmark 10 year Treasury yield dropping from 0.92% pre-election to close the week at 0.82%, reflecting expectations for a smaller than previously anticipated fiscal package and resulting Treasury supply, while dampening potential inflationary pressures and increasing expectations for a continuation of easy monetary policies. As a result, the broad bond market (as measured by the Bloomberg Barclays Aggregate Bond Index) returned 0.7% for the week. Speaking of a fiscal package, both parties continue to indicate another package is a top priority.
Strong Employment Report
While the election dominated headlines, a very strong employment report was released on Friday. The headline unemployment rate dropped a full percentage point, from 7.9% to 6.9% and was much lower than the consensus forecast of 7.7%. October payrolls beat estimates, with non-farm payrolls increasing by 638,000 vs. expectations of an increase of 578,000, while the labor force participation rate increased by 0.3%. This continues a recent trend of economic data far exceeding expectations and is a positive sign for the nascent economic expansion.
Very Strong Earnings Season
Also largely overshadowed by the election has been an exceptionally positive earnings season. Almost 90% of S&P 500 companies have now reported and more than 85% of them have posted bottom-line profits that beat expectations. According to FactSet, if that percentage holds, this earnings season will have the highest percentage of S&P 500 companies reporting a positive earnings surprise since they began tracking data in 2008. Additionally, on aggregate, companies have reported earnings that are 19.5% above estimates, which represents the second biggest earnings surprise since 2008. A resilient consumer was a widely cited theme, while some concerns remain about worsening coronavirus trends.
Recent Uptick in COVID Cases
While we do believe we are at the early stages of a new economic expansion, uncertainties still remain, none the least of which being the recent uptick in COVID cases. The U.S. continues to experience an uptick in new case growth across the country, hitting 122,000 new cases on Thursday. Hospitalizations have also increased to the highest point in three months, with particular concentration in the South and Midwest. Internationally, many European countries are also experiencing substantial upticks in new cases, causing some concern the global economic recovery could be slowed or derailed. Indeed, the UK, Germany and France all recently rolled back re-opening plans and enacted new measures aimed at containing the recent uptick in cases. More positively, vaccine optimism remains relatively high, with prediction markets continuing to indicate a high probability that a widely distributed vaccine will be available before September of next year.
We continue to monitor developments closely. Should you have any questions, please don’t hesitate to contact your Client Advisor.
10.31.20 Quarterly Market Perspectives 2020
Market Commentary and Outlook
It has certainly been an unprecedented year with the coronavirus pandemic having a pronounced impact on all facets of daily life, as well as the global economy and financial markets. 2020 will certainly be remembered as the year of the virus. I’d like to wish everyone good health and hope you are all safe and well during these unprecedented times.
This presentation will cover three broad themes: an update on markets, our views on the economy and our outlook moving forward.
Market sentiment improved significantly since bottoming in March, with global equities rallying through the second and third quarter, albeit experiencing some weakness in the month of September. So what drove markets higher? Well, massive and coordinated global monetary and fiscal policy stimulus helped underpin stronger than anticipated economic growth, while vaccine optimism has substantially improved. The weakness experienced in September was largely due to some sector rotation out of technology stocks in particular. On this point, we would caution on being overly concentrated in large tech and mega-cap growth stocks, and have been actively trimming concentrated positions across client accounts where appropriate.
Turning to the economy, while we acknowledge significant near-term uncertainties remain – amongst others, the recent uptick in Coronavirus cases both here and abroad, the election and the timing of a widely available vaccine – however economic data does indicate the economy is doing a lot better than previously anticipated and we believe we are in the early stages of a new economic growth phase. After many parts of the economy effectively hit a brick wall earlier in the year, we expect economic growth in the third quarter to rebound significantly and post the strongest quarterly growth rate since WWII. And this economic backdrop may bode very well for the current earnings season, which we anticipate will be particularly strong. Longer-term, the Fed has communicated it will continue to help support the economy via easy monetary policies – amongst others keeping short-term rates near zero through at least 2023.
The election may provide some near-term volatility, but the reality is an election is just one factor amongst thousands that have historically impacted markets; we believe maintaining a focus on the long-term, staying disciplined and looking through the short-term noise will serve investors well.
Given continued uncertainties, we do expect volatility to remain elevated over the near-term, however we believe longer term growth potential does exist. As such, we believe medium to long-term returns for global equities remain compelling and any short-term uptick in volatility may offer a rebalancing opportunity. We continue to favor high quality corporate bonds and agencies over Treasuries and maintain dedicated satellite fixed income allocations. Less liquid credit funds in particular may offer attractive return potential in the current environment.
Mission Wealth Actions
I think it’s useful to reflect on some of the actions we’ve taken in such an unprecedented year;
- Firstly and critically, we maintained our disciplined approach to portfolio construction and rebalancing, adding broadly to stock exposures throughout March and April.
- We took the opportunity to tax loss harvest where appropriate to enhance our clients after tax returns and have also reduced legacy concentrated stock exposures where it makes sense, with a particular focus on large and mega-cap tech and growth stocks.
- We continue to favor dedicated allocations to global equities. Despite recent strength, we believe longer-term return expectations remain relatively attractive. And we believe any near-term volatility may offer a rebalancing opportunity to add to stock exposures.
- We have favored allocations to high quality corporate bonds and Agency securities over Treasuries, and believe unique opportunities exist in certain areas of the bond market which may offer relative return upside for our bond funds.
- Ultimately, we continue to focus on long-term fundamentals and believe our portfolios are well positioned to continue to meet the financial goals of our clients.
For more details on these key themes and outlook, take a look at the Market Perspectives video below, or read the article here.
9.11.20 Market Update
Market Commentary and Outlook
We cautiously believe we are in the very early stages of a new economic expansion and longer term growth potential may exist. This outlook is somewhat tempered as we acknowledge substantial near-term uncertainties remain (amongst others: vaccine developments, political environment, COVID, social unrest, etc.). In taking a long-term view, we believe that any ongoing short-term market volatility and stock price weakness may offer rebalancing opportunities across our client accounts. Ultimately, we believe our portfolios are well constructed to navigate the forthcoming time period and to continue to meet the long-term financial goals of our clients, by generating both income and growth potential.
At Mission Wealth we believe it is impossible to time markets and trying to do so often only degrades portfolio performance. While no one can forecast relative stock market performance accurately, concerns have arisen in what has arguably become a disjointed market, led almost exclusively by technology and mega-cap growth companies and where many valuations are reminiscent of the late 1990’s. While technology companies may continue to outperform (we have a diversified exposure in all our portfolios), if history is a guide, it is reasonable to expect an eventual rotation in sector leadership moving forward. In observing recent relative sector performance in light of historic trends, we believe it is prudent to take advantage of this year’s strength and trim overweight technology and other mega-cap growth stock exposures, where appropriate. We have implemented this across many client accounts over recent weeks and months.
Technology Drives Markets Lower
After stocks posted strong returns in August, which capped five consecutive positive months for global stocks, markets have taken a breather to begin September. We’ve experienced an increase in volatility and a moderation in returns so far this month: through September 11th the S&P 500 is down -4.5%. International and emerging market stocks have fared better, with international stocks declining -0.4% and emerging market stocks down -1.3% so far in September. The weakness in U.S. stocks has largely been driven by a sell-off in technology companies, with the Info Technology sector down -8.6% over the same time period.
We have voiced concerns regarding the divergence in sector performance and stretched valuations for many technology and mega-cap growth companies in particular. Indeed, as the below chart highlights, U.S. stocks have experienced a startling divergence in sector performance this year through the end of August.
Historic Rotation in Sector Performance
It’s important to note that over longer periods of time, very seldom does one sector consistently outperform from one period to the next. Rather, the opposite has historically held true. U.S. stocks historically exhibit consistent rotation in sector performance and leadership over time. It’s also interesting to note that this year’s technology outperformance comes on the heels of a very strong five year period for technology, with the IT sector outperforming all other major sectors from 2015-2019. The impact of the coronavirus may have exacerbated that trend, as spending habits were driven online and companies were increasingly reliant on technology to maintain business viability in a socially distanced economy. With that said, this year’s divergence in sector performance is striking and we believe it is reasonable to expect an eventual rotation in sector performance moving forward.
Worrying Retail Investor Trends
We’ve also seen some worrying retail investor trends (historically often chasing winners at high prices or panic selling at lows) which we believe have propelled many technology and mega-cap growth companies to ever stretched valuations. As the following chart depicts, data from retail accounts shows a substantial increase in holdings of technology and mega-cap growth stocks over recent months. This trend coincided with an explosion in retail activity purchasing call options (taking a bullish bet) on many mega-cap technology and growth stocks.
Tech Valuations May Not Reflect Fundamentals
Concerns surrounding stretched valuations and the speed at which many technology and mega-cap growth companies appreciated in value has been widely cited as a key catalyst for recent stock price weakness. There has been a great deal of focus on recent trends that have driven many technology companies to valuations which arguably do not reflect the underlying fundamentals of those businesses. Indeed, the last time we saw so many technology companies trade at similarly heightened valuation metrics was the dot.com bubble.
Certain developments, including increased optimism surrounding a vaccine may have driven some rotation across sectors, precipitating weakness in technology stocks. The CDC reportedly notified public health officials across the U.S. to be prepared to distribute a coronavirus vaccine to healthcare workers and other high-risk groups as soon as late October or early November. While there remains a lot of uncertainty around the timing of a widely distributable vaccine, there are indications one may be widely available in the U.S. as soon as early 2021. This may have led some investors to recalibrate their outlook for certain technology companies should the advantages afforded by a social distanced economy not be as long lasting as previously anticipated. At the same time and under such a scenario, the outlook for other sectors may improve.
