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October 2022 | Equity Commentary

October 2022 | Equity Commentary

Published on November 8th, 2022

Market Overview

The stage was set for an equity rally in October, in our view, given that negative sentiment and oversold conditions had both moved to extremes. The S&P 500 index rebounded a stout 8.1% for the month, and the Dow Jones Industrial Average notably posted its best month (+13.95%) since 1976.1 Equity markets may also have experienced an early benefit from seasonal forces, in which stocks have historically performed relatively well in the November to January timeframe – especially when there is a US midterm election. In the 18 midterm elections that have taken place since 1950, stocks have risen in the 12 months following the election 100% of the time, with an average 12-month forward return of +18.6%.2 In the fixed income markets, the 10-year US Treasury bond finally ended a 12-week streak of negative price returns, with yields falling 0.20% to finish the month at 4.02%.3

As financial markets expected, the Federal Reserve raised the benchmark fed-funds rate by 0.75 percentage points at the November 2 FOMC meeting. Chairman Powell reiterated that the Federal Reserve would rather go too far in hiking rates than not go far enough, as the central bank would more readily accept an economic recession versus entrenched inflation.4 Powell added that if the Federal Reserve had released new federal funds rate projections, they would have likely been higher given ongoing strength in the labor markets and another elevated inflation print in September.

In Chairman Powell’s press conference following the Federal Reserve’s announcement, the message was clear to financial markets that while the size of fed-funds rate increases may shrink at future meetings, the terminal rate – which is the end target for the Federal Reserve’s interest rate – would likely need to move higher. In Powell’s words, “the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.”5In other words, investors should not see a 50-basis point increase in December or smaller rate hikes in 2023 as a sign the Federal Reserve’s monetary tightening efforts are nearing an end. The Federal Reserve may go slower with rates, but they also may go longer and, ultimately, higher.

In our view, the macroeconomic picture influencing the Federal Reserve’s decision-making continues to be stubborn (US labor market) and sticky (inflation). The Labor Department reported that demand for workers continues to far outstrip the number of unemployed Americans seeking work. Total job openings unexpectedly climbed from 10.3 million in August to 10.7 million in September, which is slightly more than double the number of unemployed Americans seeking work (5.8 million). The September uptick may ultimately just be an anomaly, however, as the number of job openings has been in steady decline since its March 2022 peak of 11.9 million.6

On the plus side, we believe wages have been moving more favorably for the Federal Reserve, with average hourly earnings increasing by 4.7% year-over-year in October, a slightly slower pace than September’s 5%, and August’s 5.2%. The Atlanta Fed’s wage growth tracker, which measures the “nominal wage growth of individuals,” also fell in September from August – an early sign that wage pressures may have peaked.7 Additional data helpful to the Fed’s goals was the slight uptick in unemployment reported in early November, to 3.7% from the prior 3.5%.8 

US GDP grew at an annual rate of 2.6% in Q3, according to the Commerce Department. Better-than-expected GDP growth runs counter to the Federal Reserve’s goal of cooling the economy, but a closer look at GDP’s components shows that overall demand in the economy is indeed falling. Final sales to private domestic purchasers –which measures underlying demand in the economy – moved up by just 0.1% from Q2 to Q3, which while positive indicates a significant downshift in activity. Final sales to private domestic purchasers had moved 2.1% higher in Q1 and 0.5% higher in Q2. A major factor in GDP’s strong Q3 print was a 2.8% increase in net external trade, a reversal from earlier in the year when imports detracted from GDP as companies rushed to restock inventories. Consumer spending edged higher in the quarter.9

Services and Manufacturing activity in the US both slowed from September to October but remain in expansion mode. The October PMI for Manufacturing was 50.2 percent, which was 70 basis points lower than the September reading. New orders eased over the summer months and companies are largely preparing for lower demand in the future, according to the survey. The ISM report showed that supplier deliveries were moving faster, raw materials prices had declined, and supply chain bottlenecks were all but gone, all of which point in a favorable direction with respect to inflationary trends. On the services side, the PMI registered at 54.4 percent, which remains firmly in expansionary territory but slowed considerably from September’s 56.7 percent reading.10

Finally, the US housing market continues to show material signs of weakness as the average 30-year fixed mortgage rate now hovers around 7%. Pending home sales declined 10.2% in September from August, pulling sales back to levels seen at the outset of the pandemic. With the exception of May, pending home sales have fallen every month in 2022, a sign that rising interest rates are denting demand and also that pandemic-driven migration trends are fading. Home prices are also showing signs of plateauing, with the S&P CoreLogic Case-Shiller National Home Price Index falling 1.1% from July to August, the biggest monthly decline since December 2011. With shelter making up approximately one-third of the Consumer Price Index (CPI) measure of inflation, easing home price pressures register as a good sign for the data- dependent Federal Reserve.11 

Source

1https://www.cnbc.com/2022/10/30/stock-market-news-futures-open-to-close.html

2https://www.forbes.com/sites/michaelcannivet/2022/10/02/the-stock-market-has-risen-after-every-midterm-election-since-1950/?sh=4897b2bf7c48

3https://www.yahoo.com/now/treasury-market-rally-faces-reality-200000035.html

4https://www.wsj.com/articles/jerome-powell-to-markets-the-destination-matters-not-the-journey-11667427735

5https://www.federalreserve.gov/newsevents.htm

6https://www.wsj.com/articles/job-openings-hiring-economy-september-2022-11667249735?mod=djemRTE_h

7https://www.atlantafed.org/blogs/macroblog/2022/10/21/viewing-the-wage-growth-tracker-through-the-lense-of-wage-levels

8https://www.wsj.com/articles/october-jobs-report-unemployment-rate-economy-growth-2022-11667516355

9https://www.wsj.com/articles/us-gdp-economic-growth-third-quarter-2022-11666830253

10https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/

11https://www.wsj.com/articles/home-price-growth-slowed-in-august-11666702621

As of October 31st, 2022

Third Quarter 2022 | Fixed Income Commentary

Published on October 25th, 2022

Third Quarter 2022 | Fixed Income Commentary

Overview

The third quarter began with financial market expectations for more dovish monetary policy by the Federal Reserve driving government yields lower and the potential odds of a recession to decline, which boosted valuations of many fixed income securities. However, the rosy outlook was short-lived as the quarter progressed and inflation readings came in both higher than financial markets expected, and more broad-based than in prior months. As a result, at the Federal Reserve annual late August retreat in Jackson Hole, Chairman Powell signaled that monetary policy would need to remain restrictive for “some time” to fight inflation, even at the expense of slowing economic growth.1 Any near-term prospects for a “Fed pivot” (a shift away from aggressive monetary tightening) were eliminated as the FOMC hiked interest rates by 75 bps in September and revised forecasts for the Fed Funds Rate over the coming years significantly higher. Source: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220921.pdf and Bloomberg Projections for the Fed Funds Rate at the end of 2022, 2023, and 2024 are shown above. Dashed lines represent what the Federal Reserve expects the path of interest rates to be (as depicted by the median FOMC participant’s projection in the “Dot Plot”) and solid lines represent what the “market” expects the path of the Fed Funds Rate to be (as depicted by where Fed Funds Futures are trading). Projections as of the September FOMC meeting (in blue) are significantly higher than projections as of the June FOMC meeting (in green) by both FOMC participants as well as futures markets. A higher expected Fed Funds rate over the coming years has also driven yields across tenors of the yield curve to rise, with two-year and ten-year US Treasury yields increasing by 132 bps and 82 bps, respectively. As a result, the longest duration securities suffered the largest losses, and Roosevelt’s Current Income Portfolios short duration of ~3.2 years in existing accounts, as well as our aversion towards low fixed-rate coupon preferred securities (< 4.5%), helped to reduce negative impacts on the portfolio. The Current Income Portfolio declined 1.8% gross (2.1% net) throughout the quarter, and 8.8% gross (9.6% net) so far this year.  
Tightening financial conditions, escalations in the war in Ukraine, and an uptick in Covid cases in China that could put more pressure on the global supply chain, continue to create headwinds for global growth. The US dollar’s recent strength likewise puts US companies with overseas operations at risk of negative effects from foreign exchange and has the potential to reduce foreign demand for US products and services. The recent spike in Gilt yields in the UK and the resulting forced selling of assets by UK pension funds also highlight hidden pockets of leverage in the system that can create considerable volatility. Together, these factors suggest greater potential odds of a recession, widening of corporate credit spreads, and overall greater financial market volatility. That said, as the graph below suggest, yields to worst are the highest they’ve been in 12 years and offer attractive projected returns in our view. As of mid-October, new Current Income Portfolio (CIP) accounts have a yield-to-worst (YTW) of ~ 6%, a current yield of ~4.6%, and duration of 4.1 years. As of mid-October, new All Preferred Securities Portfolio accounts have a YTW of ~7.2%, a taxable equivalent YTW of ~9.2% and a duration of 4.1 years. Even if credit conditions deteriorate, some companies are heading into a potential recessionary environment with stronger corporate fundamentals than they have had in recent years. Investment grade companies appear to have some of the highest levels of interest coverage and lowest levels of net leverage that they’ve had in years, we believe this puts them in a better position to withstand potential moderate declines in profit margins. Additionally, we believe banks are very well capitalized and may even be positioned to benefit from higher net interest margins. While interest rates moving higher can cause fixed income values to decline in the near term, they can also increase average return of the portfolio over a longer time horizon. With the average YTW for the ICE BofA US Corporate Bond Index at its highest level in the past twelve years, corporate bonds are well positioned to earn higher returns than they otherwise would have (if yields had not increased) over a longer period. (See illustration in appendix).
Source: Bloomberg. The US Corporate Bond Index is trading at its highest yield-to-worst in twelve years, making projected corporate bond returns look very attractive. Therefore, despite our view that the odds of a recession have increased, we believe the attractiveness of fixed income issues of high-quality companies has also increased, especially those currently trading at 6% or higher YTW in the 7-10 year maturity bucket. Although it’s possible that credit spreads widen further, expectations for slower growth could also drive government yields in the intermediate and long-term tenors of the yield curve lower, producing offsetting effects on the portfolio. While our low duration has helped to significantly reduce losses year-to-date in relative terms, with peak Fed Funds Rate projections just shy of 5% next year, there may be limited additional upside from holding a significantly shorter average duration. Since the start of the third quarter, we have slightly increased the duration in existing accounts’ corporate bonds from ~3.2 years as of June 30th to ~3.5 years, and plan to continue to reinvest proceeds from recent corporate actions into high YTW securities. These changes are incremental in nature, and the goal is to help the portfolio retains characteristics that help to protect principal should interest rates continue to rise. We view the current environment as attractive for fixed income investors, as we believe corporate balance sheets are generally strong and the current higher starting point for overall yields ultimately will raise future projected returns for investors, even in the backdrop of a potential recession. Sources: 1https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm Appendix Frequently Asked Questions: What will happen to the portfolio if the Federal Reserve continues to hike interest rates? It is worth noting that securities’ values today have already declined based on how much the market “expects” the Fed Funds Rate to rise. We can track market expectations for the Fed Funds Rate by looking at where Fed Funds Futures are trading. At the end of the third quarter, the market implied projection for the peak Fed Funds Rate in March of 2023 was 4.53%. Source: Bloomberg Therefore, if/as those hikes materialize, we believe there should be little-to-no additional decline in the Current Income Portfolio’s value from changes interest rates. * In other words, current values of securities in the portfolio should already reflect an additional 140 bps of interest rate hikes that have yet to happen. It would likely take expectations for > 140 bps of additional Fed Funds Rate hikes, or expectations for fewer cuts than are currently projected, for further portfolio declines from changes in short-term interest rates to materialize. *The portfolio can still be impacted by changes in credit spreads, all else equal (if the yield curve, and the interest rate projections implied from it, were to stay the same). How do higher interest rates affect the value of the portfolio?  While higher interest rates can cause asset values to decline over the near-term, higher yields can also lead to higher portfolio returns over time. The following illustration compares the expected return of the CIP in five years if:
  • They yield curve did not change year-to-date, and the yield-to-worst of 2.63% (at the start of the year) was the average projected return over the next five years.
  • Interest rates rose as much as they have year-to-date, and the new projected yield-to-worst of 5.56% is the average projected return over the next five years.
Conclusion: Given the substantial rise in interest rates year-to-date, the portfolio value is projected to face significant losses during Year 1. However, the higher YTW (that the portfolio is projected to earn from this point on) results in greater cumulative returns over the period of five-years. Therefore, higher interest rates can lead to higher returns (than they otherwise would have been) over longer periods of time. Disclosures This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All performance figures greater than one year are annualized. Indices are unmanaged and cannot accommodate direct investment, may include the reinvestment of earnings, and may not reflect transaction costs or management fees and other expenses. Please compare this presentation to your Custodian’s statement to ensure accuracy. If you do not receive statements for all of your accounts from the Custodian on at least a quarterly statement, please notify Roosevelt Investments immediately. This is not a recommendation to buy, sell or hold any of the securities listed and the reader should not assume that an investment in the securities listed was or will be profitable. Performance figures that are gross of fees do not represent the deduction of investment advisory fees. Net of Fees return figures shown are net of Roosevelt Investments’ management fees and trading cost. The returns of your portfolio will be reduced by such investment advisory fees and other expenses incurred in the management of your account. For example, an advisory fee of 0.70% compounded over a 10 year period would reduce a 10% return to a 9.23% annual return. Roosevelt Investments’ advisory fees are further described in its Form ADV Part 2A. Our current disclosure statement is set forth in our Form ADV Part 2A, available for your review upon request, and on our website, www.rooseveltinvestments.com. Our Form CRS is also available on our website and available for review upon request. We encourage you to compare and verify the information on this statement with your custodial statement. Please contact us at 646-452-6700 if you do not receive statements from your Custodian on at least a quarterly basis, if there is any change in your financial situation or objectives, or you wish to initiate or modify restrictions on your account. Roosevelt Investments is solely responsible for the content of its website. The sponsor/broker dealer firm has not reviewed or verified the accuracy or completeness of its content and is not responsible for any statements included therein. The indices are unmanaged, may include the reinvestment of earnings and may not reflect transaction costs or management fees and other expenses.  The index returns are calculated with dividends (net of estimated withholding taxes) reinvested.  Unlike the indices, the strategy is actively managed and may include substantially fewer securities than the number of securities comprising the indices, and may have volatility, investment and other characteristics that differ from the strategy.  Investments cannot be made directly into an index.  Your asset allocation may have undergone further changes over time.  If other changes occurred, the current benchmark may not be used on a historical basis. Data provided by BLOOMBERG – The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the ‘Services’) are owned and distributed locally by Bloomberg Finance L.P. (‘BFLP’) and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the ‘BLP Countries’). BFLP is a wholly-owned subsidiary of Bloomberg L.P. (‘BLP’). BLP provides BFLP with all global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading and order-routing services, which are available only to sophisticated institutional investors and only where necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKET, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries. Past performance is not a guarantee of future results. All recommendations within the preceding 12 months are available upon request. INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE As of September 30, 2022

WATCH NOW – Midcycle Slowdown, or Recession in the Offing?

WATCH NOW – October 13, 2022 – Midcycle Slowdown, or Recession in the Offing?

Published on October 14, 2022

John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, sat down to discuss the latest updates in the financial markets from this past quarter. In this webinar, they also discussed: Midcycle Slowdown, or Recession in the Offing? Inflation: Confluence of Factors / Powell Pivots: Transitory to Persistent / 2023 Bull-Bear Debate  

September 2022 | Equity Commentary

September 2022 | Equity Commentary

Published on October 10th, 2022

Market Overview

Stocks finished the month of September and the third quarter on a negative note, with the S&P 500 index and the Nasdaq both closing at their lowest levels of 2022. There continues to be a fairly straight line between selling pressure in the equity markets and underappreciated Federal Reserve hawkishness, which Jerome Powell sought to clarify in his Jackson Hole speech, and which has been confirmed many times since by Federal Reserve governors in separate speeches and comments. New, higher projections for the benchmark fed-funds rate by the end of 2022 also dealt a negative surprise to markets, adding to downside volatility for the month. In the fixed income markets, US Treasury bond yields also sold off sharply in September, with the yield on the 2-year Treasury rising to 4.21% and the 10-year finishing the month at 3.80%. The 2-year yield’s steep rise in the first nine months marked its fastest increase to start a year since 1981, and it also further inverted the 10-year/2-year yield curve—historically a recession indicator.1    

As widely expected, every member of the Federal Open Market Committee (FOMC) voted to raise the benchmark fed-funds rate by 75 basis points at the September 20-21 meeting, to a range between 3% and 3.25%. Even though the rate increase was expected, equity markets sold off sharply as investors took stock of the central bank’s new 4.4% projection for fed-funds by the end of the year. This projection was 25 basis points higher than traders were expecting, and it also significantly raised the likelihood of a 75-basis point rate hike at the next FOMC meeting in November.2

US economic growth is moderating, and earnings estimates are coming down, signaling that the Federal Reserve and other global central bank tightening are having at least some effect in reducing demand in the global economy. We believe the issue for the Federal Reserve, however, is that key inflation, labor market, and consumer spending data has held firm even with the backdrop of tightening financial conditions.

