Audio:

Transcript:

The following presentation by Waldron Private Wealth is intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Waldron or any other investment professional of your choosing. Please see additional important disclosures at the end of this presentation.

A copy of Waldron’s current written disclosure brochure discussing our advisory services and fees is available upon request or at www.waldronprivatewealth.com.

Ben Greenfeld:

Hey everyone. We thought we would give an update on what happened in the markets in 2023 and just give some of our brief thoughts as it relates to that. This is Ben Greenfeld, Partner and Chief Investment Officer at Waldron. I’m joined by Nate Ecoff, who’s a Managing Director on our investment team, and Pat Ellsworth, who’s a Strategist on our investment team. Guys, thanks for joining me today.

Nate Ecoff:

Yeah. Thanks, Ben.

Ben Greenfeld:

As I mentioned, I think what we want to do is just give you a brief insight as to what happened last year which certainly was a very interesting year. We had everything from headline news of inflation, fed interest rate hikes, and then we had the ongoing conflict between Russia and the Ukraine, and new geopolitical headlines like the debt ceiling and the credit rating downgrade. We had the banking – I hate to call it a contagion, but the banking flare up in the spring. We had the conflict between Israel and Hamas. There’s a lot of different things happening that led to a pretty interesting market environment last year where you had US equities as a whole up in the mid 20 range of 26%. You had global equities up 22%. On the bond side you have municipal bonds up about 6.5%. So it was a very interesting year from a wire to wire perspective with a big driver obviously as everyone’s seen, being the headlines of the magnificent 7, the biggest primarily technology names in the US driving a lot of that performance.

But Nate, if we could dive into it a little bit here. As we looked from January through I’ll call it October, it was a much different market environment than the last couple of months of the year. Can you talk a little bit about what happened there?

Nate Ecoff:

Yeah so for starters, we started the year with the 10 year around 3.8% or 3.9%. We ended the year with the 10 year Treasury yield at 3.8% or 3.9%. So you know if you looked at the starting and ending points, you wouldn’t think much happened in between but really, it was kind of a roller coaster ride. You mentioned the magnificent 7. The first 10 months of the year, I think we did a recording and most of the stock market gains were really driven by those seven big tech stocks.

Transitioning from October through the end of the year, it was really a more broad market rally so we saw stocks outside of those seven really kind of participate and drive the equity market forward. A lot of that was sort of driven by the Fed pivot. We heard the rhetoric coming out of their meeting in December about switching from “are we going to hike rates again” to “when are we going to cut interest rates in 2024” and so the market heard that and that really helped to rally some of those stocks that are a little bit more economically sensitive like small CAP stocks.

We also saw interest rates come down. The first ten months of the year, the 10 year was sort of trending higher. It peaked in October around 5% and then when we saw the Fed pivot in their rhetoric towards cutting interest rates, we saw that 10 year fall pretty significantly and with that it helped some of the international stocks rally as well which we’re kind of treading water through most of the most of the year. So it’s an interesting turn of fortune and we really saw that momentum kind of take place in November-December where it wasn’t just the seven stocks driving the market, it was it was pretty much everything.

Ben Greenfeld:

Yeah and I think if you take it a step further beyond the markets you look at some of the economic data at that point. We started to see some of the inflation data softening. We started to see the labor market continued to remain strong, which as you alluded to with interest rates, that’s a big impact there and a big driver of that. I think it was really interesting to watch just looking at broad equity indices throughout the year.  You can kind of break it into three chunks. It was January through July, July through October, and then really from end of October through the end of December. It was really just completely different environments to look at and certainly to your point of where the 10 year started to where the 10 year ended, if you fell asleep at the end of January 1st and woke up on December 31st, you’d have no idea the volatility that happened, which the last couple years we’ve seen some unprecedented moves in interest rates both at the Fed level and just prevailing rates.

Nate Ecoff:

Well, I think a lot of what drove not just the equity markets but interest rates in 2023 was again a story about what’s the Fed going to do and the story around what’s the Fed going to do was really driven by what’s happening with inflation and what’s happening in the jobs market and so we saw some of those things really sort of pivot in the later part of the year which kind of changed the story for the year.