Uncertainties surrounding an additional fiscal stimulus package and the upcoming November election may have also dampened market sentiment and contributed to the recent uptick in volatility and stock market weakness. There is now increasing skepticism that a fifth coronavirus economic relief package will be passed before the election. We also anticipate an increase in headline volatility as we approach the November election and there are some concerns election results may not be finalized until days or weeks after election day.
With this backdrop, we are maintaining our disciplined approach and a focus on long-term fundamentals. We believe our portfolios are well positioned to navigate any ongoing stock market volatility and near-term uncertainties.
We continue to monitor developments closely. Should you have any questions, please contact your Client Advisor.
6.30.20 Market Update
Stocks posted significant gains in the second quarter of 2020, largely driven by massive monetary and fiscal stimulus and better than previously anticipated virus and economic data.
The coronavirus pandemic drove a tumultuous start to the year, culminating in the fastest bear market in history and bringing the economy to a near standstill. However, stocks rallied strongly in the second quarter, as central banks and politicians around the world took decisive action to address the economic fallout of the global pandemic.
The S&P 500 closed the last trading day of June up +1.5% to finish the second quarter +20.5%, which represents the biggest quarterly gain since the fourth quarter of 1998. International and emerging market stocks also showed strength, with international stocks returning +16.9% while emerging market stocks rallied +18.6% during the quarter. Small cap stocks particularly benefited from many of the stimulus measures enacted, returning +26.5% for the quarter.
The bond market was helped by Fed policies aimed at alleviating market dislocations, specifically via expanded asset purchase programs and implementing liquidity support for credit markets. The broad bond market returned +3.1% during the quarter. High quality municipal bonds were helped by the Fed’s expanded asset purchase program, returning +2.7%. Corporate bonds in particular benefited from the Fed’s actions, with Investment grade corporate bonds rallying +9.7% during the second quarter, while high yield bonds returned +8.4%
Massive monetary and fiscal stimulus globally helped buoy market sentiment and drove stocks higher during the course of the second quarter. The Fed has indicated a strong commitment to using all the tools at its disposal to ensure the recovery is as strong as possible, while we have been encouraged by the proactive approach policymakers in Washington have taken to speedily enact economic stimulus programs, and anticipate another package in the second half of this year.
The trajectory of the virus has largely been less severe than previously anticipated, while economic data points have generally been better than expected, with many economies reopening earlier than previously thought. Indeed, data indicates the global economy likely bottomed out in April or May, with data showing a recent pickup in hiring, increased spending, recovery in employment and a strong rebound in consumer spending. Corporate commentary has also highlighted a sequential improvement in demand. This has helped put some traction behind expectations for a V-shaped economic and earnings recovery. There has also been a good deal of optimism about the potential for coronavirus vaccines and treatments, with many trials showing encouraging initial results.
With that said, the economy is by no means out of the woods yet and significant uncertainties remain. Namely, many states are currently pausing or rolling back reopening plans on the back of recent upticks in coronavirus cases, particularly in the South and West. For instance, some states have moved to re-close bars, gyms and cinemas while others are postponing re-openings. Recent upticks in cases may also lead to renewed coronavirus anxieties, which could negatively impact consumer behavior and in turn soften the strength of the economic recovery. In addition, the forthcoming election is likely to lead to elevated levels of volatility as we approach November. Historically, the most substantial legislative reform (and resulting uncertainty) occurs under a unified Congress and White House.
We continue to monitor the situation closely and employ our disciplined approach to portfolio management and rebalancing. We believe our portfolios are well positioned for the forthcoming period and will continue to meet the long-term financial goals of our clients.
Should you have any questions, please don’t hesitate to contact your Client Advisor.
6.5.20 Market Update
Unemployment Rate Unexpectedly Falls
Markets rallied on Friday after an unequivocally positive unemployment report. After a much stronger ADP private payrolls report earlier in the week, we got another positive employment surprise Friday, with the unemployment rate unexpectedly dropping from 14.7% to 13.3% in May. Forecasts were for the unemployment rate to climb to nearly 20%, however nonfarm payrolls came in well ahead of expectations, increasing +2.5 million in May, marking the single largest monthly jobs gain ever. In contrast, consensus expectations were for a decline of -8.0 million. The report indicates the green shoots of the economic recovery are well and truly underway. Encouragingly, leisure, hospitality, construction, and retail were amongst the sectors with the largest job gains.
Strong Week for Stocks
The S&P 500 rallied following the positive employment surprise, returning +2.6% on Friday to close the week up +4.9%. International and emerging markets also showed strength over the course of the week, with international stocks rallying +7.2% and emerging market stocks +7.8%. Small cap stocks showed particular strength this week, returning +3.8% on Friday to end the week +8.1%. Real estate was also helped by the improved employment situation, with publically traded Real Estate Investment Trusts (REITs) returning +9.4% this week.
Bond Yields move higher
Bond yields moved higher this week, with the benchmark U.S. 10 Year Treasury yield closing Friday at 0.90% after trading as low as 0.65% earlier in the week. Despite the rise in yields, high quality corporate bonds showed stability and benefited from ongoing spread compression relative to Treasuries, returning +0.5% over the course of the week. High yield bonds were even stronger, returning +3.1% this week, while emerging markets debt were up +2.3%.
Economic recovery expectations were a big driver of this week's positive market sentiment. Data indicates an earlier than expected start to the recovery, with a strong rebound in leisure and hospitality sector jobs, along with favorable implications for consumption. In addition to the very positive employment reports, high-frequency data continues to highlight improvements in air travel, truck traffic, restaurant reservations, and clothing and accessories purchases. US auto sales rebounded more than expected in May and many dealerships are now running low on some of their most popular models. Global Purchasing Managers Indexes (PMIs) also appear to have troughed last month. On the other hand, there are some concerns that the fiscal stimulus tailwind could start to wane on consumer spending.
We continue to monitor developments closely.
6.3.20 Market Update
There was a big surprise today with an employment report that was far better than expected. The markets in turn continued the Global equity rally. May ADP private payrolls came in at -2.76 million, well below the consensus expectation of -9.25 million, and provided greater support for the likelihood of an economic recovery. Much lower jobless claims suggests a meaningful amount of re-hiring likely occurred in May.
The S&P 500 returned +1.4% on Wednesday, International and Emerging market stocks also rallied +2.3% and +2.2% respectfully. Small cap stocks showed particular strength, returning +2.6%, while Value stocks continued their recent outperformance, rallying +2.0%.
Yields moved slightly higher, with the benchmark U.S. 10 year yield closing at 0.74% after trading as low as 0.65% earlier in the week. With that said, high quality corporate bonds have provided stability, returning +0.4% so far this week. Satellite fixed income has performed particularly well, with high yield bonds returning +2.3% for the week, while emerging markets debt has rallied +2.4% over the same time period.
The positive market narrative continues to focus on economic reopening optimism on the back of improving high-frequency economic data and more upbeat corporate demand commentary. At the same time, treatment and vaccine developments have been encouraging. Ongoing historic levels of monetary and fiscal policy support continue to help sentiment, with the Fed today expanding its Municipal Lending Facility (MLF) on the back of bi-partisan support to help ease borrowing constraints for state and local governments.
There has also been a recent drop in the number of arrests and violence related to the ongoing social unrest and protests across the nation. That said, concerns remain over the economic damage caused by the social unrest and the potential for an increase in coronavirus infections.
Concerns also surround increased U.S.-China tensions, with both countries recently increasing criticism leveled at one another. Congress also appears divided on the extent of additional support for the next coronavirus relief package, which may hinder its process.
We continue to monitor developments closely and maintain a focus on meeting the long-term financial goals of our clients.
5.26.20 Market Update
On the heels of last week’s rally of +3.2% in U.S. stocks, the benchmark S&P 500 added another +1.2% Tuesday in the first session of a holiday shortened week. Other areas of the global equity markets were even stronger: international stocks rallied +3.0%, international small company stocks were up +3.5%, and emerging markets stocks returned +2.3%. Interestingly, today’s rally in U.S. stocks was fueled by sharp gains in value stocks such as financials, industrials, and energy names, with the Russell 1000 Value index returning +2.5%. Conversely, large cap growth and momentum stocks – which have been leading the market higher over recent years (healthcare/technology) – produced smaller returns, with the Russell 1000 growth index up only +0.3% on the day. Whether this marks the beginning of a reversion in Growth vs. Value performance remains to be seen.
Tuesday’s push higher was attributed to ongoing optimism surrounding economic reopening along with expectations for further monetary and fiscal policy stimulus. It is increasingly likely Congress will pass a fifth coronavirus relief bill. The White House is examining the idea of back to work bonuses, as well as a tax credit for keeping workers on business payrolls longer. The bond market offered a level of confirmation, with yields rising for 2 Year, 10 Year, and 30 Year Treasuries, albeit still at quite low levels by historic measures.
Adding to the enthusiasm was the reopening of the New York Stock Exchange today for floor brokers and other critical personnel. The S&P 500 reached its highest level since March 5th, surpassing the psychologically important 3,000 level before settling to close just shy at 2,992. The late day softening in risk asset prices occurred as U.S./China trade tensions escalated, with the U.S. threatening to impose additional sanctions if Beijing exerts greater control over Hong Kong.
JP Morgan CEO Jaime Dimon helped underpin market confidence with comments indicating that banks may not need to set aside additional loss reserves in the second half of 2020. California announced that places of worship may reopen, and that in-store retail shopping may resume. Speaking of retail, Apple announcing plans to reopen 100 more stores in the U.S. this week with a focus on curbside service. Data continues to indicate that the worst of the shutdown-led economic contraction may be behind us, with signs economic growth is picking up, albeit from still depressed levels.
In coronavirus related news, Novavax made headlines Tuesday, indicating it had started the first human study of its vaccine and results are likely to be available as early as July. Pharmaceutical giant Merck also joined the mission to fight the coronavirus, with the acquisition of a company developing a vaccine along with separate collaboration agreements, though it did caution on timing for the development of a vaccine.