In August, the personal-consumption expenditures (PCE) price index – the Federal Reserve’s preferred measure of inflation – rose 0.3% from July and 6.2% year-over-year. The core PCE-price index, which excludes food and energy, rose at an even brisker month-over-month pace, increasing 0.6% from July and also posting a 4.9% year-over-year increase, which was higher than the 4.7% jump registered in July. This data suggests that inflation has become more broad-based, and all but ensures more runway for the Federal Reserve’s rate hike campaign.3

The US labor market and household spending have also been weathering inflation and higher rates, which together have frustrated the Federal Reserve’s efforts. Adjusted for inflation, household spending rose by 0.1% in August, recovering from a decline in July. US consumers are apparently still out spending partly because of ongoing strength in the labor market, where employers added 315,000 new jobs in August. Initial jobless claims, which had slowly started to tick higher earlier in the summer, have fallen over the past few weeks as employers cling to workers in a historically tight labor market. The four-week moving average of initial claims, which helps establish whether layoffs are on the rise in the US economy, also fell.4

One factor that may be working in the Federal Reserve’s favor is the stronger US dollar. The ICE U.S. Dollar Index, which tracks the performance of the dollar against a basket of foreign currencies, has surged over +15% year-to-date through September 30. The dollar has notably reached parity with the euro for the first time since 2002 and has also risen to multidecade highs against the British pound and Japanese yen. Since a strong US dollar lowers the price of imported goods and services while also curbing demand for US exports (and thus potentially slowing economic growth), it can help ease price pressures.5

The Federal Reserve may also benefit from generally tighter financial conditions, signs of which are starting to emerge in the capital markets. The IPO market in the US and abroad has slowed to a trickle compared to 2021, with only 187 offerings in the US raising less than $22 billion year-to-date. In 2021, IPOs raised over $300 billion.6 Banks are also starting to pull back from leveraged loan and junk bond deals, as demand from investors is notably subsiding. Anecdotally, a consortium of banks led by Bank of America and Barclays cancelled a plan to sell $3.9 billion of debt used to finance Apollo Global Management’s purchase of certain assets and operations of Lumen Technologies, after indicating the banks had not received enough indications of interest from investors.7

Overseas, U.K. markets appeared to be jolted by a sweeping plan from incoming prime minister Liz Truss to cut taxes on corporations and the highest income earners, while also implementing new spending. This proposal put the U.K. government firmly at odds with the Bank of England, which has been raising rates since December in an effort to slow growth and halt the surge in prices. Bond and currency markets in the U.K. responded viciously to the policy roll-out, with yields on U.K. gilts surging while the British pound fell to its lowest level ever against the dollar. The Bank of England responded with an emergency intervention in bond markets, announcing plans to purchase £65 billion in gilts over 13 trading days to ease upward pressure on yields (though far less than £5 billion per day has been deployed thus far). Yields on 30-year UK gilts fell from 5% to just below 4%, though they remain higher than before Prime Minister Truss’s announcement.8

We believe that the events highlighted above are but a few indications that financial conditions are indeed becoming very tight globally and combined with recent problems at a well-known Swiss investment bank, are indicating that something may be about to ‘break’ as has happened when conditions have been tight in the past.  As a result, some believe that the Federal Reserve may have to pivot to easier conditions sooner than recent rhetoric has suggested, to avoid an exacerbation of an already problematic environment.  This, combined with a very oversold equity market, could fuel at least a partial reversal of September’s market decline.  As always, we are monitoring the situation and stand ready to change the portfolio’s contours if we deem it necessary.

Sources:

1https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics

2https://www.cnn.com/2022/09/21/economy/fed-rate-hike september#:~:text=The%20median%20federal%20funds%20rate,elevated%20at%202.9%25%20in%202025.

3https://www.bea.gov/news/2022/personal-income-and-outlays-august-2022-and-annual-update#:~:text=From%20the%20preceding%20month%2C%20the,price%20index%20increased%200.6%20percent.

4https://www.wsj.com/articles/inflation-consumer-spending-personal-income-august-2022-11664484435

5https://www.wsj.com/articles/inflation-keeps-the-u-s-from-stepping-in-to-slow-dollars-rapid-rise-11664663619

6https://www.bloomberg.com/news/articles/2022-09-29/ipos-vanish-in-third-quarter-as-market-mayhem-saps-deal-appetite

7https://www.reuters.com/markets/deals/wall-street-banks-set-cancel-39-billion-brightspeed-debt-sale-2022-09-29/

8https://www.wsj.com/articles/u-k-leader-liz-truss-faces-political-backlash-after-sparking-market-turmoil-11664902325?mod=hp_lead_pos6

As of September 30th, 2022

WEBINAR- Midcycle Slowdown, or Recession in the Offing?

October 13, 2022 – Midcycle Slowdown, or Recession in the Offing?

Published on October 3rd, 2022

Please join us for a video call on Thursday, October 13th at 12 pm (ET). John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, will sit down to discuss:
  • Inflation: Confluence of Factors
  • Powell Pivots: Transitory to Persistent
  • 2023 Bull / Bear Debate
Register here for Midcycle Slowdown, or Recession in the Offing?  

Higher for Longer – Post Federal Reserve Meeting Commentary

Higher for Longer – Post Federal Reserve Meeting Commentary

Published on September 26th, 2022

Higher for Longer

The Federal Reserve concluded its meeting this past Wednesday by voting to raise its benchmark overnight interest rate by 0.75% to a new range of 3.00-3.25%. We believe an increase of this magnitude was widely anticipated by investors. The higher-than-expected August consumer price inflation data disclosed on September 131 supported the decision to maintain a rapid pace of increases, in our view. And financial press reports over the prior week that suggested an increase of this magnitude went unchallenged by Federal Reserve leadership.

The Federal Reserve also released its Summary of Economic Projections (SEP) in conjunction with Wednesday’s meeting. The SEP forecasts another 1.25% increase in the benchmark rate by year end.2 We believe this was modestly higher than expected by most investors. In our view, this creates a baseline expectation of another 0.75% increase on November 2, a further continuation of the current rapid pace. But a significant minority of the Federal Open Markets Committee provided a forecast consistent with a 0.50% increase on November 2,2so the debate remains unsettled, and will likely turn on economic reports, market moves, and geopolitical developments between now and then.

The Federal Reserve’s main message on Wednesday appeared to be that it would not deviate from what it outlined at its Jackson Hole conference. Federal Reserve Chairman Powell said on August 26 at Jackson Hole that the central bank’s commitment to taming inflation is “unconditional,” and that doing so would require maintaining a restrictive monetary policy “for some time.”3 In the September SEP, the Federal Reserve appears to have effectively marked to market its monetary policy under this rubric after inflation had proved more stubborn than expected over the last few months.2 Compared to a few months ago, the Fed now expects higher interest rates, slower growth, and higher unemployment.

In our view, the policy actions and related disclosures by the Federal Reserve on Wednesday modestly raise the probability of recession over the next 12 to 18 months. This may be reflected in the Treasury yield curve, as the 2-year yield fell further below the 10-year yield following the report. The spread between these yields widened to 0.53% from 0.41% the day before.4 The yield curve has been inverted by this measure since July 5. Inversions of this segment of the curve of this length and magnitude historically have been fairly good predictors of future recession. They are thought by some to suggest that monetary policy is too restrictive relative to the underlying strength of the economy.

Prior to the Jackson Hole conference, the U.S. equity market had been rallying. From the June 16 low of 3,666 the S&P 500 advanced 15% through August 25, the day before Federal Reserve Chair Powell spoke.5 Early on, we believe this rally was supported by the extremely oversold market conditions in mid-June. At the time, the Bull-Bear spread in the American Association of Individual Investors survey and the low percentage of NYSE-listed stocks trading above their 200 day moving averages were both indicating that the market was oversold.6 We have also heard from many trading desks around wall street that investor positioning is very light, meaning that there is much more cash on the sidelines than normal.  All of these speak to extremely bearish sentiment that tends to spark violent reversals on any positive news for the market. 

By August, we believed stocks were rallying based on the idea that inflation might have peaked and therefore the Federal Reserve would not have to raise interest rates as rapidly as feared.  On August 10 the July CPI was flat from June. Both headline and core measures were lower than expected. West Texas crude fell 29% from $122 on June 8 to $87 on August 16.7 At the time, the probability of a soft landing, where the Federal Reserve does not tighten so much as to induce a recession, seemed higher.

However, the market has now given back most of these gains. Investors reacted negatively to the Jackson Hole speech, the hot September CPI, and Wednesday’s Federal Reserve meeting. The S&P 500 declined 12% from August 25 to September 23 when it closed at 3,693.8 Overall, we think the Federal Reserve is tightening policy, and while recession risk in 2023 is elevated as a result, the bear market decline in the first half of the year priced this into the market to a significant degree. Excesses in things like cryptocurrency, unprofitable technology companies, SPACs and meme stocks have largely been wrung out of the market.  By August 12, the market had clawed back more than half its bear market losses from earlier in the year. That has happened 13 prior times since WWII and each time stocks did not exceed their prior lows.9

While we are now again close to that market level, in our view, it would take a severe deterioration of economic conditions from here for the S&P 500 to meaningfully decline below the June low.  Investors appear to have shifted into the “recession is coming” camp, and while we think that is a possibility, we also believe that if we do see a recession, it will probably be on the milder side.  Markets are likely to remain choppy as investors digest each data point on inflation and what it might mean for Federal Reserve policy as well as leading indicators and what they might mean for growth. 

Despite all of the above, we believe the risk/reward of the equity market is more balanced than may be appreciated.  We see many reasons for optimism. Europe has had more success placing natural gas in storage than feared, forestalling the worst-case scenario where there is widespread closures of manufacturing plants to allow citizens to heat their homes in winter. China could move away from its Zero Covid policy next year once Xi Jinping is established as Party Chairman in October and President in April. This could be supported by the rollout of an RNA vaccine following a recent change in Chinese regulation. U.S.-China tensions are de-escalating with an agreement to avoid U.S. delisting of Chinese stocks and a likely Xi-Biden Summit at the G-20 meeting on November 15 in Bali, Indonesia. Here at home, the labor market is healthy, corporate earnings are growing, credit spreads have not widened to recessionary levels, and the most recent manufacturing and services PMIs indicate reasonably healthy levels pointing to continued expansion.

To be sure, we also have many concerns. Atop our list may be the potential for escalation in the Ukraine conflict. Russia may act to curtail grain, fertilizer, or crude oil exports, which might exacerbate inflation and further increase the risk of global recession. But we do not believe Russia’s recent mobilization of reserve forces, or its nuclear rhetoric meaningfully changed this risk as it relates to the capital markets. In the U.S., some heavily indebted corporate debt issuers have recently faced challenges raising additional funds. And some emerging market nations are at risk of currency crisis or sovereign default. Most at risk are net importers of food and fuel, with trade deficits, and US$-denominated debt. But we believe they are of insufficient size and interconnectivity to spark a global conflagration.

Given our balanced outlook, we have taken some cautious steps in recent weeks to seek to add incremental upside capture so as to keep pace should the market advance from here. Because we expect volatility to persist, we are doing so opportunistically, and still maintain a higher-than-normal amount of spare cash. If economic data, geopolitical events, or market signals instead lead us to believe the risk-reward environment has deteriorated, we believe that we are already reasonably well positioned with shares of many companies we believe to be “recession resistant” as well as a portfolio exhibiting low downside capture, and we have the ability to get more defensive should we determine it might be necessary.

Source:

1 WSJ – Inflation Report Keeps Fed on Aggressive Rate-Rise Path 9/13/22

2https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20220921.htm

3https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm

4Bloomberg – US 2yr-10yr spread – daily closing prices

5Bloomberg – S&P 500 Total Return Jun 16 – Aug 25, 2022

6Bloomberg – AAII BullBear TD 2022

7Bloomberg – W Tx intermediate crude daily closing June – Aug 16, 2022

8Bloomberg – S&P 500 Total Return Aug 25 – Sept 22, 2022

9Bloomberg – Taking Stock: Indicator With 100! Track Record Says Bottom Is In, 8/16/2022

As of September 23, 2022

U.S. banks’ key performance metric set to turn around in second half

Jason Benowitz Featured in Reuters “U.S. banks’ key performance metric set to turn around in second half”

Published on September 14, 2022

“Banks were among the worst-performing sectors in the second-quarter earnings season as revenue growth was meager and profit decline was significant,” said Jason Benowitz, senior portfolio manager at Roosevelt Investments. “We expect some modest improvement from this low level in the third quarter.”

Read the Full Article Here

August 2022 | Equity Commentary

August 2022 | Equity Commentary

Published on September 8th, 2022

Market Overview

Last month, we suggested that equity markets seemed too optimistic about the future path of monetary tightening. Futures markets were forecasting the Federal Reserve would actually begin cutting rates by next summer, an assumption explicitly at odds with what Federal Reserve officials were communicating publicly. Nevertheless, markets appeared to rally all summer on the idea that some combination of easing inflation, a weakening economy, and rising unemployment would prompt the central bank to eventually reverse course. A hawkish 8-minute speech by Federal Reserve Chairman Jerome Powell in Jackson Hole quashed these hopes and sent equities tumbling on the final days of the month. The S&P 500 erased early August gains to finish the month down -4.1%, and the weakness in bond markets that has persisted all year continued, with yields on 1-, 3-, 5-, 10-, and 30-year U.S. Treasury bonds all rising during the month, closing above 3%. 

At the annual gathering of central bankers in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell gave a speech that lasted less than ten minutes but has been impacting equity markets for several days since. Chairman Powell reiterated the Federal Reserve’s commitment to “a restrictive policy stance for some time,” but market consternation appeared to be tied to the statement that the Federal Reserve would “keep at it [rate hikes and tightening] until the job is done.”1 Powell’s references to the Volcker Fed, which notably pursued and even welcomed an economic recession in order to tamp inflation, in our opinion, made it even more clear to market participants that the “Fed put” was off the table.

At this stage, we believe the most the financial market may be able to hope for is a 0.50 percentage point increase at the September FOMC meeting, potentially slowing to 0.25 percentage point increases in future meetings, versus additional 0.75 percentage point increases. This has created an environment where ‘good news is bad news,’ particularly with regards to the US labor market. Since the Federal Reserve is sensitive to wage growth and its impact on inflation, a stubbornly tight jobs market is counterproductive to the Federal Reserve’s objective.

The August payrolls report did not help. The Bureau of Labor Statistics reported that the US economy added 315,000 new jobs for the month, which is only slightly lower than the previous six-month average of 381,000 new positions per month.2 It was slightly encouraging that monthly wage growth eased in August, with hourly earnings for private sector workers rising 0.3% month-over-month, and 5.2% from a year earlier. But this modest wage growth was coming off an acceleration in Q2, when wages grew at 1.6% versus the 1.3% growth posted in Q1.2

One bright spot is that approximately 786,000 potential workers entered the workforce last month, which improved the labor participation rate to levels (62.4%) not seen since March 2020.2 More workers can boost economic output, but they can also remove some of the wage pressures that stem from a tight labor market. We believe additional workers may have no trouble finding a job, as the ratio of job openings to unemployed people is the highest it’s been since the Labor Department started keeping records. Overall, in our opinion, the US jobs market remains in solid shape, which many would argue is good news for the economy but bad news for Federal Reserve policy.

What matters above all is whether inflationary pressures are starting to abate. July’s Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s preferred measure of inflation, fell by 0.1% month-over-month and decelerated to 6.3% year-over-year from June’s levels.3 Falling gas prices were a key factor in the decline, and dozens of goods included in the index have shown evidence of peaking. Food prices continued to rise, however, up 1.3% month-over-month.3

Another important inflation metric is the ‘prices-paid index,’ which the Institute for Supply Management measures via surveys of US manufacturers. Encouraging signs of moderating inflation pressures emerged here as well, with the prices paid index falling from 60.0 to 52.5, its lowest level since late 2020 and well below the March 2022 peak of 87.1. Easing supplier delivery times and order backlogs also suggested that supply chain pressures were abating, which over the past year had been a major factor in driving prices higher.

On the services side of the US economy, it is somewhat unclear whether August was a month of expansion or contraction. The Institute for Supply Management reported that the services sector grew at a faster pace in August compared to July, with a reading of 56.9 versus 56.7, respectively.4 The data firm S&P Global offered a different take, stating that the services sector actually contracted in August due to falling demand. Their Services PMI Business Activity Index showed a 43.7 print for August, down from 47.3 in July and marking the fastest deceleration since May 2020.5 These conflicting readings of US economic activity are emblematic of the challenges in understanding exactly where the US economy is in this cycle, which we believe may be best described as plateauing versus contracting. 