Ben Greenfeld:

And that kind of left us with wire to wire results. I would say the returns ended up fairly close overall despite being pretty far apart throughout the year. If we look for the calendar year, you had large cap growth US equities, which again, primarily those big tech names up over 40%. And then you had large cap value names in the US, small cap growth names in the US, and small cap value names in the US, up 11% 18% and 14% respectively. It’s a pretty tight range there and even looking overseas, you had international equities up, call it 15.5% roughly. I think when you take out the outlier of big tech, everything else ended up in the same spot, but it was a very different path to get there.

Nate Ecoff:

Yeah I think the other big theme for 2023 was the reversal fortune from 2022. A lot of the things that held up better in 2022 and that rising interest rate environment – think energy stocks, utility stocks, the value dividend paying stocks – those are the ones that actually did worse in 2023 and the ones that did poorly in 2022. The high growth technology names are the ones that did the best in in 2023. I thought that was an interesting theme.

Pat Ellsworth:

Yeah and I think a lot of that is due to what we saw with interest rates. A lot of those stocks you mentioned – utilities, real estate, infrastructure stocks, etc., a lot of investors view those as bond substitutes when interest rates are really low, they’ll seek income elsewhere. I think once the 10 year got up around 5%, you really saw some rotation out of those names because you could get a similar yield within the treasury market which has over time, a lower degree of risk.

Ben Greenfeld:

So Pat, that’s a great segue. If we transition and look a little bit at when investors are looking back on portfolios from 2023 in general, what sticks out to you?

Pat Ellsworth:

Yeah similar to what Nate mentioned not just with interest rates, but with the equity markets as well, if you look at the end of the year, small caps, US large caps, international stocks – we’re all up. But if you just look at the beginning of the year versus the end of the year, you miss a lot of the storyline within it. Like you mentioned Ben, from the beginning of the year to about the end of October, the market was really dominated by a handful of tech stocks and international equities, small caps, value stocks, etc. were all flat to down on the year. Over the last two months of the year, we did see the market broaden and the rally begin to be participated by the small cap areas, utilities, energy, financials, etc. and I think to your point Ben, if you take out those seven largest names, international stocks, the equal weight S&P, which is a proxy for the broad market and small caps all traded relatively in line and most of that was due from multiple expansion – the price that investors are paying for earnings going up, but also we did see some pretty solid earnings growth throughout the year. Companies are still kind of fighting the impact of inflation on their profit margins and also the impact of borrowing costs on companies that are over levered particularly in those smaller companies that are more dependent on financing – that’s continuing to be felt but the market looked pretty strong towards the end of the year. Within the international space, going into the year, a lot of people were really bullish on China. There was a narrative surrounding their economy reopening and getting out of the kind of persistent COVID lockdown that that they were in. That ultimately did not materialize as anticipated. A lot of that was due to some struggles within their real estate market and so that kind of weighed on international equities as a whole. China is a large weight to the international stock market. It’s the second largest economy in the world. So when they struggle, it does weigh on overall international portfolios. Conversely, European stocks did better than expected. Germany, other areas of Europe, have slowed but the stock market has remained relatively strong and economic data is stronger than anticipated so that’s something we’re continuing to look at. And then for the bond market, it was a very bumpy ride but at the end of the day, returns were positive on the year. If you account for the yields that investors got and that’s a good example of investors benefiting from higher interest rates. Interest rates increasing does cause bond prices to go down in the short term, but it increases the amount of income you get on an ongoing basis, so as you expand your time horizon and you look at a one year period or three-year period, those higher rates do benefit you over time. The other thing within the fixed income market is we have seen some areas that we think are a little overvalued, particularly high-yield credit. You know these are bonds that are issued by companies that have weaker balance sheets, they may be a little riskier, and they tend to pay more interest than other bonds from a company such as Apple or Amazon, which has a really strong balance sheet and they tend to yield more than your riskless or less risky bonds and we felt that their return profile was not optimal and so that’s something that we got out of in client portfolios and looked for areas either at the short end of the yield curve to take advantage of higher interest rates to fund spending needs or in other areas of the fixed income market such as direct lending or secured finance to take advantage of other areas with higher yields.