5.18.20 Market Update
Many investors may ask how the stock market can rise in the face of all these economic headwinds? How do you reconcile record unemployment numbers and strong market performance? The rationale is relatively straightforward: market prices are forward-looking while economic data is backward-looking. The market prices itself on future expectations for growth, incorporating available information and the aggregate expectations of market participants – including the impact that coronavirus developments might have on future growth.
We believe the market had already priced in expectations for poor unemployment numbers well before they were released. Since then, the policy response to the crisis and other developments have largely been more positive than previously anticipated, which has buoyed growth expectations. While near-term economic noise may underpin ongoing volatility, market pricing may be based more on expectations for the growth potential in the latter half of the year and 2021 and beyond.
Global equity markets were soundly positive Monday, with the S&P 500 returning +3.2%, international stocks rallied +4.0%, and emerging markets were up +3.8%. Small cap stocks showed particular strength, returning +5.5%. High quality corporate bonds continued to stabilize, with investment grade corporate bonds returning +0.6%, while high yield bonds and emerging markets debt were even stronger, both returning +1.7%. Elsewhere, oil finished Monday up +7.2% as an improved global demand backdrop continued to support prices.
Sentiment was helped by reported progress on vaccine trials and optimism surrounding economic growth amid re-opening efforts. Moderna released positive data on its early stage coronavirus vaccine trial, with COVID-19 antibodies reportedly produced in all 45 participants. The company has been fast-tracking work with the National Institute of Health to develop a vaccine and expects to begin a phase 3 trial in July. Moderna Chief Medical Officer said if trials go well, the vaccine could be available for widespread use by the end of 2020 or early 2021. At the same time, AsytraZeneca said it will make as many as 30 million doses of its coronavirus vaccine available to the UK by September and has committed to delivering 100 million doses by the end of the year. While still in trials, the inoculation is already being studied in humans and could reach late-stage trials by the middle of the year.
Real time economic indicators suggest we may be past the economic trough and a tentative recovery may be underway. Real time data tracking retail sales, manufacturing and real estate have all improved in recent weeks.
Credit and debit card spending began improving from mid-April, while TSA data indicate a recent pick-up in airline passengers and rides on Uber have risen for three straight weeks. Fed Chair Powell also added to positive sentiment, indicating the Fed stands steadfastly behind the U.S. economy and by no means has it exhausted its options, while also reiterating the Fed’s resistance to negative rates.
On the other hand, trade tensions remain elevated between the U.S. and China, while there is skepticism surrounding Congress’ ability to come to an agreement regarding any additional economic stimulus package. Economic data in the U.S. and abroad is also likely to continue to underpin elevated volatility over the near-term, as the full economic impact of the virus is revealed.
These are certainly unprecedented times. We have seen over 30 million people file for unemployment and the unemployment rate sits at 14.7% with consensus expectations for it to move higher. The economy contracted by -4.8% in the first quarter, the largest drop since the Global Financial Crisis. Recently, U.S. oil prices briefly fell to $-37.62 a barrel, something that has never happened. Yet, amidst this backdrop, in April the stock market had its best month since 1987.
We continue to monitor developments closely and as always are focused on meeting the long-term financial goals of our clients.
5.8.20 Market Update
Markets rallied over the course of the week, extending gains since bottoming out in March. The S&P 500 was up +3.5%, while small cap stocks continued recent strength, returning +5.5% over the course of the week. International stocks were up +2.9%, while emerging markets returned +4.4% during the week. Credit also performed well this week, with high yield bonds up +1.5% and emerging market debt returning +2.1%.
Amongst the catalysts cited for the move higher include ongoing massive global monetary and fiscal support, an apparent easing in US-China tensions, indications that global economic activity may be bottoming out, and an increased focus on reopening the US economy. Select corporate commentary about stabilization and improvements in April and May, and improved credit market functioning also seemed to help sentiment. On the other hand, concerns remain over the extent of economic impact the virus is causing, with today’s unemployment rate hitting a post-war high of 14.7%, albeit slightly better than consensus expectations. A massive spike in the unemployment rate was widely expected, though indications suggest many job losses were temporary and we anticipate businesses may re-hire at historically high rates once the economy re-opens. With that being said, ongoing economic data and virus developments may underpin market volatility for some time yet.
We believe our portfolios are well positioned and we continue to focus on meeting the long-term financial goals of our clients.
5.4.20 Quarterly Market Perspectives 2020
As we reflect on the year so far and look towards the future our thoughts go out to everyone affected by the coronavirus pandemic. We hope you stay safe and healthy during these unprecedented times.
From a portfolio management and rebalancing standpoint, we continue to follow the same disciplined approach that allowed us to successfully navigate past periods of market dislocation, such as 9/11 and the Great Financial Crisis of 2008/09. As with all crises, this one will eventually pass. We believe we will come out of the near-term recessionary period and transition into a new growth phase for the economy and with it, opportunities may exist across asset classes.
The presentation covers a number of aspects and economic implications related to the coronavirus.
Coronavirus concerns came to the fore in late February and escalated quickly, causing the fastest bear market in history, with stocks hitting a low in March. The trajectory of the virus globally has generally improved recently. As such, policy attention has broadly shifted from containment of the virus to re-opening economies. An economic re-opening is likely to be gradual, with various forms of social distancing employed for some time.
We have been encouraged by the proactive approach policy makers have taken to address the economic impacts of the virus. The Fed has implemented aggressive monetary policy action, while Congress has largely set aside bi-partisanship to pass historic levels of fiscal policy support, which is likely to help alleviate some of the near-term economic impacts. We expect the virus and related social distancing policies have caused a very sharp, but transitory recession for the economy. We believe we may be close to the bottom of the economic contraction, and economic growth is likely to re-accelerate in the latter half of the year and into 2021 as the economy begins to re-open.
We have actively rebalanced across client accounts throughout the market dislocation, maintaining our discipline with a focus on long-term fundamentals, adding broadly to equity exposures as the market sold off. At a high level we favor stocks over bonds. Stock valuations appear relatively attractive for international and emerging markets, and we are maintaining a globally diversified allocation. Within core fixed income, we prefer high quality corporate bonds over Treasuries, and are maintaining dedicated allocations to satellite fixed income, which trades at attractive valuations. We do anticipate ongoing elevated volatility as developments regarding the virus continue to unfold. We are well prepared and will continue to employ our disciplined approach to portfolio construction and rebalancing over the forthcoming period.
4.29.20 Market Update
As was widely expected, The Federal Reserve Open Market Committee left the fed funds target rate unchanged at the zero bound of 0.00% to 0.25% on Wednesday. The Fed noted a “sharp” decline in economic activity and a “surge” in job losses with the coronavirus continuing to pose a “considerable risk” to the medium term economic outlook. Accordingly, the Fed said it will continue to buy bonds, including Treasuries, residential and commercial mortgage backed securities, in “amounts needed to support smooth market functioning” and reiterated that it will maintain rates at the current level until the economy is on track to achieve the Fed's maximum employment and price stability goals. We note this was nearly identical language to the Fed’s March 23rd statement and a continuation of the highly accommodative stance and policy that places little to no bound on how far the Fed will go to stimulate the economy.
In his press conference, Fed Chair Powell indicated that the Fed’s emergency credit facilities are “wide open” and stressed that the economy could use ongoing fiscal support if the recovery is to be a robust one. He added that now is not the time to let deficit concerns get in the way of winning the economic battle. He indicated that the Fed’s support is based on “lending, not spending”. In our opinion, Chairman Powell correctly identifies that the US consumer will ultimately define the speed and shape of this economic recovery. The Q1 GDP print of -4.8% was driven by a decline in consumer spending; consumer spending is also likely to drive the recovery once the economy begins to re-open. Spending is dependent upon the US consumer and keys to increase it include the trajectory of the virus, whether therapies are discovered quickly, the rapidness that job losses are eventually recovered, and how quickly consumer behavior returns to pre-virus levels.
Speaking of therapies, the FDA is in ongoing talks with Gilead to make Remdesivir available to coronavirus patients as soon as possible as a therapeutic. Gilead released positive results from clinical trials for the drug, which showed it improved time to recovery. Anthony Fauci indicated the results were good news and clinical trials show the drug can block the virus. He added the drug will be “the standard of care.”
Equity markets showed particular strength, rallying throughout Wednesday with the S&P 500 returning +2.6%, while small cap stocks gained even more, with the Russell 2000 returning +4.8%. International stocks were up +2.7%, and emerging markets stocks also posting a solid gain of +2.7%. Fixed income also performed well Wednesday, with the strongest gains being observed in corporate bonds, with investment grade corporate bonds returning +0.7% and high yield bonds up +1.6%. Emerging markets debt also performed strongly Wednesday, returning +1.8%. Ongoing assurance from an accommodative Fed was a contributing factor to Wednesday’s rally, as was continued optimism about coronavirus therapies.
4.24.20 Market Update
Oil dominated headlines earlier in the week, with the May WTI contract closing at -$37.63 per barrel on Monday, the first time in history it ended the session in negative territory. Oil has been impacted by an evaporation in demand due to the coronavirus, while supply has continued to expand via the OPEC/Russia response. More recently, a lack of storage capacity caused severe pricing disruptions. Storage at Cushing, OK, the US’s largest storage hub and the delivery point for the WTI contract, is expected to be completely full by the first week of May. Royal Vopak, the world's biggest oil storage company, said space for traders to store crude and refined fuels has all but run out. With that said, evidence indicates we may be at the bottom of the oil demand contraction, which could help alleviate some of the storage capacity concerns.
We have avoided direct investments in commodities and oil, and have minimal oil exposure within our portfolios. Lower oil prices may be a net positive for economic growth moving forward. Once the economy begins to re-open, we expect lower prices may act as a simulative measure. They effectively create “a tax cut” for consumers. Putting more money in the pockets of consumers may help propel higher growth once the economy re-opens.