A final note to mention is that China’s economy is in a notable slump, with data in everything from factory activity, consumer spending, and housing all in decline. The worst heat wave in 60+ years, a drought, and ongoing Covid-19 restrictions have all served as stiff headwinds to China’s economic growth. In particular, the heat wave and drought resulted in electricity shortages which curtailed manufacturing activity. Property developers in China are also reporting a plunge in activity, with sales off more than 30% compared to August 2021.6 The services sector has been hanging on, however, with China’s nonmanufacturing purchasing index slightly in expansionary territory with a 52.6 print in August. Services now make up 53% of China’s economy.7

Source:

1https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm

2https://www.bls.gov/news.release/pdf/empsit.pdf

3https://www.bea.gov/news/2022/personal-income-and-outlays-july-2022

4https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/august/

5https://www.pmi.spglobal.com/Public/Home/PressRelease/c99346fb0f424ff291acbf2598a1bda0

6https://www.asiafinancial.com/china-home-sales-fell-for-14th-month-in-a-row-wsj

7http://www.stats.gov.cn/english/PressRelease/202209/t20220901_1887830.html

As of August 31st, 2022

July 2022 | Equity Commentary

July 2022 | Equity Commentary

Published on August 9th, 2022

Market Overview

U.S. and global stocks have rallied sharply off mid-June lows, with the S&P 500 index rising nearly 13% from the mid-June low through the end of July. Perhaps counterintuitively, stocks may have staged this rally in response to weakening global economic data. In our view, market participants are wagering that slowing economic growth—which contributes to falling commodity prices and reduced inflationary pressures—will prompt the Federal Reserve to moderate its pace of monetary tightening. The bond market also seemed to confirm a slowing economic growth outlook, as the 10-year U.S. Treasury bond yield fell from a June 14 high of 3.47% to 2.65% by the end of July.1

As expected, the Federal Reserve raised the fed funds rate by 75 basis points at the July 26-27 meeting, marking the fourth rate increase in 2022. In comments delivered after the announcement, Federal Reserve Chairman Jerome Powell acknowledged the US economy was slowing, particularly as consumers are facing challenges from higher food and energy prices. These comments combined with weakening economic data had bond and futures markets betting the Federal Reserve would raise rates through the end of 2022 only to lower them in early 2023. As of early August, the Fed Funds futures market indicates that investors believed the Fed Funds rate will plateau at 3.44% in February and March, with rate cuts commencing in May 2023, bringing the fed funds rate down to 2.9% by December 2023.2

We think these market-based views of future interest rate policy may be too optimistic, as they assume the Federal Reserve is making policy decisions based on economic growth data alone. Bond traders appear to have grown accustomed to 40-plus years of monetary easing from the Federal Reserve any time the economy shows signs of weakening, an assumption we think fails to acknowledge the central role inflation is playing in policy-making decisions today. While there are signs inflation pressures may be easing, particularly with falling commodity prices over the past month, it is hard to imagine that inflation will be low enough next spring for the Federal Reserve to feel comfortable cutting rates. 

However, the US dollar has been very strong year to date, and the Federal Reserve is in the early stages of its quantitative tightening program (the flip side of quantitative easing when it was buying bonds to hold on its balance sheet).  These two factors are believed to effectively add to the monetary tightening already brought about by the Federal Reserve’s rate hikes, so it is possible the Federal Reserve may not need to hike as much going forward as some investors with more hawkish views may believe. 

While the inflation picture remains uncertain, the case for an economic slowdown in the US and abroad is growing. July factory activity in the US saw its weakest growth in two years, with the Institute for Supply Management’s index of manufacturing activity declining to 52.8 from 53 in June. New orders fell for the second straight month as many businesses worried about softening demand, seeing inventories build back up in the supply chain. On the positive side, production and the backlog of orders grew in July, and an index of prices paid fell sharply from 78.5 in June to 60 in July. The ISM attributed this sharp decline to the impact of falling commodity prices.3

The US housing market appears to be showing more signs of cooling off. Construction spending on single-family homes fell by 3.1% in June, the largest percentage since early in the pandemic. The Commerce Department also reported that new home sales in June fell to their lowest level since the early days of the pandemic, which all suggests that rising mortgage rates and higher costs are pulling builders and buyers out of the market.4 Existing home sales fell for a fifth month in a row, to a two-year low. 

Even as the broad economy weakens, the jobs market continues to power ahead. The US added 372,000 jobs in June, and the Labor Department reported that there are still a seasonally adjusted 10.7 million open jobs in the economy.5 Payroll growth in the US economy has continued to defy weakening output, with more jobs being secured in the first six months than any other post-WWII period when the economy was technically contracting. Services employment has particularly been in short supply—the Institute for Supply Management’s services survey showed an increase to 56.7 in July from 55.3 in June, with growth in new orders suggesting the shift of consumer spending to services has persisted this summer.6 The bottom line is that even as consumers pull back, companies are still appear to be struggling to hire enough workers to supply enough goods and services to meet demand.

With economic data mixed and output clearly slowing, the stock market nevertheless staged a sharp rally in July, which we think was driven by three factors. The first factor we cited above, a growing expectation the Fed might slow and possibly reverse course on rate increases over the next year or so. The second is that we believe the market was oversold in mid-June as indicated by a number of sentiment and technical measures. The percentage of stocks on the New York Stock Exchange trading above their 200-day moving average had fallen to a very low 15% by mid-June and usually registers as a contrarian indicator.  Similarly, the American Association of Individual Investors (AAII) Sentiment Survey showed the number of bearish investors surging to 59.3% by June 22,7 a level of extreme bearishness that has tended historically to align with market bottoms. Wall Street sentiment as measured by a Bank of America reading of sell-side strategists also fell to a five year low in early July, which again has historically signaled a potential rally was in the offing.

Finally, there were S&P 500 earnings reports and outlooks, which to date have not been as negative as many investors may have feared given the market’s weakness in June leading into earnings season. Shortfalls in profit were generally not accompanied by shortfalls in sales, and banks largely reported strong loan and consumer credit activity. Major corporations are also reporting strong investment activity, with capital expenditures growing at a faster pace than stock buybacks for the first time since Q1 2021.

Source:

1https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics

2https://www.wsj.com/podcasts/minute-briefing/investors-bet-that-the-fed-will-cut-interest-rates-in-2023/3b571620-1730-4d73-8400-506287ea00af

3https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/

4https://www.commerce.gov/data-and-reports

5https://www.bls.gov/

6https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/

7https://www.aaii.com/sentimentsurvey/sent_results

As of July 31st, 2022

PayPal shares jump on Elliott’s $2 bln stake, annual profit guidance raise

Jason Benowitz Featured in Reuters “PayPal shares jump on Elliott’s $2 bln stake, annual profit guidance raise”

Published on August 2, 2022

“Considering the stock’s meaningful underperformance over the last nine months, this may be enough to satisfy investors, who have lost some measure of faith in management credibility after so many downward revisions,” said Jason Benowitz, senior portfolio manager at Roosevelt Investments.

“PayPal let an activist investor inside the tent with an information sharing agreement. We expect the company to materially refresh its top management layer and make tough choices to improve profit margins,” said Benowitz.

Read the Full Article Here

Analysis: Amazon has a Prime edge over Walmart: richer customers

Jason Benowitz Featured in Reuters “Analysis: Amazon has a Prime edge over Walmart: richer customers”

Published on July 29, 2022

“Amazon delivers a significant amount of its total gross merchandise volume via third-party sellers,” said Jason Benowitz, senior portfolio manager at The Roosevelt Investment Group. “In this business, Amazon collects fees for third-party seller services that we believe are less dependent on the nature of the items sold,” Benowitz said. This also insulates Amazon from changes in consumer spending patterns and may have had a lesser impact on profitability compared to Walmart or other traditional retailers, he added. Read the Full Article Here

Second Quarter 2022 | Preferred Securities Portfolio Commentary

Published on July 25th, 2022

Second Quarter 2022 | Preferred Securities Portfolio Commentary

Overview

In the first half of 2022, fixed income markets experienced surprisingly large declines. Initially, concerns over elevated inflationary pressures and geopolitical events triggered expectations for higher interest rates, which weighed on fixed income valuations with longer durations. During the second quarter, credit concerns also began to surface as it became clear that the Federal Reserve sought even tighter monetary policy to tame the surging (and broadening) levels of inflation, even at the cost of potentially slowing down the economy.       As of June 30, 2022

Second Quarter 2022 | Fixed Income Commentary

Published on July 25th, 2022

Second Quarter 2022 | Fixed Income Commentary

Overview

In the first half of 2022, fixed income markets experienced surprisingly large declines. Initially, concerns over elevated inflationary pressures and geopolitical events triggered expectations for higher interest rates, which weighed on fixed income valuations with longer durations. During the second quarter, credit concerns also began to surface as it became clear to us, that even tighter monetary policy would be necessary to tame the surging (and broadening) levels of inflation, even at the cost of potentially slowing down the economy. Roosevelt’s Current Income Portfolio (CIP) declined 3.1% gross and 3.2% net, in the second quarter, taking the first half performance to a decline of 7.2% gross and 7.6% net. The Bloomberg Intermediate US Corporate Bond Index (comprised of 1-10 year maturity investment grade bonds) declined 3.9% and 9.0% in the second quarter and year-to-date, respectively and the ICE BofA Preferred Securities Index, P0P1, (comprised of 40% institutional and 60% retail preferred securities) declined 7.7% and 13.9% in the second quarter and year-to-date, respectively. Throughout the quarter, the Consumer Price Index and Personal Consumption Expenditures Index increased to some of the highest levels in the past 40 years1, and the Federal Reserve hiked interest rates by 50 bps and 75 bps in April and June, respectively, and signaling the need for the Federal Reserve to possibly hike more times this year. Moreover, in a statement made to Congress in June, Federal Reserve Chair Powell vowed that the committee’s commitment towards fighting inflation was “unconditional” and that price stability would be prioritized over both employment and growth.2 Accordingly, the market implied Fed Funds Rate in December 2022 increased to 3.4%, up from just 0.8% at the start of the year3, as markets reacted to the more hawkish outlook by the Federal Reserve. We believe expectations for the FOMC to hike interest rates higher and faster than previously expected not only caused the yield curve to move higher, however, but also increased the possibility of an economic slowdown or even a recession. As a result, credit spreads widened across the quality spectrum to reflect the growing levels of uncertainty. Higher yields and wider credit spreads appear to have had the greatest impact on fixed income securities having longer durations and lower quality credit ratings.  As such, the Intermediate Corporate Bond Index and the ICE BofA Preferred Securities Index underperformed CIP due to their longer durations, and greater spread durations, which indicate to us greater price sensitivities to changes in interest rates and credit spreads. Due to the sharp selloff in fixed income markets year-to-date, Roosevelt is now buying securities at considerably higher yields than at the start of the year. The average yield to worst on the US Corporate Bond Index reached over 5% for the first time since 2009 and we are now able to re-invest proceeds from maturing securities at average yields to worst of 4.8%. With respect to the credit quality of the portfolio, we believe the investment grade securities in the portfolio have a solid footing heading into a potential recessionary environment. At present, companies rated BBB- or better generally have some of the highest levels of interest coverage, and lowest levels of net leverage, that the group has had in recent years. In addition, investment grade companies tend to be larger, and more diversified in terms of their business segments, putting them in a better position to withstand potential cost pressures and/or declining profit margins in a recession. Furthermore, many companies have “termed out” their debt in recent years by calling securities early and re-issuing them at lower costs and longer maturities, effectively reducing the chances of facing pressures from near-term funding needs. Therefore, based on the current interest rate environment and our view of the resiliency of high-quality corporate issuers, we believe investing in corporate bond and preferred securities provides an attractive risk/reward today. Over the past year the portfolio management team has sought to defensively position CIP for a volatile interest rate environment and the potential for wider credit spreads, generally tilting the portfolio towards lower duration and more recently, higher quality securities. While we continue to favor a mix of both fixed and fixed to floating rate coupon securities, given the increased chances of a recession we have taken additional steps to slightly upgrade credit quality in the portfolio.  In addition, with the market now discounting a greater likelihood of rate cuts in 2023, we believe the portfolio’s very short duration may no longer be optimal. We aim to take a balanced approach in seeking high current income without taking on excess credit risk or making interest rate bets in either direction. As always, we continue to monitor geopolitical events and the macroeconomic environment as we seek attractive levels of income and capitalize on the opportunity to invest in higher yields. Source: 1Https://www.bea.gov/data/personal-consumption-expenditures-price-index 2https://www.federalreserve.gov/monetarypolicy/files/20220617_mprfullreport.pdf 3https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.html

Performance Summary as of 6/30/2022

As of June 30, 2022

WATCH NOW – Battening Down the Hatches in a Slowing Economy

WATCH NOW – July 21st, 2022 – Battening Down the Hatches in a Slowing Economy

Published on July 22, 2022

John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, sat down to discuss the latest updates in the financial markets from this past quarter. In this webinar, they also discussed:
  • Recession: Likelihood, Timing and Severity
  • Investing in a Late Cycle or Recessionary Environment
  • Why Stay Invested?
 

Nasdaq Win Streak Is Fueled by Tech Losers Turning Into Winners

Jason Benowitz Featured in Bloomberg “Nasdaq Win Streak Is Fueled by Tech Losers Turning Into Winners”

Published on June 8, 2022

Jason Benowitz, a senior portfolio manager at Roosevelt Investments, said the prospect of more tightening from the Fed brings too many risks. “We are waiting for clearer signs that we are closer to a bottom and we’re not there yet,” he said. Read the Full Article Here

June 2022 | Equity Commentary

June 2022 | Equity Commentary

Published on July 8th, 2022

Market Overview

U.S. equities experienced a broad selloff in June, with the S&P 500 index dropping 8.26%. All 11 S&P sectors suffered declines for the month. The traditionally defensive Consumer Staples sector declined the least, while Energy fell the most. The first half of 2022 was among the worst starts to a year in history for stocks – most major equity categories entered bear market territory, and the S&P 500 fell by 20% through June 30. 10-year U.S. Treasury bonds also experienced a wild swing over the course of the month, with yields jumping from 2.85% to 3.48% by mid-month, only to fall back to 3% by month end.1

U.S. GDP contracted at an annual rate of -1.6% in Q1 2022, and according to the July 1 GDPNow estimate from the Atlanta Federal Reserve, the economy may have contracted another -2.1% in Q2.2 The GDPNow forecasting tool is notoriously unreliable, but signs are pointing to two consecutive quarters of negative growth – the technical definition of a recession. Whether or not the U.S. entered recession in the first half of 2022 remains to be determined—the National Bureau of Economic Research (NBER) makes the official declaration, and in doing so they also weigh other factors like strength or weakness in the labor market, manufacturing activity, and real incomes.

If NBER declares that a recession began in the first half of this year, it would be different from the past 12 recessions the U.S. has experienced. In every postwar recession, economic output has fallen while the unemployment rate has moved higher. Over the past six months, however, the unemployment rate has fallen from 4% (December 2021) to 3.6% by the end of June. For context, there are 1.3 million Americans receiving unemployment benefits today, which is dramatically lower than the 6.5 million people on unemployment in the depths of the 2008 – 2009 Great Recession.3 Jobs remain plentiful, but the 4-week average of initial jobless claims has gone up for 11 of the past 12 weeks, and rising claims has historically been a leading indicator for economic weakness. This metric should be worth watching in the coming months.

The June Manufacturing and Services PMIs in the United States also are not yet flashing recessionary conditions. According to the Institute for Supply Management, the June Manufacturing PMI came in at 53%, which marked a significant deceleration from May’s 56.1% but still indicates expansion. A similar outcome was seen in the Services sector, which posted a reading of 55.3% and continues its streak of expansion for 25 months straight. Globally, flash PMIs show most major economies remain in expansion territory, though all have decelerated from the spring. Readings in the low 50s – where most major economies now reside – imply modest growth but not necessarily recession.4

Higher food and gas prices are clearly weighing on people’s attitudes about the economy, with the University of Michigan’s Consumer Sentiment Index falling to its lowest reading ever.  Despite this, household finances remain relatively strong. At the end of Q1 2022, Federal Reserve data showed households with $18.5 trillion in cash in checking accounts, savings accounts, and money market funds. Before the pandemic, that figure was $13.3 trillion.5

Consumer spending rose by a seasonally adjusted 0.2% in May, marking the slowest increase in 2022, as sour sentiment is starting to affect spending habits. Retail sales fell in May for the first time this year, but a shift in spending from goods to services may have driven this decline. One bright spot was orders for long-lasting durable goods like refrigerators, cars, and washing machines, which rose 0.7% in May and marked the seventh increase in eight months. Orders for nondefense capital goods, which is a good indicator for business investment, also ticked 0.5% higher in May. 6

Commodity prices retreated in June largely across the board, perhaps as the market began to price in the likelihood that tighter global monetary policy would have the effect of cooling demand. Crude oil prices fell below $100 a barrel from $120 earlier in the month, and other raw materials like cotton, copper, lumber, wheat, corn, and soybeans all fell—in some cases dramatically—from highs. Commodity prices are notoriously volatile and can be affected by everything from the weather to geopolitics, but there is also the possibility that traders are anticipating more challenging economic conditions from here, which could curtail demand.7

The stock market’s weak performance in the first half of 2022 may signal that future economic weakness is already being factored into prices. But as we wrote in our June 13 piece titled “Battening Down the Hatches,” reduced earnings expectations may not be fully baked into prices just yet. Corporate profit margins are almost certain to retreat from record highs as producer prices remain elevated and labor costs rise. We think falling margins and growing uncertainty could cause companies to slow hiring and deliver more cautious earnings guidance for the rest of the year, which has equal potential to be a positive or negative surprise for the stock market. We therefore continue to believe it is appropriate to assume a more conservative stance in the portfolio, and continue to hold a higher-than-average cash balance along with a higher proportion of companies which we believe are less exposed to the potential headwinds of a recession.