Nate Ecoff:

Yeah I was going to say, one of the things we saw start to materialize throughout the year was an increase in defaults within that space. And typically if defaults start to increase, you would expect the yield that you get paid on those bonds would start to increase as well and that’s where we saw that differential didn’t actually take place. So we saw credit spreads, which is kind of the spread that you get on a riskless bond to a high yield bond actually got tighter so you got paid less even though in the face of what seemed like a more risky market environment for those bonds.

Pat Ellsworth:

Yeah, and that is still persisting. That credit spread is still really tight. So that’s an area that we’re continuing to avoid but at some point in the future, it probably will look attractive again. It’s just a matter of waiting for either the defaults to come down or those credit spreads to come out.

Ben Greenfeld:

Yeah and I think just in summation, it was an interesting year with a lot of gyrations and a lot of dynamics both from the equity markets, the interest rates in general, bond markets, geopolitical – a lot of things going on. Quite a difference at the end of 2023 from what we were looking at the end of 2022. We had a very strange 2022 again where you had both equities and bonds down. Both of them, turned into a nice recovery as we headed into or as we rolled through 2023 and again, those diversifying assets, reasons why you build portfolios with asset classes that may not always be perfectly or may not all be correlated together is to get that diversification, get a smoother pattern of returns and I think last year was a year where you saw some of that start to play out again after a kind of correlation to one of everything in 2022 on no matter what you own it was all it was all going the same way so I think that was an interesting shift back. As we roll into 2024, I think this whole concept of back to the fundamentals as it relates to investing, really, really holds true. Nate or Pat, anything else you want to add?

Pat and Nate:

No, thanks for having us.

Ben Greenfeld:

Great. Well, thanks for thanks for listening. If you have any questions, feel free to reach out to any of the three of us or anyone else on our team here and we’ll be glad to discuss with you.  Thank you.

The previous presentation by Waldron Private Wealth was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Waldron or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy or any non-investment related or planning services discussion or content will be profitable, be suitable for your portfolio or individual situation, or proved successful. Waldron is neither a law firm nor accounting firm and no portion of its services should be construed as legal or accounting advice. No portion of the audio/video content should be construed by a client or prospective client as a guarantee that he or she will experience a certain level of results if Waldron is engaged or continues to be engaged to provide investment advisory services. A copy of Waldron’s written current disclosure brochure discussing our advisory services and fees is available upon request or at www.waldronprivatewealth.com

Disclaimer

Audio:

The following presentation by Waldron private Wealth is intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Waldron or any other investment professional of your choosing. Please see additional important disclosures at the end of this presentation.

Ben:

Hi everyone, this is Ben Greenfeld, Partner and Chief Investment Officer at Waldron Private Wealth and today I am joined by Nate Ecoff, who is Managing Director of our investment team, and Pat Ellsworth, who’s a Senior Investment Analyst on our investment team. Thanks for being here. 

Nate:

Yeah. Thanks for having us. 

Pat:

Thanks for having us. 

Ben: 

We thought we would get on today and just give a recap of what’s happening in “the markets” and I say the markets in quotes because everyone is squarely focused on what’s happening with the S&P 500 and we wanted to just dig a little deeper into that, coming out of 2022. Guys, it seems like as we rolled into 2023 and equity markets started to rally and everything that really wasn’t working last year and the major sell off started to turn around and started to work, it’s been a pretty smooth ride I think for the first six months of the year and as we turned the page into the back half, things started to gyrate a little bit and we saw some choppiness in both the equity markets broadly and the bond market, as interest rates had some movements. When we talk about markets this year, the big focus as I mentioned has been the S&P 500 and there’s been a lot of talk breaking it down into the S&P 7 and the S&P 493 – the S&P 7 being the biggest tech names out there – Meta or the former Facebook, Apple, Amazon, etc. Those names are up north of 50% when you look at them and the remaining 493 names are essentially flat for the year. Really not that exciting. 

Nate:

Yeah, that’s a great point, Ben. So one of the things the way the S&P 500 is constructed is the largest stocks in the index make up the biggest weight and those 7 names are the largest 7 stocks in the index, so they make up over 30% of the index. So when they’re up 50%, the index looks great. I think it’s interesting – a lot of investors don’t think that’s the best way to construct the index, so they use what’s called the S&P equal weight. They basically take the 500 stocks and make them all the same weight of the index. And if you look at that index this year, it’s only up 70 basis points. So you know, I think that speaks volumes to your point about just those 7 stocks really driving everything this year. 