Elsewhere, we are seeing some unique opportunities within bond markets where price discovery has yet to fully take effect. Many bonds have yet to trade off the fire sale prices that were driven by indiscriminant selling during the market sell-off. As such, we believe select bonds are trading well below fair value. This dislocation may provide unique upside opportunities across the bond spectrum and for actively managed bond funds. We are working on special report to come out shortly.
Markets finished the week strongly. Oil dominated headlines while the passing of the $484 billion interim coronavirus relief package helped sentiment towards the end of the week. The S&P 500 returned +1.4% on Friday to close the week down -1.3%. Small cap stocks performed particularly well, returning +1.6% Friday and +0.3% over the course of the week.
The $484 billion interim coronavirus package was signed into law on Friday, adding to the historic levels of fiscal and monetary support to help offset the negative economic impacts of the coronavirus. The centerpiece of the package provides expanded funding to the small business Paycheck Protection Program (PPP) and is expected to cover the vast majority of qualifying expenses. The package also increased support for hospitals and COVID-19 testing. Further fiscal stimulus may be likely, with Washington already focusing its attention towards another large spending bill, though the politics are expected to be more difficult for any additional package.
We continue to monitor market developments closely and remain focused on achieving the long-term financial goals of our clients.
4.22.20 Market Update
The Senate passed an additional coronavirus relief package totaling $484 billion, which is expected to be passed by the House on Thursday. The package increases support for small businesses as well as increasing funding for hospitals and testing. The S&P 500 returned +2.3%, international stocks were up +1.9%, while emerging market stocks returned 2.7%. Credit also performed strongly, with high yield bonds returning 1.0% on Wednesday.
The $484 billion coronavirus relief package represents 2.3% of GDP and provides expanded funding for the small business Paycheck Protection Program (PPP) of $310 billion, increased funding for hospitals of $75 billion and $25 billion for expanded testing. After borrowers exhausted the PPP last week, the bill increases the total size of the program to $659 billion. This expansion is expected to cover the vast majority of qualifying expenses for all PPP-eligible firms. Additionally, hospitals and healthcare providers are eligible for $75 billion in additional reimbursement for virus-related expenses, while the bill also provides $25 billion in funding for research and development, manufacture, purchasing and administration of COVID-19 testing.
We continue to be encouraged by the proactive response policy makers have demonstrated in addressing the impact of the coronavirus. Indeed, global discretionary fiscal easing now stands at just under 5% of world GDP, with US policy amongst the most aggressive:
Oil has been in the news and was cited as a key contributor to market weakness earlier in the week. Supply-demand mismatches and a shortage of storage capacity had an outsized negative impact on the price of near-term futures contracts. Oil was up 19.1% today, though still down over -44% so far this week. Concerns remain about the impact the virus has had on oil demand and limited global storage capacity. The largest US crude oil storage facility in Cushing, OK may be completely full by early May, though some evidence suggests we could be near the bottom of the global demand decline for oil, which may alleviate storage capacity pressures.
Coronavirus headlines continue to focus on reopening plans, though there are some concerns about moving too quickly. In Europe, Germany and Austria have allowed some shops to reopen. In the US, a phased re-opening plan was announced by the White House, though decisions will ultimately be made by state and local officials. Some states have already moved to re-open businesses, while other states have extended stay at home orders. In New York, Governor Cuomo indicated any reopening of the economy is likely to vary by region, as some areas have been harder hit than others.
We continue to monitor developments closely and are maintaining discipline with respect to rebalancing and portfolio construction.
4.17.20 Market Update
A shift in policy focus towards reopening the economy and positive developments regarding coronavirus treatments helped propel stocks to another positive week, despite the release of weak economic data.
A lot of uncertainty remains around the future trajectory of the virus, but data appears to be improving and better than previously anticipated. As such, policy focus has begun to turn from containment to re-opening economies. We believe the US economy is likely to gradually re-open as we approach summer, and as such, we may be approaching an inflection point in economic growth and anticipate a relatively quick rebound in the latter half of the year and into 2021. Markets have historically traded positively ahead of the bottom of the economy, so in our opinion the likelihood that we retest lows has been reduced. Nonetheless, we anticipate ongoing volatility as developments continue to evolve.
Markets rallied Friday, with the S&P 500 returning +2.7% to end the week +3.0%. International and emerging market stocks were also positive for a second consecutive week, with international stocks returning +0.6% and emerging market stocks +2.5%. Bond markets continued to stabilize, with the broad bond market marginally positive and municipal bonds returning +0.3% over the course of the week.
A large focus towards the end of the week was on the White House’s unveiling of phased economic reopening guidelines, which opens a pathway for restaurants, gyms, movie theaters and large sporting venues to re-open, though ultimately these decisions will be at the discretion of state governors and dependent on meeting benchmarks regarding coronavirus cases and testing capabilities. Sentiment was also helped by a report that a trial of Gilead’s Remdesivir for treating the coronavirus was showing promising results, with patients experiencing rapid recoveries in fever and respiratory symptoms and nearly all discharged within a week.
On the other hand, this week’s economic data continued to highlight the significant impact the virus is having on the economy, with weak retail, manufacturing and employment numbers. Jobless claims have totaled nearly 17 million in the past three weeks and we expect jobless claims to stay elevated over the near-term. Simply put, it is a historic surge in unemployment and we anticipate the unemployment rate to spike dramatically. With that being said, we do expect the labor market to recover faster than typically witnessed following a recession.
The size and scope of both monetary policy (the Fed) and fiscal policy (Treasury) has exceeded many expectations and governments around the world have implemented similar policies. In our opinion, these policies will help alleviate the short-term impacts on businesses and employees, and allow the economy to recover as lockdowns begin to ease and we get back towards normality. For perspective, the 2008 the relief package was less than $800 billion and thought enormous at the time. The most recent fiscal emergency relief package was $2.3 trillion.
We anticipate a very short, sharp hit to economic growth before recovering in the latter half of the year. We believe the economy is likely to reach an inflection point within weeks, before beginning to recover as the economy starts to re-open. Recent evidence is encouraging: most layoffs appear to be temporary and there has not been a major uptick in bankruptcies so far. Historically, the stock market has acted as a leading indicator for the economy; in all instances going back to the 1930s stocks have been positive in the months ahead of the end of the recession, indicating we are unlikely to retest the market lows.
Despite the recent rebound, we anticipate ongoing volatility over the near-term as market sentiment continues to swing from positive to negative on a daily basis. On the one hand, massive fiscal and monetary policy support, along with improvements in virus data are helping buoy market sentiment; on the other hand, we expect very bad economic data to continue to be released over the forthcoming weeks, as well as negative company earnings reports, which may cause short-term pessimism. Sentiment is likely to swing between positive and negative for some time yet.
We continue to monitor developments very closely and are maintaining our discipline in the face of ongoing market dislocations.
4.9.20 Market Update
Ongoing policy support and positive signs regarding the trajectory of the coronavirus globally helped propel markets higher this week. The Fed announced an additional $2.3 trillion support package Thursday, while there were signs the coronavirus outbreak is peaking and beginning to level off in a number of countries globally. Indeed, many countries are now actively discussing relaxing lockdowns and re-opening their economies.
We have actively rebalanced across client accounts throughout the market dislocation, maintaining our discipline with a focus on long-term fundamentals, adding broadly to equity exposures as the market sold off. We have also taken the opportunity to tax loss harvest where appropriate to enhance after tax client returns. Despite the recent rebound we remain vigilant and expect ongoing levels of elevated volatility for some time, as developments continue to evolve. We are well prepared and will continue to employ our disciplined approach over the forthcoming period.
Stocks continued this week’s positive run on Thursday, with the S&P 500 returning +1.5% to end the holiday shortened week up +12.1%. The Fed helped market sentiment by announcing it will provide up to $2.3 trillion in additional support, including a Main Street lending facility offering four year loans to small and medium sized businesses (businesses with up to 10,000 employees or less than $2.5 billion in revenues) with principal and interest deferred for 12 months. The Fed will also bolster the Paycheck Protection Program, create a municipal liquidity facility and is expanding corporate credit facilities. Additionally, Congress is expected to expand the small business lending program to meet outsized demand.
After Thursday’s bounce, the S&P is now -17.6% from its all-time high on February 19th and has rallied +24.7% from its low experienced March 23rd. Small capitalization stocks showed significant strength, rallying +18.5% over the course of the week, as recent policy developments are particularly favorable for small to medium sized businesses. High yield bonds also benefited from the Fed’s announcement, returning +6.7% on Thursday. Core fixed income more broadly continues to benefit from policies aimed at stabilizing bond markets: investment grade corporate bonds returned +8.9% during the week, while the broad bond market was up +2.0% and municipal bonds returned +2.9% during the week.
This week’s jobless claims came in at 6.6 million, above consensus expectations though down from the prior week’s historic level. Nonetheless, the U.S. economy has now lost 17 million jobs in the space of four weeks, by far the most dramatic ever experienced and a stark reminder of the impact the coronavirus has had on the economy. We do anticipate a sharp uptick in the unemployment rate near-term, though we believe once the economy turns and begins to re-open that businesses may re-hire relatively quickly. For example, a restaurant that has temporarily shut its doors and laid off all (or the majority) of its workforce. The day it re-opens, it will immediately need kitchen staff, servers, managers etc. As a result, we may experience historically high levels of hiring in the months following re-opening of the economy.
We continue to monitor developments and focus on achieving our client’s long-term financial goals.
4.8.20 Market Update
Positive developments regarding the likely trajectory of the coronavirus in the U.S. and abroad helped buoy investor sentiment this week, with equity markets rallying strongly.