Source:

1https://www.wsj.com/articles/markets-head-toward-worst-start-to-a-year-in-decades-11656551051

2https://www.atlantafed.org/cqer/research/gdpnow

3https://www.wsj.com/articles/recession-economy-unemployment-jobs-11656947596

4https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/

5https://www.wsj.com/articles/recession-economy-unemployment-jobs-11656947596

6https://www.bloomberg.com/news/articles/2022-06-30/us-inflation-adjusted-spending-declines-for-first-time-this-year

7https://www.wsj.com/articles/falling-commodity-prices-raise-hopes-that-inflation-has-peaked-11656811949

As of June 30th, 2022

Inflation – Things You Should Consider

Inflation – Things You Should Consider

Published on June 15th, 2022

Rising inflation can affect many areas of your financial plan. Unfortunately, many people take no action or worse, make hasty decisions, which can hurt them in the long run. Our “What Issues Should I Consider When Dealing with High Inflation” checklist can pave the way for better planning and decision-making during an inflationary period. This checklist can help guide you through often under-appreciated areas that inflation can affect, including personal spending, budgeting, assets, taxes, insurance, estate planning and more.  

Have you been contemplating these issues?

  • The effect inflation may have on your cash flow and budgeting.
  • Inflation’s consequences for your assets and the solutions that can mitigate the damage.
  • Tax planning ideas that may be relevant to you during inflationary periods.
  • Miscellaneous areas that high inflation may affect. 

We can try to help you better prepare for these issues.  After all, inflation affects many different areas of your financial plan, including living expenses, spending levels, income needs, and portfolio withdrawals and volatility.

While the checklist can help you spot good ways to identify all the different issues to consider, we are always available to meet with you to discuss your finances and goals, and to identify what the best opportunities are for you.

Battening Down the Hatches

Battening Down the Hatches

Published on June 13th, 2022

A few weeks ago, the stock market appeared to have put in a near-term bottom, as there were signs that inflation may have been in the process of peaking.  Interest rates also had peaked and were in the process of declining.  A peak in inflation would take pressure off the Fed to hike rates as aggressively as might be needed otherwise, to bring inflation back to its preferred target range in the low single digits vs. the current high single digit level.  It would also bring some relief to stock and bond investors who have been living with higher volatility and declining portfolios to date in 2022.

Year to date, the investment team has largely been adopting a more cautious approach to the market given what we saw as the higher than usual amount of uncertainty in the financial markets brought about by the unwelcome spike in inflation, the Federal Reserve, the Ukraine invasion, and the lockdowns in China.  Earlier in the year, the investment team increased its assessment that a recession is likely within the next 18-24 months.  In equities, for the most part the team has been shifting the portfolio gradually in the direction of what we consider to be ‘recession resistant’ companies, or those who in past recessions demonstrated an ability to outperform in a weaker economic environment.  We hold more cash than is typical for our portfolio, and we have also gradually increased our energy positions to try and hedge against the risk of even higher oil prices than we are now seeing.   In fixed income, the team has incrementally been adding higher coupon securities (which are more attractive in higher interest rate environments), and securities with higher credit ratings (which tend to hold up better in recessionary periods). 

Last Friday, the latest reading of the consumer price index, or CPI, negatively surprised investors, indicating that for the time being inflation has not peaked, and a separate survey from Friday (the University of Michigan Consumer Inflation Expectations) showed that for the first time since 2008, investors are now expecting inflation 5-10 years from now in the range of 3.3%, well above the Federal Reserve’s target of 2%.  %.  It is important for the Federal Reserve to keep expectations of inflation anchored near its target, in addition to actually achieving a target CPI in the range of 2%.1 Relatedly, the average national price of unleaded gasoline has reached $5 per gallon, after starting the year under about $3.30.2 Such dramatic increases in the price of gasoline in the past have typically been precursors to recessions.

The negative surprises Friday have increased the odds, in our view, that the Federal Reserve will have to hike interest rates more aggressively than previously estimated, which is why the market declined sharply on Friday and again on Monday.  In turn, we believe that this has increased the odds of the U.S. economy experiencing a recession, because interest rate policy tends to have a lagged effect on economic fundamentals.  The Federal Reserve and the administration appear to be in a bind, because they have limited tools to bring inflation under control other than to tighten monetary policy.  Further, the Federal Reserve needs to tighten policy until the economy slows, and the resultant slowdown in demand often helps bring about lower prices for goods and services.  While we do not have a crystal ball that tells us a recession is around the corner, we are battening down the hatches in the event that conditions deteriorate, as seems more likely today.

The stock and bond markets are discounting mechanisms; they represent the collective investment community’s views on what will be happening with the economy a year from now – and in future years.  With the stock market having already declined 20% so far this year, a lot of negativity has already been incorporated into security prices.  However, our concern is that a potential reduction in earnings expectations by investors may not be fully baked into prices.  While to date corporate fundamentals have been quite strong, and Wall Street analysts have been raising their estimates of corporate earnings overall for 2022 and 2023, we now believe it is likely that companies and perhaps consumers will start to act more cautiously in their levels of spending.  In our view corporations now seem more likely, in the face of growing uncertainty, to slow hiring and be more guarded when they provide guidance for the rest of the year.   As a result, analysts may start to cut their earnings estimates, which serve as a barometer for the level of the stock market that is based upon those future earnings.  We therefore believe it is appropriate to assume a more conservative stance as it pertains to the nature of the portfolio, trimming and selling a few positions we hold which carry higher valuations and/or more cyclical exposure that would likely be hurt by a recessionary environment. 

What might cause us to change our more cautious views?  Anything that could represent a dramatic shift downward in the current drivers of inflation.  One of the most pernicious drivers of today’s high inflationary readings has been the price of crude oil.  While changes in the price of crude oil do are not included in the so-called “core” CPI, these prices do feed through into the core because the cost of shipping goods – everything from groceries to TV sets to coal – has increased as producers of those goods have had to pay more for transportation.  So, anything that might bring about a dramatic reduction in the cost of oil would be a positive.  Housing costs have also been contributing to higher CPI, and unfortunately the primary way the Federal Reserve can impact housing costs is through higher interest rates feeding through to make mortgage rates so costly that the housing market has to cool off. 

We could also be wrong about a coming deterioration in spending patterns by consumers and companies.  Consumers saved a great deal of money during the pandemic period when they were at home and unable to get out and spend.  Corporate balance sheets are strong and companies with debt generally used the low interest rate environment of the last few years to refinance expensive debt and also extend the maturity structure of their debt farther into the future.  But we have already seen evidence of lower-end consumers pulling back on spending because their discretionary budgets have been nicked by gasoline prices.  And there are some concerns that corporate inventory levels may be too high (we have seen this at Walmart and Target in recent weeks), particularly if sales come in lower than anticipated.  In the end though, we believe the Federal Reserve wants to see a deterioration in spending patterns to help reduce inflation.

While we have recently changed our view to reflect a higher likelihood of recession in the coming year, we also maintain our steadfast belief that investments in well-managed companies with strong competitive advantages and great businesses should provide attractive returns over time, and we continue to hold a portfolio of such companies.  Our team will continue to manage the portfolio in a way that we believe provides a good balance of protection against downside risk but at the same time, maintaining the ability to participate in a rising market.

Sources:
1https://www.federalreserve.gov/econres/notes/feds-notes/is-trend-inflation-at-risk-of-becoming-unanchored-the-role-of-inflation-expectations-20220331.htm
2https://gasprices.aaa.com/

As of June 13th, 2022

Battening Down the Hatches

Battening Down the Hatches

Published on June 13th, 2022

A few weeks ago, the stock market appeared to have put in a near-term bottom, as there were signs that inflation may have been in the process of peaking.  Interest rates also had peaked and were in the process of declining.  A peak in inflation would take pressure off the Fed to hike rates as aggressively as might be needed otherwise, to bring inflation back to its preferred target range in the low single digits vs. the current high single digit level.  It would also bring some relief to stock and bond investors who have been living with higher volatility and declining portfolios to date in 2022.

Year to date, your portfolio managers have largely been adopting a more cautious approach to the market given what we saw as the higher than usual amount of uncertainty in the financial markets brought about by the unwelcome spike in inflation, the Federal Reserve, the Ukraine invasion, and the lockdowns in China.  Earlier in the year, the investment team increased its assessment that a recession is likely within the next 18-24 months.  In equities, for the most part the team has been shifting the portfolio gradually in the direction of what we consider to be ‘recession resistant’ companies, or those who in past recessions demonstrated an ability to outperform in a weaker economic environment.  We hold more cash than is typical for our portfolio, and we have also gradually increased our energy positions to try and hedge against the risk of even higher oil prices than we are now seeing.   In fixed income, the team has incrementally been adding higher coupon securities (which are more attractive in higher interest rate environments), and securities with higher credit ratings (which tend to hold up better in recessionary periods). 

Last Friday, the latest reading of the consumer price index, or CPI, negatively surprised investors, indicating that for the time being inflation has not peaked, and a separate survey from Friday (the University of Michigan Consumer Inflation Expectations) showed that for the first time since 2008, investors are now expecting inflation 5-10 years from now in the range of 3.3%, well above the Federal Reserve’s target of 2%.  It is important for the Federal Reserve to keep expectations of inflation anchored near its target, in addition to actually achieving a target CPI in the range of 2%.1 Relatedly, the average national price of unleaded gasoline has reached $5 per gallon, after starting the year under about $3.30.2 Such dramatic increases in the price of gasoline in the past have typically been precursors to recessions.

The negative surprises Friday have increased the odds, in our view, that the Federal Reserve will have to hike interest rates more aggressively than previously estimated, which is why the market declined sharply on Friday and again on Monday.  In turn, we believe that this has increased the odds of the U.S. economy experiencing a recession, because interest rate policy tends to have a lagged effect on economic fundamentals.  The Federal Reserve and the administration appear to be in a bind, because they have limited tools to bring inflation under control other than to tighten monetary policy.  Further, the Federal Reserve needs to tighten policy until the economy slows, and the resultant slowdown in demand often helps bring about lower prices for goods and services.  While we do not have a crystal ball that tells us a recession is around the corner, we are battening down the hatches in the event that conditions deteriorate, as seems more likely today.

The stock and bond markets are discounting mechanisms; they represent the collective investment community’s views on what will be happening with the economy a year from now – and in future years.  With the stock market having already declined 20% so far this year, a lot of negativity has already been incorporated into security prices.  However, our concern is that a potential reduction in earnings expectations by investors may not be fully baked into prices.  While to date corporate fundamentals have been quite strong, and Wall Street analysts have been raising their estimates of corporate earnings overall for 2022 and 2023, we now believe it is likely that companies and perhaps consumers will start to act more cautiously in their levels of spending.  In our view corporations now seem more likely, in the face of growing uncertainty, to slow hiring and be more guarded when they provide guidance for the rest of the year.   As a result, analysts may start to cut their earnings estimates, which serve as a barometer for the level of the stock market that is based upon those future earnings.  We therefore believe it is appropriate to assume a more conservative stance as it pertains to the nature of the portfolio, trimming and selling a few positions we hold which carry higher valuations and/or more cyclical exposure that would likely be hurt by a recessionary environment. 

What might cause us to change our more cautious views?  Anything that could represent a dramatic shift downward in the current drivers of inflation.  One of the most pernicious drivers of today’s high inflationary readings has been the price of crude oil.  While changes in the price of crude oil do are not included in the so-called “core” CPI, these prices do feed through into the core because the cost of shipping goods – everything from groceries to TV sets to coal – has increased as producers of those goods have had to pay more for transportation.  So, anything that might bring about a dramatic reduction in the cost of oil would be a positive.  Housing costs have also been contributing to higher CPI, and unfortunately the primary way the Federal Reserve can impact housing costs is through higher interest rates feeding through to make mortgage rates so costly that the housing market has to cool off. 

We could also be wrong about a coming deterioration in spending patterns by consumers and companies.  Consumers saved a great deal of money during the pandemic period when they were at home and unable to get out and spend.  Corporate balance sheets are strong and companies with debt generally used the low interest rate environment of the last few years to refinance expensive debt and also extend the maturity structure of their debt farther into the future.  But we have already seen evidence of lower-end consumers pulling back on spending because their discretionary budgets have been nicked by gasoline prices.  And there are some concerns that corporate inventory levels may be too high (we have seen this at Walmart and Target in recent weeks), particularly if sales come in lower than anticipated.  In the end though, we believe the Federal Reserve wants to see a deterioration in spending patterns to help reduce inflation.

While we have recently changed our view to reflect a higher likelihood of recession in the coming year, we also maintain our steadfast belief that investments in well-managed companies with strong competitive advantages and great businesses should provide attractive returns over time, and we continue to hold a portfolio of such companies.  Our team will continue to manage the portfolio in a way that we believe provides a good balance of protection against downside risk but at the same time, maintaining the ability to participate in a rising market.

Sources:
1https://www.federalreserve.gov/econres/notes/feds-notes/is-trend-inflation-at-risk-of-becoming-unanchored-the-role-of-inflation-expectations-20220331.htm
2https://gasprices.aaa.com/

As of June 13th, 2022

May 2022 | Equity Commentary

May 2022 | Equity Commentary

Published on June 6th, 2022

Market Overview

The U.S. stock market continued its choppy streak in May, with volatility working both ways (up and down). Early in the month, stocks seemed to welcome news that Federal Reserve Chairman Jerome Powell was “not actively considering” raising rates in three quarter percentage point increments. But that rally was short-lived. China lockdowns, combined with weaker-than-expected earnings from major retailers, sent stocks sharply downward. At one point in late May, the S&P 500 nearly crossed into bear market territory, but just as the index approached a 20% decline from its peak level stocks swung wildly again—this time higher. By the end of the month stocks had completed a round trip, leaving the index flat for May. The U.S. Treasury bond market had a far less eventful month, with the 10-year and 30-year U.S. Treasury bond yields both trading in a tight range below and above 3%, respectively.

One of the most discussed topics on Wall Street last month was whether inflation may be peaking. The deceleration of headline inflation from March to April seemed to confirm this possibility—month-over-month, inflation fell from 1.2% in March to 0.3% in April. The same went for the year-over-year change in CPI, which fell to 8.3% in April from 8.5% in March1. It is likely too soon to call peak inflation with just these data points, however. Gas prices continued to rise throughout May, and the European Union’s just-announced Russian oil ban, coupled with China’s economic reopening, could further disrupt commodity markets and global supply chains, respectively.

The inflation question matters to markets because it is likely to be a key determinant of the path of the Federal Funds rate for this year and next. The Federal Reserve has been explicit in prioritizing inflation over growth and employment, so the ongoing inflation question continues to drive uncertainty about where rates will end up. In our view, there is a fairly straight line between Federal Reserve policy uncertainty and ongoing equity market volatility.

Economic data in May was mixed. A look at economic fundamentals in key U.S. districts, compiled in a survey known as the Fed beige book, showed the U.S. economy growing at a more modest pace in the spring than previously expected. Many companies reported worker shortages, struggles with higher input costs, and consumers who were starting to push back against higher prices. Even still, 77% of S&P 500 companies beat earnings expectations in Q1, delivering a blended earnings growth rate of +9.2%, according to Factset.2 Nine of the eleven S&P 500 sectors reported earnings growth in Q1, with the Energy sector contributing the lion’s share to the overall figure. Without the Energy sector, however, S&P 500 earnings-per-share growth would have registered at much more modest +3.2% for Q1.2 

In the U.S. labor market, workers continue to have the upper hand. The Labor Department reported that employers added 390,000 new jobs in May, with wages increasing 5.2% year-over-year. May’s figures fall just short of extending the 12-month streak of the U.S. economy adding 400,000 jobs per month, which still marks the strongest period of job gains dating back to 1939.3 Initial jobless claims also fell to 200,000 in the final week of May, indicating that employers are holding on to workers in hopes of avoiding further shortages. The unemployment rate remained steady at 3.6%, which is nearly in-line with its pre-pandemic level.

Manufacturing and services in the U.S. continue to demonstrate resilience even as headwinds persist. The May Manufacturing PMI was 56.1%,4 which marked an increase of 0.7% from April and firmly suggests the economy remains in expansion mode. Manufacturing activity has been expanding for 24 straight months now in the U.S., and businesses surveyed continue to point to strong demand looking ahead. For every cautious comment made in the survey, there were five positive growth comments.