Ben: 

Yeah, it’s been quite a difference when you take it even a step further and get out of just the big tech or the big growth names in the US. Even look at the large companies with a value bias, companies that are energy related or financially related as examples, those names are essentially flat for the year and you take it down the market cap to small cap equities and you have small cap growth equities essentially flat and small cap value oriented equities down over 3% for the year and it’s really been a wild, divergence between what’s happening in the various asset classes. And looking at equities overseas, you have equities overseas as a whole up about 5%, and emerging market equities up a couple percent for the year. Really not much is happening. It’s been wire to wire from January through first week of November here, not much has happened widely and I think Pat, maybe you want to comment a little bit about what we’ve seen happen in the bond market this year. I think that’s been a really interesting scenario. 

Pat: 

Yeah, as we’re all aware, last year was kind of marked by really rapid increases in short-term interest rates and we came into 2023 with the yield curve pretty substantially inverted, which means that short-term interest rates were higher than long-term interest rates and that generally is an indication that the economy has some signs of weakness that’s indicating that investors are anticipating interest rates to come down in the future and that really gathered a lot of headlines and caused some pessimism within the market. And what we’ve seen, especially in the last two to three months is the long end of the yield curve and longer-term interest rates begin to move substantially higher. From around the end of July to a few weeks ago they were up over a full percent, which is a pretty substantial move for the bond market and that’s due to a few factors, but one of the main ones is the economy has been a lot stronger than a lot of individuals anticipated. Employment has been strong, wage growth has started to moderate, inflation has come down and the housing market stays strong. There’s still work to do on the inflation front and the labor market is something to monitor but the the long end of the yield curve coming up has driven bond prices down, which leads to a lot of volatility, especially after 2022 when bonds had a relatively poor year. The important thing to note is that the starting yield when you invest in the bond market is a pretty good indicator of what your return is going to be over a long period of time and so, while the increase in yields right now causes prices to go down on paper, if you’re invested in high quality bonds that you are not going to default, your forward-looking return is a lot better when yields increase to the extent they have. 

Nate: 

I think overall it’s a good time to invest in bonds, just considering the fact that if you look at the change in interest rates from a positive change of 1% in bonds and the return that you would get or the negative return that you would receive from that versus a 1% decrease in bonds, especially considering everybody does expect interest rates to fall at some point in the future. It’s actually kind of an asymmetric profile right now so you actually get more from interest rates falling on your bond portfolio than you would be negatively impacted from interest rates rising. 

Ben:

Yeah, it seems like even over the last couple of weeks, volatility in bond prices has really picked up. We now have bonds essentially flat for the year. Municipal bonds are essentially flat. Taxable bonds are slightly down for the year. That is a meaningful change from if we were looking at this data 10 days ago, right? You saw both taxable bonds and municipal bonds down for the year and that movement, to Nate’s point, isn’t something we normally see that quick movement in bond prices in a short period of time. Nate, if we look at the likelihood of interest rates going down from an economic perspective, where do you see things today? 

Nate:

Considering how quickly we’ve seen monetary policy change over the past 18 months to go from a Fed funds rate at 0% to where we sit today at 5.5%, the employment market still remains pretty strong. Inflation is coming down. All those things point to signs of strength within the economy, especially that it can hold up to that degree considering the vast change that we saw over the past 18 months, so my expectation is that we’ll probably see either some form of a soft landing, maybe a medium-hard landing, which would be some form of mild recession. In either of those scenarios, I would expect equity markets to rally in either of those scenarios. I would expect the Fed to eventually pull back on the Fed funds rate and lower that. And if we can see GDP growth hold up in the face of 5.5% Fed funds rate increase, I think we could be in store for a good couple of years ahead. 