The stock market added to its gains on Wednesday, with the S&P 500 returning +3.4% and is now up +10.5% this week alone. The S&P 500 is now down -18.8% from its all-time high on Feb 19th, having rallied +22.9% from the recent low on March 23rd. Small capitalization stocks did particularly well Wednesday, returning +4.9%, while real estate also showed strength, rallying +6.8% as the perceived risks to the sector appear to have lessened. The bond market continued to show stabilization, with core bonds up +0.3% and municipal bonds +0.4%, indicating the Fed’s actions to reduce market dislocations have been effective. Specifically, investment grade corporate bonds returned +1.8%, while non-investment grade bonds were up +2.3%.
More positive signs regarding the likely trajectory of the coronavirus have helped drive an uptick in market sentiment. In Europe, data indicates daily infection rates are slowing, particularly for Italy and Spain. Indeed, Governments across Europe are now beginning preparations to ease lockdowns. For example, Germany is targeting April 19th to relax its lockdown and begin to re-open the economy. Many developed Asian economies have been effective in containing the virus. In the US, most large states appear to be on a lower infection trajectory than New York and New Jersey (see chart below). Moreover, data from New York indicates infections may have peaked and Governor Cuomo is now actively discussing plans on how to unwind restrictions and re-start the economy.
Adding to investor sentiment is the potential for a “phase four” fiscal emergency relief bill, which continues to gain traction with Congress. Expectations are for another package of as much as $1 trillion or more, and would likely include expansions to the small business support program, additional checks to individuals, extended unemployment benefits, and additional support to states. Infrastructure spending also appears to have a lot of support in Washington.
Despite the recent market strength and uptick in optimism, we do anticipate ongoing levels of elevated volatility over the coming weeks. Simply put, bear markets tend to take some time to resolve themselves, and we don’t anticipate this situation to be any different. Though, we do note the current recession is likely to be shorter than past recessionary periods. We expect a significant deterioration in economic data over the forthcoming period, as the full extent of the economic impact becomes clearer. Again, our base case is for a short, sharp hit to the economy, before rebounding in the latter half of the year. While virus data appears to be improving, there nonetheless remains a lot of uncertainty regarding its future trajectory. Also, data from some emerging market countries, such as Russia and Brazil, indicate the virus is still accelerating.
We have continued to follow our disciplined approach to portfolio construction and rebalancing throughout this period of market dislocation. We have been active in adding to equity positions across client accounts throughout the downturn, and have also taken advantage of market pricing to tax loss harvest where appropriate. As always, we maintain our focus on achieving the long-term financial goals for our clients.
4.3.20 The Payroll Protection Act
The U.S. Small Business Administration (SBA) opened up their Payroll Protection Program (PPP) today. We found that the SBA website, The U.S. Chamber Small Business Guide and Checklist, and the U.S. Treasury PPP Information Sheet for Borrowers offer substantial loan resources for you. The following updated commentary from Larry Brown, CPA is also helpful.
If you need assistance, we recommend to be in contact with your local SBA authorized bank. Please contact your advisor if you have any additional questions.
Additional Information Regarding the Payroll Protection Program (PPP) - By Larry Brown, CPA
I’d like to share some information we learned over the last couple of days from a variety of clients and directly from bankers and senior bankers. I know that the process has seemed very disorganized, but the SBA has undertaken a herculean task in a very short time. The bankers are doing the best they can, but there is a lot of information to process and get organized to offer these loans in a very tight timeline. There is and will continue to be confusion, but they are working very hard to get these programs available for you. You may likely find that staff isn’t adequately trained. Please recognize that the people at the banks are doing the best they can under very stressful circumstances. They are still getting details on how to administer the plan less than 24 hours before they are scheduled to start offering these loans to the public.
Unfortunately, the news is reporting there will be significantly more demand for these loans than funds allocated. Based on discussions with clients, we believe this is true. According to the senior bankers, the SBA believes they will be undersubscribed. We ultimately do not know which will be true but believe the prudent course is to submit the applications as soon as possible to give yourselves the greatest likelihood of success in securing the funds.
Based on information released this morning, it will be left to the banks to define eligible payroll costs. We have heard from some banks that they will be looking solely at payroll reports, but the definition in the law is more broad. We are also finding that some banks are assuming that the $100,000 cap per employee is based on all eligible expenses for that employee, but again, we read the law as the compensation is limited to $100,000 and the eligible benefits can be added.
You can also read the law as the amount for eligible payroll expenses includes payments to independent contractors. As a result, we are recommending clients assemble the information in a manner that will allow them to quickly calculate the payroll figure based on their specific banks instructions. We want you to proactively be ready to submit your application when the floodgates open. Our hope is that between now and when your bank starts accepting applications, they will have provided you with clarity on how they will be calculating payroll.
Some additional information:
Submit one application for each separate EIN and get one loan for each of your entities that qualify. The bankers believe this is correct, and believe that your separate applications will be aggregated only to make sure the total loaned to the group does not exceed $10 million.
You get to count up to $100,000 per employee. You do not get zero because an employee made more than that. Note the clerks are likely to get confused by benefits especially where the employee and employer share the medical insurance cost, and where there is a 401(k) with employee and employer portions.
We are still not clear as to what 12 month period to measure. We believe you should use calendar year 2019 because those numbers will be easily be supported by W-2s, W-3’s and calendar payroll reports. If your payroll is much larger by including a month or two or the first quarter of 2020 compared to 2019, you might get a bigger loan, but might have a harder time with if the clerk does not understand your numbers.
Small businesses and sole proprietors can apply today - Friday, April 3rd. Independent contractors (who are sole proprietors) and the self-employed (generally sole proprietors, working partners or LLC members and farmers) are supposed to wait until April 10. This guidance is contradictory on its face. We believe the government is prioritizing S and C corporations who generally employ more people and where “payroll is easier” to prove and understand. A partnership with big payroll can apply April 3rd without counting its partner self-employment income and leave money on the table, with partner self-employment income and risk getting put on the bottom of the pile, or wait until April 10 and risk being too late.
Steve Mnuchin indicated that if the funds run out, he will go back to congress to request more funds where this program has broad based bipartisan support.
Employers may not claim both the Employee Retention Credit and receive a Payroll Protection Loan.
Your best bet for obtaining this loan is through your existing bank. Many bankers are taking the stance right now that they are only offering these loans to.
If you have any questions, please reach out to me at 805-708-3812. I will do my best to help, but any guidance issued by your bank is what should be relied upon in the event it contradicts information I have provided.
3.31.20 Market Update
As we reflect on the first quarter of 2020 and look towards the future our thoughts go out to everyone affected by the ongoing coronavirus crisis. We hope you stay safe and healthy during these uncertain times. From a portfolio management and rebalancing standpoint, we continue to follow the same disciplined approach that allowed us to successfully navigate past periods of market dislocation, such as 9/11 and the Great Financial Crisis of 2008/09. As with all crises, this one will eventually pass. We believe we will come out of the near-term recessionary period and transition into a new growth phase for the economy and with it, opportunities may exist across asset classes. Indeed, if history is a guide, the current time period may be a favorable entry point for stocks, with medium to long-term return expectations soundly positive. With that said, we do anticipate ongoing elevated volatility as developments regarding the virus continue to unfold.
2020 is likely to be remembered as the year of the virus. Coronavirus concerns came to the fore in late February and escalated quickly, dominating investor sentiment through the month of March. Leading into the crisis the economy appeared to be robust, with many economic metrics pointing to an uptick in economic growth. Indeed, the S&P 500 hit an all-time high on February 19. However, as fears grew regarding the impact of the virus, markets sold off precipitously. The S&P 500 experienced the fastest bear market on record, and ultimately ended the quarter down -20.0%. That said, the S&P 500 did finish the quarter +15.5% above its intra-quarter low following the passage of a historic fiscal emergency relief package and aggressive monetary policy action. International and emerging markets were also down, with international stocks falling -22.3% and emerging markets down -24.8% during the quarter. Conversely, core bonds were positive for the quarter, with core fixed income returning +3.2%, helping mitigate the stock market sell-off and providing much needed diversification benefits.
We expect the virus and related social distancing policies will cause a sharp but transitory recession for the economy. We do not anticipate a drawn out recession. For one, the economy was relatively healthy ahead of the crisis, with a lack of economic excesses, which may help mitigate systemic issues. Nor do we underestimate the ingenuity of humans to adapt and find solutions. A vaccine is likely to be available in the next 12 months and a treatment may become available sooner. Indeed, there have been many positive early indications for both vaccines and treatments, with many ahead of schedule. Additionally, we have been encouraged by the degree of coordination and the proactive approach policy makers have shown to address the situation. The Federal Reserve (Fed) has implemented aggressive monetary policy action, amongst others cutting interest rates to the zero bound (fed funds target of between 0% - 0.25%), implementing an expanded and unlimited asset purchase program, and providing support to short-term corporate debt via a $700 billion commercial paper funding facility. Moreover, Congress largely set aside bi-partisanship to expeditiously pass a $2.2 trillion emergency relief bill, the largest economic relief package in U.S. history. For perspective, the fiscal rescue package at the height of the Great Financial Crisis of 2008/09 totaled $800 billion. Similar monetary and fiscal policy actions have been taken around the globe.
We anticipate the economy will enter a new period of economic growth beginning in the latter half of 2020 and into 2021. The unemployment rate is likely to spike near-term, particularly within industry sectors most impacted by the virus. This was evident in last week’s historically high initial jobless claims data. However, key components of the fiscal stimulus package include expanded unemployment support for those workers already laid off and small business loans that will be completely forgiven if those companies maintain payroll. These programs may soften the near-term economic impact and help mitigate further increases in the unemployment rate. Once economic growth resumes and businesses re-open, we anticipate businesses will re-hire relatively quickly through the second half of the year and into 2021.
We continue to remain disciplined with respect to portfolio construction and rebalancing and focused on long-term fundamentals. We are monitoring the situation closely and are squarely focused on continuing to meet the long-term financial goals of our clients.
3.30.20 The CARES Act and How it Might Affect You
By Greg Smith, CFP®, CLU®, ChFC®, CRPS®
On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, HR 748. While the focus of the legislation is not tax, a large number of tax provisions are included in the over-600 page bill.