The U.S. services sector also posted strong activity in May, with the Services PMI registering at 55.9%.5 Services have also expanded for 24 months straight, but a cautious reading of this services print would note that activity decelerated 1.2% from April. In particular, the Business Activity Index declined by 4.6% from April to March, and the Supplier Deliveries Index—which measures how long deliveries are taking—remains elevated.5 A close read of the May jobs report offers a hint that the services sector could feel some tailwinds heading into summer—while retailers cut nearly 61,000 jobs in May, leisure and hospitality employers added 84,000.5 The suggestion here is that consumers are increasingly shifting spending from goods to services.

Finally, the big news late in the month was the European Union’s announcement of a phased Russian oil ban. The EU will start by blocking all Russian crude and refined fuels that arrive on ships, leaving a carve-out for pipeline oil to appease Hungary. Germany and Poland have pledged to stop buying oil that arrives via pipeline by the end of the year, however, which will effectively sanction 90% of Russian oil imports. The EU also took the bold step of blocking insurance companies from covering cargo ships carrying Russian oil, which is meaningful given that European insurers cover most of the world’s oil trade.

Days later, an agreement was reached by OPEC+ to raise output by 648,000 barrels a day in July and August,6 which marks a 50% increase in production from previously announced plans. Oil markets did not seem placated by the news, however, as the benchmark for U.S. crude prices (WTI) rose by 1% on the day of the announcement and continued charting higher the following day. There are also murmurings that OPEC is considering exempting Russia from its oil-production targets, which would open the door for increased production from Saudi Arabia, the United Arab Emirates, and other key oil producers. Whether there will be any follow-through on this plan is unclear.

From an investment portfolio standpoint, not much has changed over the last month. We continue to favor defensive, high cash flow, ‘recession-resistant’ businesses while also holding excess cash to pad against further volatility.

Source:

1https://www.nytimes.com/live/2022/05/11/business/inflation-cpi-report-April

2https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_052722.pdf

3https://www.wsj.com/articles/u-s-jobless-benefits-fell-last-week-extending-stretch-of-low-filings-to-four-months-11654174339

4https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/may/

5https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/may/

6https://www.cnbc.com/2022/06/02/oil-prices-eu-sanctions-russia-saudi-arabia-output-opec.html

As of May 31st, 2022

Best Buy earnings expected to fan inflation gloom gripping America’s retailers

Jason Benowitz Featured in Reuters “Best Buy earnings expected to fan inflation gloom gripping America’s retailers “

Published on  May 24, 2022

“Inflationary pressures are weighing on discretionary purchases, particularly among low-income consumers. There was also a material shift in consumption from goods to services and demand for large ticket items appear to have suffered the most from this shift,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group. “We believe these trends are likely to weigh on Best Buy’s results and outlook when it reports,” he added. “We believe investors may have gotten ahead of the company and Wall Street analysts by pricing in a downward revision to earnings expectations ahead of the quarterly report,” Benowitz said. Read the Full Article Here

Best Buy sees bigger drop in annual sales on inflation hit

Jason Benowitz Featured in Reuters “Best Buy sees bigger drop in annual sales on inflation hit”

Published on  May 24, 2022

“We believe investors had anticipated the earnings miss and guidance reduction to a large degree following reports of similar struggles at other retailers,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.

Read the Full Article Here

Are Soft Markets Ignoring Hard Evidence

Are Soft Markets Ignoring Hard Evidence

Published on May 16th, 2022

Since the Federal Reserve met eight days ago on May 4, the U.S. stock market as measured by the S&P 500 has declined by over 8%, bringing its total decline for the year to about 17%.  We believe the market has declined this year because of a confluence of events; raging inflationary aftereffects from the CARES Act and related monetary stimulus, the Russian invasion of Ukraine, and more recently COVID-related lockdowns in China relating to its zero-tolerance policy.  As a result, we believe that investors perceive a heightened probability of recession in the next 12 to 18 months. Historically, recessions have been associated with bear markets that begin some months in advance of the economic decline. At present, recession risk may be elevated because the Federal Reserve is rapidly tightening monetary policy to fight inflation. Unfortunately, the Ukraine conflict and the Shanghai lockdown compound this risk, by introducing additional inflationary pressures while also slowing global growth.

In recent days, U.S. consumer and producer price inflation data for April suggested that inflation may be slowing from a peak in March, but more modestly than expected. On the margin, we believe this drove investors to forecast even more stringent monetary policy and higher recession risk in the months ahead, further weighing on stocks. In Ukraine, the fighting continues, while EU member states discuss curtailment of Russian oil purchases, in our view thereby reducing the chances for near-term de-escalation of the war. And Shanghai remains locked down, while maritime congestion builds in its harbor, creating future risk of logistics bottlenecks when the city finally reopens.

Nevertheless, we believe the case for long-term investment in stocks remains intact. The U.S. has added over 400,000 new jobs monthly for the past 12 months, an unprecedented streak that creates a lot of momentum for consumer spending, the key engine of the U.S. economy. While a total measure of the economy declined in the first quarter, we believe this is a misleading headline because the core measure of real final domestic demand grew at a healthy pace. (The core measure excludes inventories and trade, the two volatile swing factors that dragged down the headline figure.) In aggregate, first quarter corporate earnings reports have reflected this strength, with companies exceeding Wall Street consensus expectations, and analysts revising future earnings estimates higher once factoring in the results. In our view, the evidence on the ground in the U.S. economy is far removed from the recessionary fear taking hold in the capital markets.

The combination of stock price declines and positive earnings revisions has left the stock market more attractively valued, in our view. The market discount may be justified at present given stubbornly high inflation and risks raised by the conflict in Ukraine and lockdowns in China. But we suspect these issues may prove transitory over the next 6 to 12 months, and when they finally subside, it will likely be a relief to investors and as a result, may provide support to a stock market which we believe is technically oversold at present. With respect to inflation, recent readings have slowed across many measures1,; capacity additions may address shortages and bottlenecks2; and slowing growth may tamp down demand2. We believe China must eventually reopen, with priority given to economic strongholds. like Shanghai. Finally, it is our current view that the Ukraine conflict will persist, but we also acknowledge how challenging it has been to forecast events there, and so we have the humility to allow for the possibility of a more rapid de-escalation than expected.

Outside of recession risk, some investors have expressed concern about systemic risk arising from an institutional failure. Several key financial conditions have tightened this year: interest rates have increased, the dollar has strengthened, and stock prices have declined. This creates the possibility for a poorly positioned institution to suffer losses or even fail if sufficiently leveraged, with potential cascading effects in an interconnected financial system. In our view, this type of event is unlikely. We observe solid financial health across banks, consumers, and corporations.

After the global financial crisis in 2008, banks were forced by regulators to hold significant amounts of excess capital, a situation which persists today.  Consumers were aided by stimulus funds and home price appreciation, and corporations took advantage of financial conditions to lower debt burdens and refinance debt at lower interest rates. Against this backdrop, we believe the financial system can easily weather a potential future default on Russian sovereign debt, or the possible failure of a cryptocurrency to hold its value, both of which are too small and too disconnected to pose a systemic risk, in our view. Finally, we note that when these types of events occur outside of recession, the typical stock market decline is comparable to what has been experienced already, suggesting that fear of such an event may be already priced into the market, to a meaningful degree.

Looking ahead, we expect volatility to persist in the coming months, as the Federal Reserve further tightens policy, and the overhang of risks related to Ukraine and China continue to weigh. But we also believe the market decline has priced a considerable degree of investor fear into stocks. Over the next six months, evidence may emerge that inflation has peaked and began to recede; that important economic centers in China may reopen; or even that hostilities may de-escalate in Ukraine. We believe some combination of those events, were they to unfold, might catalyze a rally, with investors racing to reprice stocks more in line with the encouraging outlook for the U.S. economy and corporate earnings. Conversely, events in Ukraine and China could place further inflationary burdens on the U.S., thereby raising the required tempo of Federal Reserve action and heightening the risk of recession.

Whichever scenario develops, consistent with our portfolio management philosophy and process, we will seek to position the portfolio in a way that we believe appropriately balances the risk of downside and the ability to participate in a rising stock market. 

Source: Bureau of Labor Statistics. “Employment Situation Summary.” May 6, 2022.
Source: Bureau of Economic Analysis. “Gross Domestic Product, First Quarter 2022 (Advance Estimate).” April 28, 2022.
Source: Factset. “Earnings Insight.” May 13, 2022.
Source: Bureau of Labor Statistics. “Consumer Price Index Summary.” May 11, 2022; “Producer Price Index News Release Summary.” May 12, 2022.

As of May 12th, 2022

April 2022 | Equity Commentary

April 2022 | Equity Commentary

Published on May 6th, 2022

Market Overview

The capital markets endured a difficult April. The S&P 500 fell -8.7% for the month, marking the index’s worst monthly decline since the pandemic-induced bear market in early 2020. Technology stocks bore the brunt of the selling pressure—the Nasdaq declined -13.2%—which pulled down overall returns for U.S. stocks. Pronounced selling pressure in technology stocks and other high valuation categories is almost certainly linked to the ongoing decline in the bond markets, which pushed the 10-year U.S. Treasury bond yield to 3% for the first time since 2018. For investors, persistent volatility is unsettling, but the upshot is that the U.S. stock market is more attractively valued today than it was at the start of the year. The S&P 500’s multiple has fallen from 21.4x at the start of the year to 17.5x by the end of April, while the consensus forward outlook for earnings has improved by 5.7% over the same period.

The big news for us in April was the surprise decline in U.S. GDP for the first quarter. According to the BEA report the economy contracted at a -1.4% annual rate in Q1 2022, marking a sharp turn from the 6.9% annual growth rate registered in Q4 2021. A surge of imports and a drastic swing in inventory investment were likely the main culprits behind the weak headline number. Inventory investment added 5% to the Q4 2021 headline number, but subtracted -0.84% in Q1 2022, marking a major swing that should not repeat in Q2. Government spending also fell at a -2.7% annualized pace as pandemic stimulus faded, which subtracted -0.48% from the headline figure.

There were some key bright spots in the Q1 GDP numbers, however. The biggest and, we believe the most relevant component of the U.S. economy, consumer spending, grew at a 2.7% annual rate, with spending accelerating from Q4 2021. Importantly, consumers shifted spending in Q1 from goods to services, with travel and hospitality as notable beneficiaries. U.S. hotel occupancy was at 65.8% in the last week of April, up from 49.6% at the end of January, and the Transportation Security Administration (TSA) reported that about 2.1 million travelers passed through security in late April, up from 1.4 million in January. A continued shift in spending to services could help ease inflationary pressures in the coming months.

Inflation continued on its upward trajectory in March, surging 8.5% year-over-year and fueled by rising energy and food costs. An encouraging note is that core inflation, which excludes food and energy prices, rose just 0.3% month-over-month, which marks a significant reduction from previous month’s rise in prices. Surging U.S. Treasury bond yields seem to signal the market’s acknowledgement that inflation could remain elevated. The Federal Reserve responded this week with a widely expected half-percentage-point increase in the benchmark fed funds rate. The Federal Reserve also announced plans to start shrinking its $9 trillion balance sheet starting next month. However, the Federal Reserve made it fairly clear that three-quarter percentage-point increases were largely off the table, at least in the near term. The market had previously been pricing-in a 95% possibility of a bigger rate increase in June, so the news factored as a positive surprise.

The global inflation picture continues to be complicated by the ongoing war in Ukraine and, more recently, by the Covid-19 outbreak in China. The war has generated a spike in prices for wheat, which is significantly produced in Russia and Ukraine, corn and soybean prices are approaching record highs, and fertilizer prices have soared. The World Bank anticipates that a broad swath of commodity prices will remain elevated for the balance of 2022 if not longer, as the war will ultimately reshuffle how commodities are produced, shipped, and traded. Energy prices appear likely to continue on a similar path, according to the World Bank, with expectations of a 50.5% year-over-year price increase. Food prices could jump 22.9% in 2022, which would follow a 31% increase last year.

China’s zero-tolerance approach to Covid-19 has added further pressure to supply chains. An outbreak of the Omicron variant has left Shanghai shut down for over a month, with millions of residents unable to leave their homes. Beijing, a city of about 22 million, has implemented restrictions and school closures but has so far stopped short of a full lockdown. These restrictions have resulted in a contraction in factory and service-sector activity for two straight months in China. Economists and market-watchers have been anticipating a strong policy response from the government and China’s central bank but have so far been disappointed—the People’s Bank of China cut banks’ reserve requirements but did not change interest rates, and no stimulus plans have been announced.

Another area of concern in the current environment is Europe. Eurostat reported slower-than-expected growth for the eurozone in Q1, with the GDP print showing 0.2% growth quarter-over-quarter. Europe has high exposure to war-related energy market disruptions, and debate currently centers around whether the EU should ban the import of Russian oil altogether. This outcome is far from assured, however, as Germany has voiced support for a gradual, phased-in ban, and garnering support from Hungary and Austria could be difficult.

Here in the U.S., despite the Q1 GDP figure, economic data remains on relatively strong footing and, in our view, is not signaling a recession is nigh. In the latest jobs numbers release by the Labor Department in March, U.S. employers added 431,000 jobs, with particularly strong hiring in services industries like restaurants and retail. The Labor Department also said that hiring in January and February was stronger than initially reported, signaling that the jobs market may be better today than most appreciate. The latest release was the 11th straight month where job gains totaled more than 400,000, which marks the longest stretch of consecutive gains of that magnitude dating back to 1939. Nonfarm employment is now very close to retracing all of the jobs lost in the pandemic.

U.S. corporate earnings season is also underway, and results have been mixed but largely positive. According to FactSet, with 55% of S&P 500 companies reporting Q1 earnings, 80% of them have reported a positive earnings-per-share surprise and 72% have reported a positive revenue surprise. These figures are high by historical standards.

Profit margins also remain quite strong for U.S. companies. According to FactSet, over the last 12 months, S&P 500 companies have reported a collective net profit margin of 12.18%, representing the highest after-tax corporate profits relative to GDP that have ever been recorded (records date back to the 1940s). There have only been three years since 1999 when corporate profit margins reached double-digits—2006, 2018, and 2019. In those three years, however, corporate profit margins never reached 11%. This strong profit outlook has led many analysts and companies to raise corporate earnings expectations for fiscal year 2022.1 Market historians would note that recessions typically accompany weakening and declining earnings, not strong and rising earnings.

Source:

1https://www.morningstar.com/news/marketwatch/20220414382/corporate-profit-is-at-a-level-well-beyond-what-we-have-ever-seen-and-its-expected-to-keep-growing

As of April 30th, 2022

March 2022 | Equity Commentary

March 2022 | Equity Commentary

Published on April 12th, 2022

Market Overview

We believe the first quarter ended on a positive note, despite all the gloomy headlines. Up until the Russian invasion of Ukraine on February 24, the S&P 500 index had declined -11.3% for the year, but from that date to the end of the quarter, all 11 S&P 500 sectors moved higher and the broad index rallied +7.4%. In our view, the equity market recovery is not a sign that armed conflict is bullish—it isn’t. But the fighting did end the uncertainty weighing on markets about the possibility of war, which allowed investors to assess the downstream effects of the conflict and associated economic sanctions. The sharp correction and partial rebound left the S&P 500 down -4.6% for the quarter, a fairly modest decline, all things considered.  Unlike in many other volatile, risk-off periods, bonds were not a reliable hedge against downside equity market volatility.  The Barclays US Aggregate bond index finished the quarter with a total return of -5.9%, worse than the S&P 500 index.

In the wake of the war, commodity prices have surged across many different categories. This has already begun to reverberate across the global economy, exacerbating inflationary pressures, contributing further to supply chain issues, and making the Federal Reserve’s task even more challenging. As the conflict wears on, and calls for additional sanctions grow louder, commodity supplies will probably remain tight, exacerbating inflationary pressures on the real economy.

The Covid-19 outbreak in Shanghai may also place some additional pressure on supply chains and inflation in the short-term. As of this writing, most of Shanghai’s 25 million residents are in lockdown, and many factories have been shuttered as officials try to get the outbreak under control. Notably, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for China fell to 48.1 in March, a contractionary reading that signals the steepest slowdown since the pandemic started in February 2020. The PMI for Services was even worse, falling to 42.

U.S. inflation reached a 40-year high in February using the Federal Reserve’s preferred personal-consumption-expenditures price index. The index rose 6.4% in February from a year ago, which marked the fastest pace of rising prices since 1982. Even when stripping out food and energy, core prices rose 5.4% year-over-year, signaling that inflationary pressures are broad-based.

This environment has shifted interest rate expectations even higher and has likely contributed to consternation in the stock market. The Federal Reserve raised the benchmark federal funds rate by a quarter point at their March meeting, but Chairman Jerome Powell and other Federal Reserve governors have indicated the Federal Reserve’s willingness—and perhaps even intent—to raise rates more aggressively. 50 basis point rate increases at future Federal Reserve meetings seem likely, as does balance sheet reduction, otherwise known as quantitative tightening. Federal Reserve Governor Lael Brainard, who is awaiting Senate confirmation to serve as the Federal Reserve’s vice chairwoman, said recently that the central bank will start reducing its balance sheet “at a rapid pace as soon as its May meeting,” which notably drove selling pressure in the stock market following her comments.