Ben: 

I think your comment about GDP is really interesting because I don’t think the full impact of the Fed raising rates over 5% really isn’t going to be felt from a GDP perspective until the middle part of 2024. We haven’t seen that really having major impact on the economy yet. If you look at where the Fed rates are today, looking at the Fed watch tool, there’s a very strong likelihood, I think we can all agree, that there’s probably not a good chance of the Fed raises rates at its next meeting in December. I think it’s probably a foregone conclusion. They’re going to hold rates steady despite the fact that their last statement has continued to leave the door open for that. What I find interesting is that when you look at probabilities of where rates are going, by the time you get to June of next year, you start to see the majority of the Fed watch tool kind of lean towards a rate cut. I think that whether it happens in June or July or September, when we start to see cuts, I’m not confident when it’s going to be. But I do think at some point in the middle part/middle of the back half of 2024, we’ll start to see rates come down for all the reasons you just talked about Nate. 

Nate:

It truly depends on what’s happening in the underlying economy. We always say the Fed takes the stairs up and the elevator down, right? So typically it’s a slow rise in Fed funds rate and then we see some sort of pain or stress in the economy and the Fed cuts more quickly on the on the way down than they do on the way up. 

Pat: 

I think the other good thing to point out and Nate, you kind of touched on this, but the degree to which the economy has been resilient through these rate cuts is a sign of a healthier economy than most people anticipated. I think post financial crisis, we had zero to very low interest rates for a long period of time and that’s not an indication of a well-functioning, healthy economy. We don’t want to need artificially low interest rates to prop up investment markets and try to push employment and economic growth. So the fact that we have higher interest rates than we’ve had in quite some time and even had one of the highest quarterly GDP readings outside of COVID in some time last quarter is a good sign. There are still things too that need to be worked out, but it’s a good indication. 

Nate:

It’s a good sign and then the markets interpret it in a bad way, right? It’s the good news is bad news sort of scenario where because the economy is doing so good, that’s going to lead to the Fed not needing to cut rates as quickly or as soon. And so equity markets don’t like that. Equity markets want to be propped up by lower interest rates and I think it’s unfortunate but it’s a good news, bad news, but eventually good news will become good news.

Ben: 

Absolutely. I think that your comment about how the markets react is something that we’ve also seen play out this year, as of late of how markets react to corporate earnings. It seems like earning come out, the headline earnings look good and then there’s a comment made in the earnings release or the earnings press call that causes the markets to sell off whatever that particular name is. I happen to be talking to a guy recently about this, and he’s like, “I don’t understand – earnings were great and then we had great revenue growth and then the stock sells off.”  

Nate:

They didn’t say AI enough.

Ben: 

Exactly, you’re exactly right. Yeah, all the all the hot items this year are the hot button topics of AI, big tech – all that is really what’s continuing to get the focus. I think this has been a good, good recap. Anything else you want to add?

Pat:

Not on my end. Thanks for having us.

Ben: 

Again, thank you guys. We hope that this has been helpful and we’re here to discuss any questions you might have. Feel free to reach out to any of us or feel free to reach out to anyone that you work with here at Waldron. We’d be glad to talk in more depth about what’s happening as it relates to your specific situation or about the markets or economy in general.

The previous presentation by Waldron private wealth was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Waldron or any other investment professional of your choice. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy or any non investment related or planning services discussion or content will be profitable be suitable for your portfolio or individual situation or prove successful. Waldron is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client or prospective client as a guarantee that he or she will experience a certain level of results. If Waldron is engaged or continues to be engaged to provide investment advisory services, a copy of Waldron’s written current disclosure brochure discussing our advisory services.

On the heels of a stronger than anticipated inflation (CPI) report, the Federal Reserve increased the Fed Funds rate by 0.75% at their regularly scheduled meeting.  While a hike of 0.75% was higher than the 0.5% that the Fed had been portraying for the last month or so, the markets had priced in a high likelihood of this more aggressive action after the recent data.  The markets are also predicting another 0.75% move in July.  While the year-end target for Fed Funds rate remains similar, the path to get there has changed.

With the elevated inflation data for May, we are moving closer to a peak inflation level.  Looking back 12 months, outside of a few key items (lumber, automobiles, travel & entertainment) the remainder of the data points for inflation were hovering around the long-term target of the Fed.  As we moved through June 2021 and further into the summer, the elevated inflation levels began to broaden out into many other inputs that make up the CPI measurement, like food, energy, and housing.  At this point, our expectation is not that prices will go down, but rather the rate of increase will normalize.