Required Minimum Distributions for 2020
This requirement has been waived for 2020. This is a real benefit for those IRA owners whose 2020 RMD was based on a much larger account balance as of December 31, 2019. Taxpayers can now sit this out for a year and avoid selling investment holdings that have declined in value and avoid paying a large tax bill. This applies to Traditional IRAs, Inherited Roth IRAs, and company retirement plans. NOTE: this also applies to 2019 RMDs that may have been postponed to April 1, 2020 as the required beginning date; any 2019 amount remaining and not withdrawn by January 1, 2020 is waived.
Sec 72(t) 10% Early Withdrawal Penalty
This penalty has been waived for distributions up to $100,000 taken in 2020 from IRAs and company retirement plans. Eligible distributions can be taken up to December 31, 2020. The taxes would still need to be paid, but can be spread out evenly over three years. The funds could be repaid during those three years. You qualify if any of the following criteria are met: (1) you, a spouse, or dependent tested positive for SARS CoV-2 or COVID-19, or (2) you, a spouse, or a dependent suffered adverse financial consequences from being quarantined, furloughed, or laid off or had their work hours reduced or unable to attend work due to lack of child care. Employers could allow plan participants to self-certify that they are qualified to withdraw funds from an employer-sponsored plan.
Minimum Contributions for Retirement Plans
The bill delays 2020 minimum required contributions for single-employer plans until 2021.
Company Retirement Plan Loans
The plan loan limit has been increased from $50,000 to $100,000 (limited to the actual account balance, if less). This rule applies to loans taken out within 180 days of the CARES Act enactment. Any loan payments due between date of enactment and December 31, 2020 could be suspended for one year. Written evidence showing that a participant has been affected by the pandemic would need to be submitted to the plan administrator.
Student Loan Payments
The government has already waived two months of student loan payments and interest for federal student loan borrowers. In addition, until September 30, there will be automatic payment suspensions for any student loan held by the Federal government. The bill says that interest “shall not accrue” on the loan during the suspension period.
Tax Filing Deadline Extended
The tax filing deadline for 2019 returns has been extended from April 15 to July 15, 2020. Confirmed by the IRS, this extension also postpones the deadline for making 2019 prior-year Traditional IRA and Roth contributions to July 15, 2020. State filing and payment deadlines vary by state and do not always follow the federal filing deadline; California will be following the Federal filing date of July 15, 2020.
The bill provides for payments to taxpayers, called “recovery rebates”, which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers), plus $500 for each qualifying dependent child. The credit is phased out for adjusted incomes over $150,000 (joint filers), $112,500 (heads of household), and $75,000 (single filers). Taxpayers will reduce the amount of their credit available on their 2020 returns by the amount of the refund received in advance.
The bill creates an above-the-line charitable deduction for 2020 (not to exceed $300). The bill also modifies the AGI (Adjusted Gross Income) limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Please contact your advisor to determine whether any of these provisions apply to you, and how they may additionally provide a tax benefit for 2020.
1. Ed Slott IRA Newsletter, April 2020 edition.
2. Journal of Accountancy, 3/27/20. Alistair M. Nevius, J.D.
3.26.20 Market Update
We continue to be encouraged by the committed approach policy makers are taking to help mitigate the economic effects of the coronavirus. Global equity markets were soundly positive for a third consecutive day Thursday after the Senate passed a landmark emergency relief bill totaling $2.2 trillion. The package now heads to the House, where it is expected to pass by the end of the week.
Global markets rallied on Thursday, as the fiscal stimulus package overshadowed an initial jobless claims number that was higher than consensus expectations. The S&P 500 returning +6.2%, international stocks were up +4.5%, and emerging market stocks increased +4.4%. Bond markets continued to show resilience, signaling that the Fed’s steps to help alleviate market dislocations are working. In particular, investment grade corporate bonds were up +1.5%, while municipal bonds returned +3.4% on Thursday.
Market sentiment was clearly helped by the Senate passing the largest economic relief package in American history. The package has grown in size and now stands at approx. $2.2 trillion, representing 10% of GDP. For perspective, the fiscal rescue package at the height of the 2008/09 Great Financial Crisis (GFC) totaled $800 billion. Back then, criticism was leveled at policy makers for the slow response taken to enact much needed economic relief. As a result, policy makers today know the importance of a coordinated, proactive response to crises. While the current emergency package can’t come soon enough, it is nonetheless heartening to see that policy makers have largely set aside bi-partisanship and have shown a commitment to expeditiously pass the bill into law.
The impact of the coronavirus on the economy was clear in Thursday’s initial jobless claims data, which came in at 3.28 million, substantially higher than consensus expectations and at the top end of the expected range. We estimate the unemployment rate is likely to spike short-term, with much of the job losses concentrated in industries most impacted by the virus. Importantly, amongst the key components of the fiscal stimulus package are expanded unemployment support for those who have already lost their jobs, and small business loans that will be forgiven for companies that continue to make payroll. We believe these programs will help alleviate much of the economic pain near-term, and the small business program may help mitigate further increases in the unemployment rate.
Governments globally are enacting similar programs. Japan announced it is working on a $500 billion stimulus package, while Germany earlier approved an $800 billion spending program.
We continue to monitor developments closely.
3.25.20 Market Update
Ongoing developments regarding the emergency fiscal stimulus package, now estimated to exceed $2 trillion, continued to dominate headlines Wednesday. Despite ongoing negotiations, Congress is expected to pass the legislation expeditiously, and it would represent the largest emergency relief package in American history.
Following a record setting positive stock market session on Tuesday, the S&P 500 extended its gains, returning +1.2% on Wednesday, albeit closing off its intra-day highs. This is the first consecutive day of gains for global equities since early February, and while we believe ongoing volatility is likely, it may represent a positive sign for investor sentiment. International and emerging market stocks were particularly strong Wednesday, with international stocks increasing +3.6% and emerging markets up +3.5%. Bond markets continued to show improvements as Fed policies appear to be working in alleviating market dislocations. In particular, municipal bonds were soundly positive Wednesday, returning +4.4%, while investment grade corporate bonds continued to rebound, increasing +4.8% on the day. Ongoing optimism regarding the likelihood that Congress will soon pass a stimulus package now expected to be $2.2 trillion was the primary catalyst for Wednesday’s stock market rally. The commitment of the Fed to provide ongoing market support and adequate market liquidity within credit markets also helped buoy sentiment.
Economically, we are seeing jobless claims escalate quickly though job losses appear to be concentrated within virus sensitive industry sectors such as hospitality, and travel. Importantly, large portions of the fiscal stimulus package are aimed specifically at addressing problems faced within those industries. Moreover, the fiscal package provides support to small businesses in the form of loans that will be forgiven if those firms retain employees and continue to make payroll, which we consider will be an important factor in stemming unemployment. Given the highly labor intensive nature of the sectors under duress, it is believed that once the economy re-starts, businesses such as restaurants, hotels, and hospitality will implement a sharp rebound in hiring.
With respect to the nation’s ongoing coronavirus response, Minnesota joined the list of states asking residents to shelter in place. Indeed, many countries around the world are beginning to follow suit with India being the largest example asking its 1.3 billion citizens to social distance and shelter in place for 3 weeks. Our base economic forecast remains a sharp deceleration of economic activity in the second quarter of 2020 coincident with social distancing policies, followed by a swift rebound in economic activity in the second half of the year and into 2021. Indeed, China, the country first hit by the virus is already seeing substantial improvements across many economic metrics and we anticipate the U.S. economy will follow a similar pattern, albeit with a multi-week lag.
3.24.20 Market Update
We continue to be encouraged by the pro-active response policy makers are taking in addressing the current crisis. Congress has largely shown a coordinated approach and a strong commitment to passing a multi trillion dollar package aimed at addressing the key economic concerns facing the nation. This follows decisive action taken by the Fed to help address market dislocations.
Financial markets rallied strongly Tuesday amid ongoing optimism that Congress will agree on a comprehensive fiscal stimulus package expected to total approximately $2 trillion, with indications it may be signed into law by the end of the week. The S&P 500 rallied +9.4% today, international stocks were up +8.9%, and emerging market stocks increased +7.2%. Bond markets also performed strongly, with particular strength in investment grade corporate bonds, which returned +2.1%, while high yield bonds and emerging market debt posted even larger gains, returning +4.7% and +4.0%, respectively. Other income-oriented asset classes also performed well, with publicly traded real estate trusts (REITs) rallying +9.0%. Despite today’s strength, we do anticipate elevated levels of volatility will remain with us for some time as developments continue to evolve.
Tuesday’s equity market bounce represents the strongest percentage gain in 87 years for the Dow Jones Industrial Average and came amidst a myriad of news updates. In addition to headlines surrounding the fiscal stimulus package, of note European Union regulators recently banned short selling of stocks in a number of countries to help address equity market volatility. President Trump also indicated the White House may be guiding the economy toward re-opening in “weeks, not months,” and indicated April 12th as a possible target date. Though, the verdict is out from medical experts as to whether that is too early or not.
The Mission Wealth team remains vigilant and ready to serve your needs as they arise. Should you have any questions please don’t hesitate to contact your Client Advisor.
3.23.20 Market Update
We are encouraged by the proactive response policy makers are taking to the current crisis. Namely, the Fed took decisive action this morning to help stabilize bond market dislocations. We also anticipate a substantial fiscal package well in excess of $1.5 trillion dollars to ultimately be passed by Congress later this week.
The Federal Reserve announced extensive new measures Monday morning to help stimulate the economy and provide stability to financial markets. Amongst them, the Fed is expected to establish a Main Street Business Lending Program, specifically to support lending to eligible small and medium sized businesses. The Fed signaled it would purchase unlimited amounts of Treasuries and Mortgage backed securities, and expanded the list of eligible securities it will provide liquidity support for to include investment grade corporate bonds, commercial mortgage backed securities, asset backed securities, and high quality municipal bonds. Additionally, the Fed is re-establishing the 2008-era Term Asset Backed Securities Lending Facility (TALF), which is aimed at supporting consumer and business credit. Investment grade corporate bonds rallied significantly on the day, gaining +7.4%, though lower credit quality bonds fell in tandem with equity markets.