Changes in interest rates and interest rate expectations have resulted in a flattening yield curve. The yield on two-year Treasury notes briefly moved higher than the yield on 10-year notes, an inversion which many investors view as a ‘flashing yellow’ signal that weaker growth conditions may lie ahead. Yield curves can be measured using interest rates across a wide range of maturities, however, and not all of them are signaling possible recession. The Federal Reserve’s preferred gauge for the yield curve, which compares the yield on the 3-month Treasury note to the 10-year yield, is not inverted and actually steepened in Q1.

While economic headwinds are building and the risk of recession in the future is arguably rising, in our view, the U.S. economy, for now, remains on solid footing. In the latest jobs numbers release in March, U.S. employers added 431,000 jobs with particularly strong hiring in services industries like restaurants and retail. The Labor Department also said that hiring in January and February was stronger than initially reported, signaling that the jobs market is better than most appreciate.

The latest release was the 11th straight month where job gains totaled more than 400,000, which marks the longest stretch of consecutive gains of that magnitude dating back to 1939. The unemployment rate fell to 3.6%, which now puts it very close to its pre-pandemic level of 3.5% (which is also a 50-year low). There are also a historically high number of jobs available in the U.S. economy, which is the opposite of what we would see in recessionary times.

U.S. corporations are also flush with cash and have been investing at a solid clip. According to the “third” estimate released on March 30, 2022 by the Bureau of Economic Analysis, private nonresidential fixed investment – a proxy for business investment – jumped 7.4% in 2021, even when adjusting for inflation. This uptick in business spending marked the fastest rate of increase since 2012. U.S. businesses spent the most on software and information-processing, as the need to ‘digitize’ business operations was catalyzed during the pandemic and is bound to grow as remote work becomes the norm. Spending in this area of IT rose a solid 14% in 2021. We think the trend of ramping up business investment looks poised to continue. Manufacturing firms surveyed by the Institute for Supply Management said they plan to increase investment by 7.7% in 2022, and services firms – which comprise a majority of the U.S. economy – expect a 10.3% increase, as productivity will need to rise in order to offset cost pressures relating to inflation, and in some cases, worker shortages.

As we have mentioned in previous notes, Roosevelt Investments raised cash in our equity portfolios in December and again in February, which we continue holding to cushion the market’s volatility as the conflict runs its course. Our portfolio has recently incrementally shifted into a more defensive posture, adding some positions which we believe are likely to outperform in a weaker economic environment, while shedding others which in our view may be challenged by a weaker environment. 

As of March 31st, 2022

Tech Goes From Haven to Hazard as Investors Fear Recession

Jason Benowitz Featured in Bloomberg “Tech Goes From Haven to Hazard as Investors Fear Recession”

Published on  April 7, 2022

“A recession doesn’t look imminent, but the recipe is there,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group. “There are lots of reasons to be concerned and to think that maybe the rally we saw over the last two weeks wasn’t the start of a new market regime and instead more of an oversold bounce.”     Read the Full Article Here

WATCH NOW: April 27th, 2022 – Inflation, Conflict, and Implications for the Capital Markets

April 27th, 2022 – Inflation, Conflict, and Implications for the Capital Markets

Published on April 29, 2022

John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, sat down to discuss the latest updates in the financial markets from this past quarter. In this webinar, they also discussed:
  • Inflation: Forcing the Fed’s hand
  • Ukraine: Conflict impacts ripple across markets
  • Recession Risk: Elevated in the U.S. and globally
Recording of Inflation, Conflict, and Implications for the Capital Markets  

What Issues Should You Consider When Reviewing Your Investments?

What Issues Should You Consider When Reviewing Your Investments?

Published on March 29th, 2022

Careful investment planning is essential, but can be quite complex. Performance is just one consideration when reviewing your portfolio. Factors such as diversification, taxation, and fees can have a dramatic impact in any economic climate.

To assist you in reviewing your investments, we have a checklist, What Issues Should I Consider When Reviewing My Investments, that outlines over 25 key considerations to guide your analysis.

While the checklist can help you spot good ways to identify all the different opportunities to consider, we are always available to meet with you to discuss your finances and goals, and to identify what the best opportunities are for you.

Can the Fed Land the Plane?

Can the Fed Land the Plane?

Published on March 11th, 2022

We expect a tug of war between the economic expansion and the Federal Reserve’s efforts to fight inflation will keep financial market volatility elevated this year. Fortunately, the U.S. entered 2022 with good economic momentum. On the other hand, inflation is high. The root causes include fiscal and monetary stimulus in response to the 2020 recession, whose stimulative effects have persisted after a rapid recovery. Inflation was likely exacerbated by the pandemic impacts which shifted consumption to goods, created bottlenecks in manufacturing components and transporting them over logistics networks, and held back labor supply due to health and childcare concerns and early retirements.  In addition, we expect the recent bout of home price appreciation to feed into apartment rents over time.  Now the Ukraine conflict has added further inflationary pressure by raising the price of oil and gas, as well as other commodities including wheat, metals, and fertilizers. 

With all of this as a backdrop, we believe the Federal Reserve has little choice but to tighten policy to fight inflation.  If the Federal Reserve can gradually move inflation back to target while not derailing the economic expansion, then we believe the market can rebound and potentially advance for years. But if the Federal Reserve tightens too rapidly, and the economy tips into recession, the market may decline further. So, can the Federal Reserve land the plane – in the sense that it must tighten only enough for an economic soft landing, but no further?

We believe inflation may continue to accelerate over the next few months before finally reaching a peak. We then expect it to decline, but perhaps more slowly than the Federal Reserve has forecast.  In our view, the decline in inflation should occur as consumption shifts back to services, demand moderates as excess savings are spent, the private sector addresses the twin bottlenecks in manufacturing and logistics, and workers return to the labor force. The comparisons versus a year ago also get easier as the year progresses.

We believe the risk of recession has increased.  Evidence for this can be found in the flattening yield curve and dramatically higher oil (and gasoline) prices, items we have touched on in recent blog posts. More recently, the poor performance of cyclical stocks (outside of the energy sector) indicates that many investors increasingly have come to believe that earnings estimates for these companies will be dramatically reduced, which is typically seen when economic growth slows materially. All three of these flags typically precede recession. One measure holding up well is credit spreads. These have widened, but not to distressed levels, in part due to the importance of the energy sector in the high yield market. We expect financial market volatility is likely to persist, as investors continue to revise probabilities around this bimodal distribution (recession or no recession), with very different implications for asset prices depending on where they land.

Historically the U.S. economy has slowed when materially higher gasoline prices weighed on consumer spending. In the years of elevated crude oil prices following the Arab Spring, the U.S. shale oil production boom was sufficient to offset this economic impact. Currently we believe that higher gasoline prices will again be a net negative for the U.S. economy, as the demand response from shale oil producers appears insufficient at this time to offset the headwind to consumption as consumers seem likely to make fewer discretionary purchases.  We expect the Federal Reserve to raise interest rates at nearly every Federal Reserve Open Markets Committee meeting this year. This might weigh on asset prices including homes, bonds, and stocks. It might also slow the economy.

We expect Russia to continue its war until Kyiv falls. At that point the conflict may switch to an insurgency. Therefore, the geopolitical price premium embedded in crude oil and other relevant commodities appears unlikely to fully subside without more of an offsetting supply response. We believe the level of the price premium is correlated to investor fears that Russia may escalate the conflict with an attack on a NATO nation.  Alternatively, it is possible that the conflict ends with a negotiated settlement sooner than expected. In that scenario, the West would likely reward Russia with a reduction in sanctions.  But we believe large multinationals, which have been rapidly shutting down their operations in Russia and in some cases writing down the value of those assets, would likely be slow to reconnect, because Russia is a small actor in the context of the global economy, and the risk remains that future Russian actions could lead to a reimposition of sanctions.  Overall, this would appear to suggest that the inflationary impact of the Ukraine conflict could be with us for some time.

While it is difficult to know, we believe the odds of a recession in the next 12-18 months may have increased from under 20% at the start of the year, to between 30-50% currently.  This change in our view is largely the result of the dramatic upward change in the price of oil and gasoline since the end of February, and the increased odds of a protracted war in Ukraine.  However, the situation is volatile, and we may yet revise our view further in the coming weeks and months. 

We must also keep in mind that there are strong counterarguments to the recession scenario, including a robust US economy with companies continuing to add to payrolls at a rapid pace, and wages that continue to rise. Manufacturing and services activity measures remain healthy.  It seems likely that there will be a reopening tailwind following the recent collapse in COVID cases.  We also see the data which indicates corporate inventories are low, and rebuilding of inventories has historically been a strong driver of economic activity.  Despite an uptick in mortgage rates, housing activity remains strong, and consumers are sitting on $2 trillion of excess savings, which could serve as a strong buffer to many headwinds.  As always, we will be carefully monitoring developments, and adjusting our views as necessary.

February 2022 | Equity Commentary

February 2022 | Equity Commentary

Published on March 8th, 2022

Market Overview

Market volatility continued in February, as uncertainty over the pace of interest rate increases amidst a backdrop of rising inflationary pressures, Russia’s saber rattling, and ultimately, the invasion of Ukraine, weighed on sentiment. The S&P 500 declined about 3% for the month.   With about a month’s lag, the market’s peak near year end coincided with the Federal Reserves shift to more hawkish monetary policy—the prospect of higher interest rates lowers what investors are willing to pay for future earnings, which makes many high valuation technology names go from looking attractive to looking expensive.

The ‘twin crises’ of high inflation and the Russian invasion of Ukraine may make it seem like the U.S. and global economy are not on solid footing. But the economic data appears to tell a different story. In February, nonfarm employment jumped by 678,000, which was well above economists’ forecasts, and 200,000 above the January pace.1 November and December jobs numbers were revised higher by 709,000, underscoring that the impact of the Omicron variant on the U.S. labor market was modest.1 The unemployment rate now sits at 3.8%, marking a continued decline even as the labor force participation rate has moved slightly higher. Monthly wage growth was largely flat in February alleviating some concern about a potential wage-price spiral driving inflation even higher. 

The Omicron variant did appear to influence consumer spending in January, resulting in yet another month where goods spending outstripped services spending. With many consumers and workers opting to stay home, January’s inflation-adjusted personal spending rose by 1.5% from December, with goods spending jumping by 4.3% and services spending increasing by only 0.1%.2 Spending at restaurants, bars, hotels, and air travel all fell for the month. We believe future months will see a shift back to spending on services, which could help ease inflationary pressures on goods in the second half of the year. Business investment also rose in January. Durable goods orders ticked 1.6% higher month-over-month, while core capital goods orders for things like computer equipment and industrial machinery also went up by 0.7%, which does not include the investments being made in software, research and development, and labor.2

Finally, activity in the U.S. services sector continues to post what we believe to be strong readings, notwithstanding the flat consumer services number. Both the Institute for Supply Management and Markit surveys said the index for non-manufacturing activity was 56.5 in February3, a healthy reading in our opinion. Order backlogs at services businesses also increased in February, which points to persistent issues in supply chains but also to strong demand in the economy. The services sector accounts for roughly two-thirds of U.S. economic activity.  

The U.S. economy is expanding at a healthy clip, but inflation persists as a headwind to growth. The Bureau of Economic Analysis’s headline price index rose 6.1% year-over-year in January, which marks the fastest rate of increase since 1982.3 Even with food and energy prices stripped out, the core price index rose by 5.2% y/y, underscoring the breadth of rising prices.3 A key risk to the longevity of the economic expansion is if the Federal Reserve continues to have to fight inflation with higher rates even as the economy begins to slow.

The Russian invasion of Ukraine is an unfortunate development that is weighing on investor sentiment. The response from the West is almost certain to be limited to economic sanctions on Russia, which could have significant impact on the Russian economy but should not cause much disruption to the global economy or financial markets. We believe, the U.S. economy in particular is at low risk—Russia and Ukraine combined make up far less than 1% of total U.S. imports and exports, and U.S. banks have very little direct exposure to Russia. Russia is the world’s third largest oil producer and the world’s largest exporter of natural gas, however, so there is legitimate concern that a supply shock—which could come via a broadening of Western sanctions, Russian curtailment, or supply lines severed in the fog of war—could inflict real economic pain. This outcome is certainly possible and would be bearish if that is ultimately where the escalations land. West Texas Intermediate crude oil is up about 26% in response, and natural gas prices in the EU have also jumped.  

For now, sanctions have expressly omitted Russian oil and gas, and even the removal of most Russian banks from the SWIFT global financial transactions network leaves some banks still able to access and process oil and gas transactions. Europe does not appear likely to budge on the issue, as EU countries rely too heavily on Russian oil and gas to ban imports. The United States has less exposure, with roughly 3% of total U.S. crude oil imports coming from Russia. Some U.S. lawmakers are calling for a ban on U.S. imports of Russian fossil fuels, including crude oil, refined petroleum products, and coal, and this drumbeat has been growing louder in recent days. Half of the Russian government’s revenue comes from energy exports, so cutting off the West completely would be economically crippling, at a time when the Russian economy is already hobbled. Beyond oil and gas, the conflict may reduce the supply of other commodities produced in the region, such as wheat, metals, and fertilizers. This has sparked price increases in recent weeks. While they do not play the same critical role as oil and gas, the price increases add to inflationary pressures and may push the Federal Reserve to stay the course regarding its plans to tighten policy, broadly weighing on security prices.

Roosevelt Investments increased the amount of cash in our model equity portfolios in December and again in February, and in the near term we may continue holding higher cash than we usually hold.  This is being done in order to try and help cushion the market’s volatility as the conflict runs its course. We continue to believe the U.S. economy is stronger than many appreciate, however, and that the risk of recession in the near term is low, in our view. War is ugly and disheartening, but regional conflicts historically have not derailed global economic activity. Looking back at conflicts since 1925 (when reliable S&P 500 data became available)—the Korean War, Vietnam, the Cuban Missile Crisis, the Iran/Iraq War, two U.S. wars in Iraq—only World War II directly resulted in a bear market, though oil embargoes associated with Arab-Israeli conflicts in the 1970s coincided with equity market turbulence in a way that bears some similarity to the current situation.4 Assuming this regional conflict does not turn global, we believe the fighting and associated sanctions will have only modest impact on the U.S. capital markets, although if high oil prices persist for a longer period of time, our view might change.

Source:

1 https://www.wsj.com/articles/february-jobs-report-unemployment-rate-2022-11646343310?mod=djemRTE_h

2 https://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

3 https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/

4 https://www.fisherinvestments.com/en-us/marketminder/the-likely-market-implications-of-putins-latest-ukraine-gambit

As of February 28th 2022

Putin Reveals His Hand

Putin Reveals His Hand

Published on February 28th, 2022

Russian President Vladimir Putin finally revealed his hand and ordered the invasion of Ukraine. It is a full invasion with attacks beyond just breakaway regions in eastern Ukraine, with troops entering from Belarus as well as Russia and Crimea. The possibility of these events was suggested by prior Russian moves against Georgia and Crimea, the massive buildup of Russian forces in the prior two months, and recent U.S. intelligence disclosures. But Putin’s true intentions were not known until the invasion began. The U.S. and allied nations responded with economic and financial sanctions against Russia, which have escalated in recent days to include shutting off most Russian banks from the SWIFT global financial transactions network, a major escalation.

In response to Russia’s actions, over the past week the Russian stock market initially crashed by over 50% while the Russian Ruble lost about 8% of its value against the dollar. Given the dynamic nature of the still-developing situation, these levels are likely to change, perhaps dramatically, in the coming weeks. However, we believe the impacts of the conflict and associated sanctions on the U.S. capital markets are likely to be modest. Historically, most comparable Cold War and post-Cold War military conflicts have had little effect on U.S. markets. Looking to the closest analog, when Russia annexed Crimea in 2014 and the U.S. responded with sanctions, there was no discernible U.S. market impact, in our opinion. The 1998 Russian debt default catalyzed the collapse of Long-Term Capital Management, a large and levered hedge fund, prompting Federal Reserve intervention to stabilize the financial system. But U.S. banks are far more well capitalized today, making it very unlikely that any loss in value from Russian sovereign debt holdings would raise systemic risks.

In our view, one key feature of the current conflict stands out: It raises the risk of supply shocks across a wide range of commodities. This could come about by deliberate action from one or more of the parties who choose to limit their own supply, or to sabotage an adversary’s capability to reach the market. It could also result from miscalculation in the fog of war. While oil and gas are most closely watched, many metals, wheat, fertilizer, and uranium may also be vulnerable. In anticipation of the conflict, investors appear to have priced a geopolitical risk premium into many traded commodities. West Texas Intermediate crude is up nearly 40% in price since early December when satellite images displayed the start of a building presence of Russian troops near the Ukrainian border.