As many have likely seen, the S&P 500 entered a bear market last week (defined as a 20% decline from peak levels).  While equity markets have declined this year, corporate earnings continue to remain strong.  In fact, earnings have grown by 6.2% which means the decline in prices is driven by multiple contraction (or stocks becoming cheaper).  While uncertainty of the impact from supply chain disruptions and energy price increases still exists, the forecast for corporate earnings remains strong for the remainder of 2022 and 2023.  We are seeing a shift in consumer spending from goods to services and the inflationary pricing is reflecting this.

The risk of a recession has gained increased headlines recently.  A recession is defined technically as two consecutive quarters of negative Gross Domestic Product (GDP).  As you can see in the chart below, the U.S. economy contracted by -1.4% in the 1^st quarter of 2022.  There are a wide range of estimates for 2^nd quarter growth, most of which point to positive growth which would avoid a technical recession.  However, there is a chance that we are already in the midst of a recession since the data is backward looking.  Many economists predict that there will be a recession in the next 12-24 months.  Regardless of if we are in a recession now or enter one in the next year or so, we would expect it to not be as deep as we’ve seen in the past.  Overall, the consumer remains in strong shape with high household savings rates and low debt service ratio, and corporations (earnings) are also on sound financial footing which should help alleviate the impact.  In fact, US consumption and investment growth were both positive during the 1^st quarter while the negative economic growth was driven by a contraction in government spending and trade.

While we may not have hit market lows yet, looking forward we remain positive on the equity markets but expect volatility to continue. Historically since 1940, the S&P 500 returns +13% on average in the next 12 months after entering a bear market.

Disclaimer

Roughly a decade ago, investors were introduced to what was once an esoteric federal government process: the increase of the debt ceiling. The debt ceiling is simply the legislative limit on the amount of national debt outstanding in the United States, a dollar figure that historically was increased ad-hoc on a bipartisan basis. The implications of the debt ceiling are significant with a worst-case being the failure to raise the limit could result in a default on US government debt obligations, an event that would have untold repercussions in financial markets. In less severe outcomes, there are considerations for potentially higher borrowing costs, which also have significant economic implications.

Starting in late July 2011 a fierce debate raged over increasing the debt ceiling. The initial inability to pass an increase of the debt ceiling led to significant uncertainty in financial markets, with the US equity market falling over -15% and Standard & Poor’s downgrading the US Government credit rating to AA, the first such downgrade in the country’s history.

Source: Bloomberg LP and Wells Fargo Securities

Ultimately legislation to raise the debt ceiling was passed two days prior to the estimated default date, averting the worst-case scenario, leading to a recovery of equity and bond markets globally. The events of 2011 did set the stage for a lessor debate in 2013, but certainly raised the stature of this once-obscure legislation process for good.

While investors are certainly better prepared than 10-years ago, the political tension around the debt ceiling has come back in a strong fashion, with larger implications given the significant growth in outstanding federal debt. The timeline is quite tight – Congress returns from recess in mid-September, having to tackle the fact the government is set to shutdown on September 30^th unless budget legislation can be passed. On top of a potential government shutdown, Treasury Secretary Janet Yellen warned in early September that the Treasury Department would likely run out of cash by the end of October if the debt ceiling is not raised.

Recent posturing has increased fears of a political game-of-chicken over the next two months. Congressional Democrats intentionally did not address the debt ceiling increase in their $3.5 trillion budget reconciliation package (presumably to maintain broader support for the legislation). On the opposite side of the aisle, 46 out of 50 Senate Republicans signed a letter pledging not to vote for a debt ceiling increase in any fashion, presumably to force Congressional Democrats to use the budget reconciliation process (which would not require any of the 50 Republican Senators). There are additional complications with the legislative ability to address the debt ceiling in this fashion.

The potential legislative saga is certainly better understood by investors today, in sharp contrast to 2011. The fact also remains that the US government has never defaulted on debt obligations and presumably the Democratic Party would not that break that trend while controlling Congress and the Presidency. Nonetheless, there is a potential for headline volatility as negotiations progress, which could result in attractive opportunities for long-term minded investors.