Politics were front and center in the news today with the Senate unable to move forward with a fiscal response bill for the coronavirus. The likely size of the combined program has expanded in recent days to an estimated $1.5 Trillion in stimulus (equivalent to 7% of GDP). The combined stimulus package has a myriad of elements, with much of the program dedicated to helping ease what is likely to be a rapid increase in the nation’s unemployment rate. Equity markets finished lower with U.S. stocks sliding -2.9%, international stocks dropping -1.0%, and emerging markets falling -1.9%.
Elsewhere, Moderna (a biotech company currently testing a COVID-19 vaccine), announced that while a vaccine won’t be available commercially for at least 12 months, it may be made available to certain people, including medical professionals, in the fall of this year. There have also been a number of promising indications for potential treatments for the virus.
We anticipate ongoing developments regarding the coronavirus will remain dynamic for a period of time. Recent reports from Italy appear to indicate a slowing in the number of new daily cases, which is encouraging to say the least. We continue to monitor the situation closely. We remain disciplined and focused on long-term fundamentals in the face of today’s challenges.
3.20.20 Market Update
Federal, State, and local governments continue to take aggressive measures to curb the spread of coronavirus, instructing citizens to remain in their homes and that only essential service businesses are to remain functional. Global equity markets were mixed on Friday with the S&P 500 dropping -4.3%, international stocks dropping -1.0%, and emerging markets stocks gaining +0.8%. Bond markets have experienced significant liquidity issues in recent days, but high quality fixed income largely reversed that trend today and rallied strongly with core bonds returning +1.7%. With respect to this issue of bond market liquidity, the Federal Reserve announced that they will increase the size of their asset purchase programs materially in an effort to provide much needed liquidity. Similarly, the Treasury and Federal Reserve have both opened and expanded credit facilities in recent days to ensure the liquidity and stability of money market funds.
Additionally, the U.S. Treasury announced an extension of personal and business tax returns from the normal deadline of April 15th to July 15th. There looks to be many nuances in the difference between tax return filing date, payment date, extension payment dates, estimated tax payment dates, and whether all states will follow suit. However, the impact of this fiscal stimulus is estimated at $300B in the short term and is aimed to coincide with the period of time most impacted by the coronavirus. Please contact your tax advisor for a full understanding of how this change impacts your personal situation.
Our investment department continues to diligently gather economic data and our advisor team has remained in close contact with our clients. As a firm, we have been holding daily video conference calls to discuss strategy, market conditions, and the changing economic environment. Our team remains resilient, working efficiently and effectively from home, and highly dedicated to our clients.
3.20.20 Press Release From Treasury and IRS: Treasury and IRS Issue Guidance on Deferring Tax Payments to COVID-19 Outbreak
WASHINGTON - Following President Donald J. Trump’s emergency declaration pursuant to the Stafford Act, the U.S. Treasury Department and Internal Revenue Service (IRS) today issued guidance allowing all individual and other non-corporate tax filers to defer up to $1 million of federal income tax (including self-employment tax) payments due on April 15, 2020, until July 15, 2020, without penalties or interest. The guidance also allows corporate taxpayers a similar deferment of up to $10 million of federal income tax payments that would be due on April 15, 2020, until July 15, 2020, without penalties or interest. This guidance does not change the April 15 filing deadline.
“Americans should file their tax returns by April 15 because many will receive a refund. Those filing will be able to take advantage of their refunds sooner,” said Treasury Secretary Steven T. Mnuchin. “This deferment allows those who owe a payment to the IRS to defer the payment until July 15 without interest or penalties. Treasury and IRS are ensuring that hardworking Americans and businesses have additional liquidity for the next several months.”
Today’s guidance will result in about $300 billion of additional liquidity in the economy in the near term. Treasury and IRS will issue additional guidance as needed and continue working with Congress, on a bipartisan basis, on legislation to provide further relief to the American people.
On a separate but related note, the AICPA has put together a useful state by state reference list that can be found by clicking here.
Please coordinate your personal situation with your advisor and tax professional to figure out what is the right strategy for you and updates will be forthcoming.
3.18.20 Market Update
Despite positive headlines regarding additional fiscal policy and support, the S&P 500 declined -5.2% on Wednesday, but did finish well off its intra-day lows. While no one can exactly forecast when the market bottom will ultimately occur, our investment partner research and historical metrics indicate that the stock market is now pricing at a level indicative of a sharp, but temporary global recession. Historically, these moments and market conditions have in hindsight been a favorable entry point for risk assets with soundly positive expected return potential over the medium- to long-term. With that said, we do anticipate ongoing and elevated volatility over the near-term, as many large uncertainties clearly remain.
Heading into this year, we were not fully invested in equities as a firm preferring a balanced approach between equities, bonds, cash, and alternatives. We understand this balance does not address the immediate issue of the stock market movement but it does allow us the flexibility and time to not be forced to sell for liquidity reasons. Instead, this balanced approach affords the opportunity to evaluate thoughtfully and eventually rebalance into stocks. The major lesson from 9/11 and 2008/2009 was to be a buyer, even if small, as sharp declines are almost always followed by swift recoveries. Back in 2008/2009, the government, albeit slow to the game, ended up throwing trillions of dollars at the problem which eventually led to one of the longest rallies on record.
Today, policy makers are taking a very proactive approach to the crisis, with Congress and the Treasury already formulating a third round of fiscal measures exceeding $1 Trillion. The plan will likely include sending direct payments in April to many Americans, as well as providing hundreds of billions in relief to businesses, with targeted measures to help industry sectors most affected by the coronavirus. A second round of direct payments to individuals is likely to be included in the plan and to occur in May. Earlier today, the Senate passed a coronavirus relief plan aimed at supporting paid sick leave, paying for virus testing, bolstering unemployment/food assistance, and sending tens of billions in fresh aid to States. The Federal Reserve has also expanded its liquidity operations, announcing yesterday that it will provide support to the short-term corporate debt market by way of a $700 billion commercial paper funding facility.
While there are a lot of uncertainties regarding the spread and trajectory of the virus, our base case remains that we will experience a short, sharp decline in economic growth as a function of the social distancing measures being put in place. We anticipate negative growth over the short-term with economic growth rebounding sharply in the latter half of the year and into 2021. We are encouraged by the cooperation being shown by policy makers to provide much needed economic support in a timely manner to those people and areas of the economy that need it most. Additionally, clinical trials for both vaccines and treatments are already underway and ahead of schedule.
We continue to employ a disciplined approach to portfolio construction and rebalancing that has helped us successfully navigate past stock market sell-offs such as 9/11 and the Great Financial Crisis. During these challenging times, it is of the utmost importance to focus on long-term fundamentals and to not allow emotions to dictate investment decision making.
3.16.20 Market Update
Remaining disciplined in the face of today’s challenging environment is key. We will get through this current pandemic but it will take time. We are steadfastly focused on the long-term economic fundamentals and disciplined with respect to our portfolio construction and rebalancing. We are also seeking tax loss harvesting where client situations warrant and taking the opportunity to reduce legacy concentrated stock positions where suitable. Time and again the market has faced crises and rebounded. We anticipate the current environment will be no different. We are employing the same disciplined approach that helped us successfully navigate past stock market dislocations, such as 9/11 and the 2008/09 Great Financial Crisis.
Equity markets closed sharply lower on Monday, with the S&P 500 falling -12% as coronavirus developments continue to unfold. The Fed announced another 100bps interest rate cut over the weekend, bringing the target range for the fed funds rate to 0-0.25%. Additionally, they announced another $700 billion of asset purchases, targeting Treasuries and mortgage backed securities. Despite the market-wide sell-off, bond prices provided stabilization, indicating the Fed’s policies are helping to alleviate some of the market dislocations experienced last week.
A bi-partisan federal virus relief stimulus package is expected to pass Congress this week. The bill includes paid leave, expanded benefits, and increased fiscal aid to States. We anticipate this will be followed by a broader set of measures over the next several weeks aimed at providing much needed funding to industries and employees most affected by the virus. Indeed, officials have signaled they are looking to help airline, cruise line, and hospitality industries, amongst others.
While today’s challenges are unique in their own right, we can look to the past for direction. The influenza pandemic of 1918 (often referred to as the “Spanish flu”) may be the closest parallel to today’s situation, though there are distinct and important differences. Economically, the Spanish flu caused a recession for just over two quarters (seven months), but importantly it did not have a lasting impact on economic growth, which quickly reversed to trend. Today, our economy and healthcare systems are far more developed than they were in 1918. Moreover, policymakers today are taking much more coordinated and necessary steps to help address this exogenous shock to the system. As such, we anticipate a short, sharp fall in economic activity, followed by a bounce back to trend growth in the latter half of the year and into 2021.
We are continually monitoring the situation. While it is difficult to look through the short-term noise, we anticipate asset prices will ultimately rebound once the current uncertainty passes. We are maintaining our focus on long-term fundamentals in the face of current challenges. We remain disciplined with respect to rebalancing and vigilant in seeking tax loss harvest opportunities where client situations warrant. Our portfolios are constructed to continue to meet the long-term financial goals of our clients.
3.13.20 Market Update
We continue to maintain investment discipline and focus on long-term fundamentals amidst the current market volatility. Stocks bounced on Friday, with the S&P 500 returning +9.3% and reversing much of Thursday’s decline. Sentiment was buoyed by policy action to address the impact of the coronavirus. Amongst steps announced were waiving interest on federal student loans, a commitment to substantially increase virus testing availability, and directed purchases of oil for the strategic reserve. This follows measures put in place Thursday by the Fed to provide liquidity to financial markets via a large scale bond purchase program. Additionally, Congress is expected to pass stimulus legislation that would provide funding to targeted sectors and industries most affected by the coronavirus. Central banks and governments globally have put in place similar measures to help offset the global economic impact of the virus.