Upward pressure on commodity prices comes as U.S. inflation measures are accelerating to growth rates that are the highest in decades, and well above the Federal Reserve’s targeted level. We therefore expect the central bank will look through the limited impacts of the conflict on economic growth and persevere with its plans to raise interest rates at successive meetings throughout much of 2022,while simultaneously allowing many of its Treasury and mortgage-backed securities holdings to mature without reinvestment, thereby shrinking the size of its balance sheet. These actions will hope to fight inflation by tightening financial conditions but may also weigh on U.S. fixed income and equity markets. On the other hand, if the Federal Reserve sees any signs that the economy is slowing unexpectedly, it may have to pull back on its tightening activity. For now though, futures show that investors are expecting six rate hikes this year.

Looking ahead, we expect the assault to be short-lived. Either the parties will rapidly reach a negotiated solution, or Russia will overrun Ukraine with its superior military capability. But other scenarios are possible. We have been surprised that a few days after the invasion started, no Ukrainian city has fallen to the Russians, who clearly have a superior military in size and capabilities. And this horrible incident is complicated by the historical relationship between the two countries, with many families on each side of the border having relatives on the other side, which creates the potential for reluctance by Russian soldiers to aggressively attack civilian centers.

On the other hand, we believe the sanctions currently in place may well persist long past the end of the conflict, as will the geopolitical risk premium that investors have priced into commodity markets. Stepping back from these events, we believe the U.S. economy has shifted from early to mid-cycle. Investors now anticipate a far more rapid removal of accommodation than the Federal Reserve had forecast just two months ago. This pivot by the Federal Reserve to a potentially fast-paced rate hike path and runoff of its balance sheet has led to a surge in market volatility and a decline in investor sentiment and stock prices. The Russia-Ukraine conflict reinforces that negative sentiment.

We believe there is little risk of a U.S. recession at present, given the powerful momentum of the economy headed into this period, supported by record household net worth, the reopening tailwind, and the rebuilding of the inventory deficit. We continue to expect solid U.S. economic and corporate earnings growth this year. But the transition to mid-cycle, paired with a significant increase in inflation, has caused investors to revalue asset markets, a process we believe is underway but not yet complete. We raised cash in our equity portfolios in December and again in February, and in the near term we may continue holding excess cash to cushion the market’s volatility. As always, however, we will be looking for stocks which end up in the bargain bin if any market dislocations occur.

Inflation and The Federal Reserve

Inflation and The Federal Reserve

Published on February 14th, 2022

Overview

Financial Market volatility continues in February, with significant drivers of the recent financial market decline including higher inflation and concerns that the Federal Reserve will need to remove policy accommodation in a more aggressive fashion. The inflation report last Thursday was higher than economists had expected. It does suggest the Federal Reserve may have to hike interest rates more forcefully in 2022. Prior to the inflation report, the Treasury market had priced in 5.5 rate hikes, and in the last few days that has increased to 6.3 rate hikes.

While Federal Reserve Chairman Powell said as recently as mid-November that the inflation America is experiencing was likely transitory, the Federal Reserve has apparently shifted in a few short months to a point where it is considering a 50-basis point increase at its next meeting (March 16), as noted by Federal Reserve member Bullard last week. By that date the Federal Reserve should have seen the February monthly inflation report and employment report. The Federal Reserve should also release its Summary of Economic Projections at the March meeting, where it is expected to update its own forecast of year end interest rates. This forecast suggested 3 rate hikes in 2021 when it was released in December. We believe it is likely to show at least 5 to 6 rate hikes when it is updated in March.

The issue, as always with the Federal Reserve and rate hikes, is that the impact takes a while to flow through the economy. For this reason, the Federal Reserve does not know the impact of its action right after a rate hike; it can take up to a year to discern. This means that the chances of making a mistake can be high. Investors are concerned that the Federal Reserve will push the economy into a recession with too many rate hikes – something that may not be known until well after the fact.

We can see this concern by looking at the Treasury curve. Normally investors like to see a steep yield curve, which reflects a healthy, growing economy. Focusing on the 2yr to 10yr treasury spread, at the end of November, this spread was 100bps but has since fallen to 44bps. Over the last two days it flattened by 15bps, a large move. When investors talk about an inverted yield curve, they are usually talking about this 2–10-year spread being negative. So, this is something we are watching closely since inverted yield curves sometimes predict an impending recession.

It is important to note, however, that all of this is occurring in the backdrop of what we believe to be a very strong economy. In the fourth quarter of 2021 GDP saw 6.9% growth, and not only were an impressive 467,000 jobs created in January, but the employment numbers for November and December were revised higher by a cumulative 709,000 jobs created.1 In addition, over 15 million vehicles were sold in the U.S. by automakers in January2 and purchasing manager indices were at levels consistent with solid economic growth.3 January’s strength is notable because it is when the Omicron wave appears to have peaked. One could therefore imagine that the economy might accelerate in the coming months as the Omicron wave recedes. While the Federal Reserve may remove accommodation faster than investors had been expecting, the data show that the economy may be robust enough to handle the tighter financial conditions.

Along with the Federal Reserve’s change in monetary policy, the U.S. economy may be in the process of shifting from early cycle to midcycle. The shift to midcycle suggests improving our equity portfolio’s overall quality, as well as potentially reducing the overall beta. Quality companies by our definition have competitive advantages, high returns on capital, strong balance sheets, trustworthy management, and can compound intrinsic value over time. As the Federal Reserve gradually reduces support for the economy, it is our contention that this matters more for lower quality companies, while higher quality companies can thrive regardless.

We regularly evaluate the companies in our equity portfolios against their ability to withstand a variety of risks, including inflation and tighter monetary conditions. As long-term investors, we tend to favor companies which have strong balance sheets and generate abundant free cash flow, reducing their need to access the capital markets for financing their operations. Regarding inflation, we believe it is important that a company can pass along higher costs they may be experiencing so that they do not experience a margin squeeze. Generally, strong competitive advantages enable companies to do this.

Some investors have asked us whether we might seek to hedge against inflation by owning gold or cryptocurrency. We generally have avoided these investments and consider them as separate asset classes. Cryptocurrency investors had hoped that their investment would offer an uncorrelated asset, but we have seen recently that Bitcoin, for example, fell just as hard as many high-flying Nasdaq stocks so far this year. Gold has declined slightly so far this year. And we have observed over the past two decades that changes in the price of gold have not been correlated with changes in the core CPI, a measure of inflation.

This shift from early to mid-cycle, accompanied by a more aggressive Federal Reserve and greater volatility in the stock market, is a typical progression for our economy as the expansion matures, and not overly concerning to us. We believe the evidence is in favor of a self-sustaining economic expansion, propelled by robust growth and a waning Omicron wave. As always, we continue to seek out all evidence which might suggest a more defensive posture is warranted. We will continue to tweak our equity portfolios as needed in favor of quality and somewhat reduced risk, but for now believe the economy should be our friend.

 

1 Source: https://www.bls.gov/news.release/empsit.nr0.htm 
2 Source: https://wardsintelligence.informa.com/WI966218/January-US-LightVehicle-Sales-Record-7MonthHigh-Annualized-Rate
3 Source: https://tradingeconomics.com/united-states/business-confidence

January 2022 | Equity Commentary

January 2022 | Equity Commentary

Published on February 8th, 2022

Market Overview

Financial markets have been choppy to start the new year. The S&P 500 reached an all-time high on January 3, but the index has experienced pronounced volatility since. Concerns over rising interest rates, persistent inflation, and geopolitical tensions between Russia and Ukraine were likely what drove the index into correction territory mid-day on January 24. Volatility moves stocks in both directions, however, and the index finished January down a meaningful but not alarming 5.3%. Bond markets were not insulated from the selling pressure either, as yields on long duration U.S. Treasuries marched higher throughout the month.

The U.S. economy posted a strong 6.9% annualized growth rate in Q4 2021. Strength in Q4 capped off the strongest year of economic growth in the U.S. in almost 40 years, with output growing by 5.5%. To be fair, however, a significant driver of the strong Q4 GDP was due to companies replenishing inventories. Without the inventory restock, GDP would have grown at a much more modest 1.9% in Q4.1

Activity in the U.S. jobs market continues to surprise to the upside. From December to January, nonfarm employment rose by 467,000, which was over three times Wall Street estimates.2  The unemployment rate rose to 4% from 3.9%, as approximately 1.2 million new people entered the labor force. The Bureau of Labor Statistics also reported that December and November’s jobs numbers were significantly understated December was revised from 199,000 to 510,000, and November was changed from 249,000 to 647,000.2  Much like the GDP figures cited above, the jobs numbers clearly indicate that Omicron did not create a major disruption to economic momentum.

In 2021, U.S. home sales hit a 15-year high, with homes selling at their fastest pace in history.3  According to data from the National Association of Realtors, existing-home sales rose 8.5% in 2021 from a year earlier. These trends have spurred homebuilders to ramp-up construction, leading to their most active year since the housing bubble burst in 2006. In December, the number of housing units under construction was the highest it’s been since 1973.3 However, many homebuilders are starting construction on more homes than they are finishing, underscoring some of the issues with labor and materials shortages.

The Consumer Price Index for all urban consumers rose 0.5% in December (seasonally adjusted), putting inflation’s full year increase at 7% and marking the biggest jump in over 20 years. Wages are also on the rise, as the U.S. employment-cost index rose 4% in Q4 2021 from a year earlier, which was also the biggest jump in 20+ years.4 Higher wages are something of a double-edged sword in an inflationary environment. Rising wages can neutralize the effect of higher prices for goods and services, but they can also compel businesses to raise prices to account for the higher cost of labor.

The Federal Reserve appears to have turned hawkish on the inflation issue, and January market volatility may reflect uncertainty over how frequently, and by how much, the Federal Reserve plans to lift the fed funds rate. In Chairman Powell’s words, “It isn’t possible to sit here today and tell you with any confidence what the precise path [of the fed funds rate] will be.” This level of ambiguity is a departure from Federal Reserve guidance over the last twenty years, which sought to assure market participants of “gradual increases.” Investors could rely on quarter point rate increases at every meeting or every other meeting. In the current environment, the Federal Reserve is offering no timeline and no real guidance, which has been unsettling for the equity markets.

We believe that another reason for uncertainty in the markets is the sheer range of possibilities when it comes to inflation, interest rates, and the pandemic in 2022. Inflation may persist all year, which could trigger a rate increase of a quarter percentage point or more at all seven Federal Reserve meetings. Alternately, inflation could subside later in the year as supply chain issues are resolved and consumers shift spending to services, which may lead to fewer rate cuts during the year. The pandemic, as ever, is a wildcard. Myriad potential outcomes make forecasting 2022 leadership in the markets very challenging, which we think favors broad diversification focused on quality. 

U.S. government policy appears to be setting up to have a muted effect on the markets in the new year. 2022 is a midterm election year, which historically has meant no big legislative efforts (a positive for markets). Build Back Better legislation is losing momentum while simultaneously shrinking in size, and previous fiscal stimulus efforts have largely run their course. It is fair to say the economic recovery has been fully handed-off to the private sector, also a positive.

Finally, tensions on the border between Russia and the Ukraine are troubling, but conflict should not have the power to derail global economic growth. Market cycles are not generally impacted by regional conflicts unless global commerce is greatly affected, which a Russia-Ukraine conflict does not make likely. When Russia annexed Crimea in 2014, U.S. stocks were largely unaffected.5

 

Source:

1 https://www.bea.gov/news/2022/gross-domestic-product-fourth-quarter-and-year-2021-advance-estimate#:~:text=Current%E2%80%91dollar%20GDP%20increased%2014.3,a%20level%20of%20%2423.99%20trillion.

2 https://www.bls.gov/news.release/empsit.nr0.htm

3 https://www.nar.realtor/newsroom/annual-existing-home-sales-hit-highest-mark-since-2006

4 https://www.bls.gov/news.release/cpi.nr0.htm

5 https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

Fourth Quarter 2021 | Fixed Income Commentary

Published on January 20th, 2022

Fourth Quarter 2021 | Fixed Income Commentary

Market Overview

The Current Income Portfolio declined 0.54% gross during the fourth quarter. Corporate bonds, which make up roughly 73% of the portfolio, declined 0.82%, while preferred securities, which comprised roughly 23% of the portfolio, gained 0.27%. Within the preferred securities allocation, retail securities, which have both fixed and fixed-to-floating rate coupons, accounted for 70% while institutional securities, which only have fixed-to-floating rate coupons, made up the remainder.  The portfolio’s retail preferred securities gained 0.73% during the quarter and the institutional preferred securities declined 0.91%. The Bloomberg Barclays Intermediate US Corporate Bond Index, and Intermediate US Govt/Credit Index, declined 0.55% and 0.57%, respectively. The BofA Fixed Rate Preferred Securities Index, which is made up of 40% institutional and 60% retail preferred securities, was essentially unchanged for the quarter.

Fixed income markets started the quarter on a positive note, with many companies reporting better than expected corporate earnings and many macroeconomic indicators, such as consumer confidence, labor force participation and unemployment claims, showing signs of further economic recovery.  As the quarter progressed, however, consumer prices continued to climb as shortages and bottlenecks showed little sign of easing. According to the Bureau of Labor Statistics, the Consumer Price Index rose by 6.2% in October, and by 6.8% in November, the largest 12 month increase in four decades.

With a wave of new cases of the Omicron variant starting to surge across the country in late November, fears of additional government lockdowns and prolonged inflationary pressures deepened. As a result, the Federal Reserve officials began to signal a more hawkish outlook for monetary policy. In a senate hearing on Nov. 30th, Federal Reserve Chairman Powell acknowledged that inflation has been “broad” and “more persistent” than previously anticipated, and that the committee would consider tapering asset purchases at a faster pace than the current $15B per month.

At December’s FOMC meeting, the Federal Reserve took further tightening action. Chairman Powell revised the committee’s tapering plan higher to $30B per month, and to conclude the bond buying program three months earlier, in March of 2022. A faster end to tapering also meant an earlier “lift-off” by the Federal Reserve in raising interest rates, as median dot plot forecasts were revised upward to reflect three hikes in 2022, three in 2023, and eight interest rate hikes in total by 2024.

During the quarter, the yield curve underwent a bear flattener shift whereby interest rates rose by more in the front-end than in the intermediate and long-term segments of the curve. By the end of the quarter, two-year U.S. Treasury yields had increased by 46 bps, to reflect the perceived earlier interest rate hikes, while ten-year yields increased by just 2 bps. This flattening in the slope of the yield curve caused shorter duration securities to decline to a greater degree than intermediate and longer-term duration securities. As a result, CIP’s corporate bonds, which have a shorter duration than the intermediate-term US investment grade corporate bond market, experienced a greater decline than that of the respective index. In addition, when the yield curve flattens, it can also have a slightly negative effect on fixed-to-floating rate securities. While higher interest rates generally increase the value of the securities’ floating-rate coupon component, the average period before which the Current Income Portfolio’s securities begin to float is approximately three years. Therefore, any increases in the yields for maturities of up to three years can still negatively impact the portfolio’s fixed-to-floating rate securities via the fixed-rate component.

Fourth Quarter Increase in 2Y and 10Y US Treasury Yields

Source: Bloomberg

Given our belief that expectations for earlier timing and a greater number of interest rate hikes have now been priced into the yield curve by investors, it seems likely that much of the expected decline from rising interest rates is already “baked into” current prices of securities in the portfolio. For further portfolio deterioration to continue from changes in the yield curve, interest rates would need to exceed what current hawkish projections imply. Therefore, we believe the Current Income Portfolio is well positioned to withstand the several interest rate hikes that are currently projected for this year.  Should expectations for an even more aggressive hiking cycle materialize, the portfolio’s relatively short duration should limit the severity of any impact from changes in interest rates and the inclusion of fixed to floating rate preferred securities provides offsetting interest rate exposure to fixed-rate coupons, which in turn lowers overall portfolio volatility.

In our view, credit conditions should remain benign in the near to intermediate term. Companies continue to have strong balance sheets, solid corporate earnings, and, because of the many refinancing’s that took place in recent years at historically low interest rates, some of the highest interest coverage ratios since 2015. We continue to monitor the credit and interest rate environments and believe the portfolio is appropriately positioned to earn enhanced income without taking on excessive risk to do so.

As of December 31, 2021

WATCH NOW – 2022 Outlook: The Year of Normalization

Published on Jan. 20, 2022

January 19th, 2021 – 2022 Outlook: The Year of Normalization

John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, sat down to discuss the latest updates in the financial markets from this past quarter. In this webinar, they also discussed:
  • Shift to Mid-Cycle: slower growth, higher rates, and Washington gridlock
  • Pass the Baton: from government support to self-sustaining expansion
  • Risks to the Outlook: inflation, regulation, and geopolitics
 

December 2021 | Equity Commentary

December 2021 | Equity Commentary

Published on January 10th, 2022

Market Overview

Rapidly rising cases of the Omicron variant did not deter U.S. stocks from pushing higher in December. The S&P 500 rose 4.5% with cyclical value stocks outperforming growth for the month. The “reopening trade” that saw value lead in the first four months of the year reversed in mid-May, giving way to growth stocks’ leadership until December. The 10-year U.S. Treasury bond yield moved slightly higher in December but finished the year at a still historically low level of 1.52%. Globally, U.S. stocks were the place to be in 2021—the MSCI USA index posted a return of +27%, which was 19% higher than an MSCI index tracking 49 developed and emerging markets.