Disclaimer

It is hard to believe that the COVID environment has been with us for over twelve months, a fact many would like to forget. There is a fact that will be less transitory in nature because of the COVID environment: the mounting debt across developed and emerging countries globally. The resurgence of this topic following 2020 is not without reason: in the United States, the outstanding publicly held Federal Debt exploded to 100% of the United States annual Gross Domestic Product (GDP), the highest the ratio has been since the end of World War II (roughly $21.5 trillion dollars).

Although annual deficits had been running higher than usual heading into 2020, the sharp increase was largely due to the significant fiscal response to the COVID pandemic. The response was swift and large in magnitude- effectively larger than the response to the Global Financial Crisis, in a fraction of the time. The strong response from policy makers was one of the key reasons we had a powerful economic and financial market recovery, but it did come at a significant cost from debt perspective.

Now that the economy and financial markets have nearly recovered, market participants are turning their attention to the newly increased debt burden, and the potential impact on inflation and interest rate dynamics. While it is understandable to be concerned, there are two key considerations when discussing the fiscal health of the United States: the US Dollars role as the reserve currency of the world, and the low level of interest rates globally.

These two factors are the key reasons why the United States should not be viewed through a “household balance sheet” lens. As reserve currency holder, which is effectively the main currency held in reserves and used for global transactions, we are able to in essence “print” money. This means in practice there is consistent technical and fundamental demand for our debt, which funds our ability to execute programs such as the CARES Act. Lower interest rates also have the obvious benefit of reducing the cost to pay interest on the existing debt. Despite the debt/GDP ratio being twice as high as it was in 1996, the annual debt service cost as a percentage of GDP was lower in 2020.

These factors, combined with the emergence of economic theories such as Modern Monetary Theory, have paved the way for the change in perception around debt growth. There still will be questions about the long-term burden of the debt, and market participants are looking at the post-World War II playbook for clues. This playbook, the last and only time the debt/GDP ratio has been higher, involved various financial repression policies. Stated simply, this refers to policies to keep interest rates (artificially) low, allowing an economy to growth through its debt burden (less desirable outcome would be to purely inflate through nominal debt). This took various forms during and after World War II in the United States, including Treasury yields effectively being fixed below free market rates.

While there are considerations regarding the amount of public debt outstanding, they are in our opinion very long-term. The fiscal and monetary policies of 2020 have set-up the US economy for potentially its highest GDP growth rate in +25 years, and helped financial markets recover to all-time highs. The US Dollar’s position as reserve currency, and generationally low interest rates, combined with strong economic growth, make Federal Debt situation very manageable in the near-term.

Disclaimer

We understand that your inbox, news and social media have been flooded with information about the COVID-19 pandemic, the stock market, political posts and countless other topics. We first and foremost hope that you and your families are safe during these unprecedented times. We also hope that you are finding ways to keep yourselves occupied during this pandemic.

We know that it is important to find shows, documentaries, movies, books and activities to keep ourselves from going stir crazy. So, it was an idea of our team member Garrett Frey to put together a Top 10 list of the ways the Waldron team is staying sane during our COVID-19 quarantine.

1. At Home Workouts – this is the clear top activity that our team is doing overall
2. Cleaning and Reorganizing the House
3. Family Walks
4. Watching The Tiger King Netflix Docuseries
5. Taking the dog(s) for a walk
6. FaceTiming extended family members
7. Baking
8. House projects
9. Board Games
10. Planting an indoor garden

We hope that this list might provide some activities that you can incorporate to help you pass the time. If you have any activities that you are doing, we would love to hear them.

Photo by Kelly Sikkema on Unsplash

Disclaimer

We wanted to pass along an update on the quickly changing news over the weekend and the implications to financial markets/economy.  It is important to recognize that the current market and economic conditions are event driven vs. technical driven as we saw in 2008.  The plumbing in the financial markets continues to be fully functioning at this time.