Policy makers around the world know the importance of being proactive in response to exogenous economic shocks and it is constructive to see that much needed steps are being taken. Ultimately, we believe the virus will have a short, sharp impact on consumer spending and the economy, followed by a relatively quick “V” shaped recovery in the latter half of the year and into 2021. We do not anticipate a protracted, drawn out downturn because the underlying health of the economy had been strong leading into this crisis and a lack of excesses had been built up. While volatility is likely to remain elevated as developments unfold, we anticipate the economy and the stock market will eventually bounce back from current levels.
We are maintaining discipline and a focus on the long-term fundamentals in the face of the current short-term circumstances. Our portfolios are constructed to continue to meet the long-term financial goals of our clients.
3.12.20 Market Update
We are maintaining discipline and a focus on long-term fundamentals in the face of today's challenges. We are taking the same actions that helped us successfully navigate 9/11, 2008, and a myriad of other economic shocks. While this is not 2008, rebalancing and maintaining discipline was the key to significantly participating in the upswing after that market selloff. Going into this downturn, our clients held a tremendous amount of bonds and other income investments which may provide a significant opportunity for redeployment.
We continue to monitor developments with respect to the coronavirus and its impact on the economy and growth rates moving forward. We are maintaining a long-term focus and discipline with respect to portfolio construction and rebalancing. While short-term risks have become elevated, we believe the long-term economic fundamentals remain sound and the market impact will be temporary over the long haul. The market closed significantly lower today, with the S&P falling -9.5% and bringing the 11 year bull-market to an abrupt end. Market volatility was driven by a number of factors. On the bright side, the Federal Reserve (Fed) did announce a bond purchase program to help address temporary disruptions across financial markets to abate certain risks. Central Banks and governments around the world know the importance of being more proactive post 2008 and one would expect them to be accommodative.
As coronavirus developments have evolved, the chances of a near-term recession have clearly increased. If this situation follows the historical path of similar health events, the economic impact is likely to be short and sharp, and a “V” shaped recovery is very possible if not likely. Specifically, we anticipate economic growth to bounce back in the latter half of the year and into 2021 as the impacts of the virus wane. As such, we anticipate stock prices will eventually bounce back from current levels and if history is a guide, these time periods are very favorable entry points for stocks.
The oil price war added to market uncertainty at the beginning of the week. That said, outside of the energy sector, the ultimate economic impact is actually likely to be a positive one, as lower oil prices translate to an effective tax break for consumers via lower prices at the pump. Our portfolios have limited exposure to energy.
Importantly, this is not 2008. It is a very different scenario. Earlier in the year, economic data figures pointed to a positive uptick in growth and underlying business fundamentals remained robust. Moreover, the economy simply does not have near the level of excesses today as it did in 2008, or leading up to prior economic recessions. This can't be understated. Obviously the coronavirus presents an exogenous shock to the system, but the underlying health of the economy is such that we do not anticipate systemic issues causing a protracted decline in the economy. Rather, our base case expectation is for a short, sharp impact on growth, with a relatively quick recovery.
We are maintaining discipline and a focus on the long-term fundamentals in the face of the current short-term circumstances. Our portfolios are constructed for the long-term financial goals of our clients.
3.6.20 Market Update
We continue to monitor developments closely and are well prepared for the current environment. Our portfolios are constructed to help clients navigate times of increased market volatility and to continue to meet their long-term financial goals.
Market volatility has remained elevated as coronavirus developments continue to evolve. Despite all the headlines and volatility, the S&P was higher over the course of the week, returning +0.6%, though remains -12.1% below its recent high. We manage globally diversified stock portfolios. While still down, international and emerging market stocks have not fallen as drastically from the market’s recent high, with international falling –10.5% and emerging market stocks down –8.8% over the same timeframe.
Conversely, core fixed income has continued to perform well as yields have fallen. The 10-year treasury yield ended the week at 0.77% and the broad bond market returned +1.6% over the course of this week and is up +3.2% since the S&P high. This underscores the importance of maintaining a core fixed income allocation; during times of market duress it acts as an anchor of the portfolio, helping to mitigate increased volatility. Moreover, it can be used to effectively rebalance portfolios. Our disciplined approach guides us to sell asset classes that have rallied in favor of assets that have experienced relative weakness, and has proven to add value over time.
We anticipate the current environment will eventually abate and the impact on the global economy is likely to be transitory over the long-term. Many economic stimulus packages have already been announced globally and the Treasury today communicated they favor a timely and targeted stimulus program to help alleviate the negative impacts on the economy. Our base case remains that we will not experience a near-term recession. Feedback from industry contacts reaffirms this view.
Eventually there will be a vaccine for the coronavirus. Yet it will be interesting to see how many people actually get vaccinated. We all know many people who don’t get the flu vaccine. And that brings about an interesting perspective. The unfortunate reality is we deal with a pandemic every year in the form of influenza. It’s not referred to as such because it’s been normalized. We have a vaccine. Yet sadly it causes upwards of 12,000 deaths every year in the U.S. alone and up to 650,000 deaths globally according to the CDC and WHO. However it doesn’t affect financial markets because it is a known risk that we have been dealing with for years.
Any death is sad and unfortunate. But we can’t let the headline fears and emotions dictate our investment decision making. Ultimately we believe the economic and market impacts of the coronavirus will be short-lived in the grand scheme of things, but anticipate ongoing market volatility as developments unfold. We are well prepared and believe our portfolios will continue to meet the financial goals of our clients for years to come.
2.28.20 Market Update
In the face of the coronavirus we remain focused on long-term fundamentals and disciplined with respect to portfolio construction and rebalancing. Concerns have led to a continuation in the “risk off" environment, with the S&P falling 11.45% over the course of this week.
Amidst short-term sell-offs such as these it may be hard to focus on the long-term. We believe long-term fundamentals remain intact and the short-term economic impact of the virus is likely to be transitory in nature. Reduced consumer spending and supply chain disruptions globally are likely to negatively impact economic growth in Q1 and likely Q2. With that said, we expect a rebound in the second half of the year as pent up demand and manufacturing comes back online (for instance, many Chinese manufacturing plants have already reopened and where spread of the virus appears to have improved). Nonetheless, we do expect a reduction in global economic growth for the full year, however our base case remains for no near-term recession. In speaking with multiple industry partners, business fundamentals remain sound. The likelihood of Fed and fiscal stimulus has also increased in addition to numerous stimulus programs already announced worldwide.
Our portfolios are carefully constructed to help mitigate periods of elevated market volatility such as these. We maintain globally diversified allocations to stocks. While still down, international and emerging market equities have held up slightly better than US stocks this week, with international falling 8.77% and emerging markets down 6.16%. Our core fixed income allocations have performed well and provided overall portfolio protection, as bond prices appreciated over the course of the week on the back of falling yields. The widely followed 10-year treasury yield ended the week at 1.16% and the broad bond market appreciated 1.12%.
Not only does core fixed income act as an important portfolio diversifier and anchor of the portfolio, but it also plays an important role with respect to our disciplined approach to rebalancing. As fixed income has rallied, we can increasingly take the opportunity to sell it on strength and rotate into stocks on weakness. This is the crux of our disciplined approach, forcing us to “buy low sell high” and has proven to add value over time.
We continue to monitor the situation closely. We remain disciplined with respect to portfolio construction and rebalancing. Our long-term outlook for equities remains positive and we believe the current elevated volatility will ultimately subside. Our portfolios are well positioned to navigate the current environment and continue to meet the long-term objectives of our clients.
2.25.20 Market Update
We believe our portfolios are well positioned to help mitigate any ongoing market volatility associated with the coronavirus. We are closely monitoring developments and maintain a long-term, disciplined approach to portfolio construction and rebalancing.
The recent sell off in global equity markets was sparked by heightened concerns about the spread of the coronavirus outside of China. The “risk off” atmosphere was evident in stocks, with global indices dropping by -4.3% to -6.3% over Monday and Tuesday. Conversely, bond markets rallied sharply with prices rising and the yield on the 10 Year Treasury ending Tuesday at 1.34%. This “flight to safety” within fixed income represents a key reason for owning and maintaining a balanced and diversified portfolio. When volatility inevitably creeps into the equity markets (generally several times per year), owning a basket of high quality fixed income helps mitigate equity market risks and provides a reservoir from which to rebalance out of bonds and into stocks should the selloff persist and offer a long-term investment opportunity. At Mission Wealth we maintain a disciplined approach to rebalancing, which allows us to take advantage of movements in market pricing, implicitly “buying low and selling high” which may add value over time.
While it is impossible to forecast exactly how the virus will evolve, the economic impact is anticipated to be transitory in nature. Coronavirus supply chain and economic disruptions will likely negatively affect Q1 and possibly Q2 global economic growth rates but we believe that the corresponding pent up demand should cause a bounce back in Q3 and Q4 global growth. The Chinese government as well as other foreign governments and central banks have already instituted stimulus measures to help offset the economic impacts of the virus. Domestically, the odds of a Federal Reserve rate cut have increased and the Fed and Treasury stand ready to also add stimulus should the economic impact of coronavirus worsen.
As context, 2019 provided many new cycle challenges for investors – the trade war, global growth fears, an inverted yield curve, near-term recession risks, impeachment, etc. These types of unpredictable risks have always been a part of equity investing. Indeed, the last decade saw an unprecedented U.S. credit downgrade, a European debt crisis, GREXIT, BREXIT, natural disasters, to name but a few. Despite this, global equity markets more than doubled over the same time frame. We continue to favor diversified portfolios, a long term focus, and a disciplined approach to rebalancing as the key pillars to withstanding market shocks and uncertainty.