Given the extreme volatility and tight liquidity last week, as well as additional restrictions on public gatherings (restaurants, bars, etc.), the Federal Reserve launched emergency measures Sunday night. These measures were part of a globally-coordinated effort by central banks to ensure continued proper functioning of the “plumbing” of our financial markets; this was not an effort to boost the stock market. The Federal Reserve’s aggressive actions were:

• Cutting short-term interest rates to 0% to 0.25% range, which was a drop of 100bps to the Federal Funds rate, following an emergency 50bps cut last week. They also provided changes to forward guidance
• Relaunching a version of Quantitative Easing (QE) –  buying $700bn of government securities (Treasurys and Mortgage Backed Securities)
• Various measures to improve short-term lending in the form of global currency swaps which encourages banks to borrow for shorter-periods of time.

These measures will go a long way to reducing stress on short-term funding markets and improving liquidity in the Treasury market.  The actions taken over the weekend are meant to ensure the financial markets continue to operate uninterrupted without structural problems.  It is important to note that the Federal Reserve has “saved some bullets” with regards to additional policy action.

The coordinated global monetary policy intervention is a very important step, but financial markets will continue to be volatile until a) there are additional significant fiscal measures taken (similar magnitude to the global monetary policy actions taken Sunday) and b) there is clarity around the path of COVID-19 in Europe and the United States (improvement in Asia will not be enough to offset uncertainty in Europe and the US in the short-term).

While the recovery should still be “v-shaped” in nature (meaning we will see a quick rebound from the bottom rather than a slow gradual climb up), the question is how much further will be go before bottoming out. Given the path of economic data, it is likely that we will meet the technical definition of entering a recession (defined in the United States by NBER “as a significant decline in economic activity spread across the economy, lasting more than a few months”). It is also important to remember in times of uncertainty that financial markets are forward looking and constantly price in changes in future expectations. Global equity markets have fallen into a bear market, to a magnitude that is in-line with historical examples of “event-driven” occurrences and should bottom out ahead of the complete economic recovery.

We understand that the volatility in the short-term may not always feel great, but as long term investors we continue to look to take advantage of opportunities that have been created over the past several weeks. Please don’t hesitate to contact us with any questions you have.

Disclaimer

Global equity markets tumbled Monday, continuation of concerns around the growth of the COVID-19 virus, and new fears of a price war between Saudi Arabia and Russia after the Organization of the Petroleum Exporting Countries (OPEC) failed to come to a consensus around oil production. On Saturday, Saudi Arabia slashed official crude oil selling prices for April and is preparing to increase production, indicating a sudden shift from their previous stance to support the oil market as global demand weakened from coronavirus fears. The price cut comes after a breakdown in OPEC talks last week, with Russia rejecting additional cuts. Oil had its worst day since 1991 during the Gulf War, diving more than 30% at intra-day lows, causing additional uncertainty and volatility in global markets.

In the US, major US indices fell more than 7% at the open, causing trading to be halted for 15 minutes within 5 minutes of the open. In Europe, major indices fell more than 7%, entering bear market territory. Globally, bond yields fell, with the US 10-year Treasury yield falling to a new record low of 0.32%, while expectations of additional rate cuts by the Federal Reserve have risen significantly since last week. Experts are mixed regarding oil forecasts in 2020, with some anticipating further price decreases and others viewing this as a short-term event as the two sides will eventually come to an agreement.

Periods of elevated short-term volatility present attractive opportunities for long-term investors. With equity markets globally 15% to 20% off of February highs and the significant drop in interest rates, we are tactically looking for opportunities to rotate into undervalued equity markets to take advantage of opportunities, and using the pullback to harvest losses in the portfolio from a tax standpoint.

As always, we are here for you. We have designed portfolios around your financial goals that are meant to be long-term and are happy to discuss market conditions or any other questions.

Disclaimer

2019 was an extraordinary year for capital markets. 

US equities are up nearly 40% since Christmas Day in 2018, while global risk assets as a whole had their best year in nearly two decades. However, the results of 2019 are unusual, and it is important to remain cognizant of that when reviewing your investment portfolio. It’s also important to understand that attempting to time the market often results in missing opportunities to be a part of years like we experienced in 2019.

Disclaimer

Investors and advisors have some strong opinions about the relative merits of active vs passive investing.

For the investment department at Waldron, we can see value in both approaches, depending on a number of factors, but the most important of which are the investor’s goals.

Disclaimer