U.S. economic growth is expected to be strong for Q4 2021. As of January 4, the Atlanta Federal Reserve’s GDP Now model estimates real GDP growth in the fourth quarter at 7.4%, while Wall Street consensus estimates peg GDP at closer to 6%. The Omicron variant’s impact is likely to be less in the realm of reduced demand in leisure, hospitality, and travel (as in previous waves), and more in supply disruptions linked to people missing work due to sickness. The same general economic takeaway applies now as in previous phases of the pandemic: less growth now likely means more growth later, as demand is delayed but not destroyed.

The number of people filing for unemployment (initial jobless claims) registered at 207,000 for the week ending January 1, close to a 50-year low. Job openings in the U.S. also continue to reach record highs, with an estimated 12 million available jobs by the end of last year, according to job-search site Indeed. These levels imply 1 million new jobs were added in Q4 2021, underscoring the desperation of companies to bring on new workers to meet demand. In December, employers added 199,000 new jobs and the unemployment rate fell to 3.9%. Labor force participation ticked slightly higher but remains below pre-pandemic levels.

The housing market continues to show few signs of cooling, even as the average rate for a 30-year fixed loan has moved from 2.65% a year ago to 3.22% today, according to Freddie Mac. Median existing-home prices rose 13.9% in November from a year ago, in line with trends from previous months. The median sales price for a newly built homes also reached an all-time high. According to the Mortgage Bankers Association, Americans borrowed a record $1.61 trillion to buy homes last year, up from the previous record set in 2020 ($1.48 trillion).

Services and manufacturing PMIs remain firmly in expansion territory, but the Institute of Supply Management said manufacturing activity fell from 61.1 in November to 58.7 in December. The upshot is that the decline was largely influenced by the ‘supplier delivery times’ component of the index. In normal times, falling supplier delivery times implies that demand is waning. Today, it means that bottlenecks are clearing.

There is a good argument that the U.S. economy is experiencing somewhere near peak inflation. Commodity prices may have peaked in October, and supply chain problems started to move in the right direction particularly as Asian factories reopened following pandemic-related lockdowns. Minutes from the Federal Reserve’s December 14-15 meeting, however, make it clear that the Federal Reserve is no longer comfortable waiting for prices to ease: “participants generally noted that…it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.” The minutes also noted that some participants see it as “appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.” Trading in interest rate futures indicates an approximately 70% probability the Federal Reserve would increase the fed funds rate at or before their March meeting, a greatly accelerated timeline from expectations just two months ago.

The Federal Reserve turned more hawkish in Q4. But it is also important to acknowledge their starting point of extraordinary accommodation. In other words, even if the Federal Reserve follows through with ending QE, raising rates three or four times, and shrinking its $8.76 trillion balance sheet over the course of the year, they will still likely finish the year looking quite accommodative by historical standards. The Federal Reserve’s actions in 2022 may be better described as ‘becoming less accommodative’ versus engaging in monetary tightening.

On the political front, the Biden administration’s Build Back Better agenda is stalled. There may be a small near-term impact with the ending of the expanded child tax credit, but it is not likely to significantly alter U.S. households’ overall strong financial position. The bill still has a chance of passing in the coming months in some form but will likely be reduced to a size that would not have meaningful economic impact in 2022. It is also worth noting that the proposed set of tax increases in the original bill have been either removed or considerably scaled down as negotiations continue.

Megacap Tech Stocks Still Have Lots of Fans After Historic Run

Published on Jan. 5, 2021

Jason Benowitz Featured in Bloomberg “Megacap Tech Stocks Still Have Lots of Fans After Historic Run”

“These companies have profits and cash flows and solid balance sheets,” said Jason Benowitz, senior portfolio manager with Roosevelt Investment Group. “High valuation by itself is not a sufficient thesis to be negative on a stock.”

The big risk, according to Benowitz, is if interest rates rise even more than is currently forecast. Indeed, the Nasdaq 100 fell 1.4% Tuesday as yields on the 10-year U.S. Treasuries jumped 16 basis points in just two days, serving a reminder to technology investors of the need to guard against unwelcome surprises. Higher rates reduce the present value of future earnings, weighing especially on shares of highly valued, fast-growing companies.

Read the Full Article Here

CIP Update: The Best Offense is a Good Defense

CIP Update: The Best Offense is a Good Defense

Published on December 21st, 2021

US Treasury yields have been volatile this year, but overall have moved higher, and the rising interest rate environment has had a negative impact on many fixed income assets.  Bond math dictates that the higher the duration (effectively, the longer the maturity) of a fixed-rate coupon security, the greater the decline in value will be from an increase in interest rates. Other factors affecting the value of fixed income portfolios include the relative change in a security’s credit spread, (which can be caused by macroeconomic factors as well as security-specific factors), and the overall allocation to various types of coupons, including those with both fixed and variable-rates.

In general, when a security’s credit spread declines, its value appreciates to reflect the issuer’s lower risk of default.  In addition, when a security’s coupon structure is fixed for a period, and then floats after a certain date is reached, its value can appreciate even as interest rates rise or the yield curve steepens. By carefully selecting high quality, undervalued issuers that offer attractive compensation in terms of “credit spread”, a fixed income portfolio can benefit from credit spread tightening regardless of the ensuing interest rate environment. Furthermore, by including an allocation to fixed-to-floating rate coupon securities within the portfolio, that portfolio’s overall sensitivity to changes in government yields can be significantly reduced as fixed rate and fixed-to-floating rate exposures offset each other.

In the process of portfolio construction for the Current Income Portfolio, we attempt to apply a risk-conscious approach that considers each of the aforementioned factors. We believe the resulting portfolio is a unique blend of high-quality corporate bond and preferred securities, diversified by industry and sector, with a shorter duration than respective intermediate-term fixed income indices and lower overall sensitivity to changes in interest rates.

The success of this risk-adjusted approach is supported by the relative outperformance of the portfolio versus benchmark indices so far this year. The Intermediate-term US Gov/Credit Index, which is comprised of government securities and investment grade corporate bonds, with an overall duration of 4.1, has declined by 1.3% through December 17th, while the Intermediate-term US Corporate Bond Index, which is comprised of intermediate-term investment grade corporate bonds, with an overall duration of 4.5, has declined by 1.00%. The Current Income Portfolio, which is comprised of investment grade corporate bonds and preferred securities, with an overall duration of 3.4, has declined by just 0.65% gross throughout the same period. Therefore, although performance has declined year-to-date, we believe CIP has benefited more from credit spread tightening and lost less from interest rates rising than respective benchmark indices.

While we continue to believe that the “best offense is a good defense”, and that the portfolio is defensively positioned to continue to earn high current income with low overall volatility, it does not imply that we expect the portfolio to continue to decline in the future. With a credit environment that is relatively benign, coupled with solid corporate fundamentals, strong balance sheet positioning and the highest levels of interest coverage that investment grade companies have had since 2015, we expect a relatively muted effect from changes in credit spreads over the next year.

In addition, with recent improvements in the labor market, and macro-economic data seemingly showing signs of elevated inflationary pressures, FOMC forecasts now project an earlier lift-off, and greater number of interest rate hikes over next few years. Median FOMC dot plot forecasts now project three interest rate hikes in 2022, three in 2023, and eight interest rate hikes in total by 2024.

Shift in the U.S. Treasury Yield Curve in 2021

Given that a portfolio with a duration of 3.4 is most affected by the near and intermediate-term segments of the yield curve (highlighted in the white box in the chart above), and expectations for earlier, and a greater number of, interest rate hikes have been priced in (as depicted by the shift from green, to orange, to blue lines throughout 2021 in the chart above), we believe much of the projected decline from higher interest rates is already “baked into” current prices of securities in the portfolio. For further portfolio deterioration to apply, we think interest rate hikes would need to exceed what current hawkish yield curve projections imply. 

The CIP portfolio continues to be defensively positioned, in our view, with respect to both credit and interest rate risk. The inclusion of fixed-to-floating rate coupons in CIP’s preferred securities allocation has helped to lower portfolio volatility from changes in interest rates. Moreover, approximately one-third of the portfolio matures in the next one to three years, which offers the opportunity to re-invest those funds at potentially higher rates.  The intent to enhance yield and reduce overall portfolio risk is unchanged, and the portfolio continues to be positioned to earn high current income, without extending duration or lowering our credit quality standards.

DISCLOSURES
Past performance is not a guarantee of future results. This information is intended solely to report on investment strategies and opportunities  identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of  financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell  any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and  should not be interpreted as, recommendations to purchase or sell such securities. Our current disclosure statement is set forth on our Form ADV  Part 2, available for your review upon request, and on our website, www.rooseveltinvestments.com. Our Form CRS is also available on our website and available for review upon request.
Indices are unmanaged and cannot accommodate direct investment. Roosevelt Investments is solely responsible for the content of its website.  The sponsor/ broker dealer firm has not reviewed or verified the accuracy or completeness of its content and is not responsible for any  statements included therein.
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE • MAY LOSE VALUE

WATCH NOW: Kates-Boylston Webinar “How to Navigate the Tax Landscape When Selling your Business and in Retirement”

Published on Dec. 9, 2021

WATCH NOW: Kates-Boylston Publications Presents – How-To Webinar Series 2021 “How to Navigate the Tax Landscape When Selling your Business and in Retirement”

How to Navigate the Tax Landscape When Selling your Business and in Retirement

Funeral home owners often sell their business without realizing how much money from the sale will go to taxes and how much they may have saved in taxes with proper planning. With an uncertain tax environment in the years to come, having a plan in place is crucial.

Join Tim Hermann, vice president and senior wealth advisor at Roosevelt Investments, as he shares insight into different tax savings and retirement planning strategies owners may want to consider as they look to sell their business and transition into retirement.

Yield Generating Considerations for Year-End

Yield Generating Considerations for Year-End

Published on December 10th, 2021

Overview

As we speak to our clients, one of the biggest concerns that they focus on is the low interest rate environment of the past few years. Yields have remained at near historical lows across the board for most traditional income products, and it’s becoming increasingly difficult to construct solid income generating portfolios. Low interest rates have incentivized income-starved investors to take on additional risks to generate the yield they require. Inflation has become a source of angst in the investment community as well.

In November of this year, the U.S. Treasury Department began offering a new series of “I Bonds”, which can be purchased directly through the TreasuryDirect website1 . I Bonds are essentially a savings bond that earns interest based on combining a fixed rate and an inflation rate. The combined rate is called a composite rate; simply the combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. The Composite Rate for I Bonds bought from November 2021 through April 2022 is an annualized 7.12%. This applies for only the first six months after the issue date. This semiannual rate then changes depending on the fixed rate and the inflation rate as measured by the Consumer Price Index.

These bonds are backed by the full faith of the U.S. government and are limited to an annual $10,000 per person. Because of the annual limit, strategically, an individual can purchase the bonds before January 1st and then purchase an additional $10,000 anytime between January 1st and April 30, 2022. A married couple can then receive $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held or ~ 3.5% for the first 6 months risk free. The I Bonds can also be purchased for children, grandchildren or using businesses and trusts. An individual purchaser can also elect up to $5,000 from your federal income tax refund to I Bonds, thereby increasing your calendar year limit to $15,000.

We often see opportunities that make sense for some of our clients, but there are few things to keep in mind.

  • A new Composite Rate will be announced on May 1, 2022. There is a likelihood that the rate currently offered will change.
  • The I Bonds are taxed on the federal level but not on the state and local income tax level.
  • I Bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest.

If you have any questions or would like our help reviewing your circumstances, please do not hesitate to reach out to us.

1 Source: https://www.treasurydirect.gov/

November 2021 | Equity Commentary

November 2021 | Equity Commentary

Published on December 7th, 2021

Market Overview

U.S. equities continued to rally in early November on stronger economic data and fading risks from the Delta wave. Covid-19 cases moved higher later in the month, however, and the emergence of the Omicron variant spurred volatility around the Thanksgiving holiday. Snarled supply chains and longer-than-expected inflation also continued to weigh on sentiment, particularly as kitchen table issues such as higher gas and food prices send mixed signals to investors about whether the economy is indeed strong. To cap off the month, Federal Reserve Chairman Jerome Powell effectively dropped the “transitory” inflation narrative and signaled the Federal Reserve may need to move more quickly to combat rising prices. The S&P 500 finished the month with a total return of negative 0.7%, while 10- and 30-year U.S. Treasury bond yields declined.

U.S. economic re-acceleration largely surprised to the upside in November. For the week ending November 20, the number of workers filing for unemployment benefits (jobless claims) fell to 199,000, marking the lowest level in 52 years1 and underscoring tightness in the labor market. Jobless claims serve as a proxy for layoffs, so it makes sense to us why they are so low employers that have workers don’t want to lose them. In the last week of November, claims remained very low, in our opinion but rose slightly to 222,000.

We believe consumer and investor sentiment appear somewhat anchored to supply chain and inflation worries, but corporate earnings and other gauges of economic activity continue to point to sustained levels of demand, production, and growth. There is arguably a growing disconnect between expectations for sustained inflation and holiday shopping shortages and the reality of record economic activity and profits. This disconnect appears likely to open the door for positive growth and earnings surprises, which have historically worked in equity markets’ favor.

Entrepreneurs and self-employed workers are also contributing to the tight U.S. labor market. There are now 9.4 million self-employed workers in the U.S., according to the Labor Department, which marks a 500,000 increase since the start of the pandemic. Many workers are eschewing service sector jobs to set out on their own as consultants, freelancers, or small business owners. In 2021, the share of U.S. workers employed by a large company (more than 1,000 employees) fell for the first time since 2004, while the number of self-employed workers is at its highest level in 11 years. The number of self-employed workers may continue to rise from here—in September alone, 4.4 million people resigned from their jobs, a record.1

President Biden signed the infrastructure bill into law on November 15, which paves the way for significant investment in traditional forms of infrastructure, like roads, bridges, the electrical grid, rail, water, and broadband. The $1 trillion price tag actually represents $550 billion in additional spending above projected federal spending for roads, bridges, etc. This level of spending marks the largest investment in infrastructure in over a decade and should provide modest tailwinds for economic activity and growth. In addition, since the spending is spread out over a decade, we believe the inflationary impact should be small.

Early signs suggest the holiday shopping season may prove sturdy in spite of the ongoing pandemic, supply chain issues. and rising prices. RetailNext, a research firm that tracks in-store shoppers, said foot traffic in stores was up 61% this Black Friday compared to 2020, when many consumers were still skittish about the spread of Covid-19. Consumer enthusiasm to get out and shop led to online sales falling slightly year-over-year, from $9 billion in 2020 to $8.9 billion this year. U.S. consumers continue to propel the economy forward, having increased their spending by about 4.4% on average over the last five years.

Activity in factories, mines, and utilities in the U.S. rose at a solid 1.6% month-over-month clip in October, which followed a slowdown in September tied to the rise of the Delta variant.2 The October reading shows companies working to bring production back up to full capacity. Manufacturing, which is the biggest component of industrial production, rose by 1.2%.2 Momentum continued last month, as the Institute for Supply Management said its index of factory activity rose from 60.8 in October to 61.1 in November. Any reading above 50 signals expansion.

The U.S. housing market also remains quite strong. The average price of a home in a major U.S. city, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.5% year-over-year in September. This figure is down slightly from the 19.8% annual rate posted in August, but nevertheless points to consistent and above-average growth. Sales of previously owned homes are set to reach their highest level since 2006.

The U.S. economy is fundamentally strong, but there are also a few negatives that warrant some caution in the near term. The Federal Reserve, for one, has shifted their messaging materially over the last couple of weeks. In a Senate hearing on November 30, Chairman Powell allowed that “pricing increases have spread much more broadly” than anticipated in the economy, and that the Federal Reserve “didn’t predict supply-side problems.” Shifting focus to price stability, the Federal Reserve may be setting the stage to accelerate the reduction of its asset-purchase (QE) program, which could in turn open the door to interest rate increases sooner rather than later.

The Omicron variant, and the potential for a ‘winter wave,’ could also potentially create some headwinds to growth. Early indications show the variant being no more deadly than previous strains, and vaccines also appear effective at continuing to provide protection against severe cases. Two new antiviral pills – one from Merck and another from Pfizer – could receive emergency use authorization in the coming weeks, which would add another layer of defense against hospitalizations and deaths and thus help to curb adverse economic impact. There are more unknowns than knowns in this moment, however, and uncertainty may drive volatility in the short term.

Finally, a modest and likely fleeting background negative is government funding and the debt ceiling, which we anticipated would return to headlines in early December. Political posturing and hamstringing funding bills is likely in the coming days and weeks, but early signs point to a more-than-usual amount of negotiation happening between parties. Congress voted on December 2 to extend government funding through February 18, and now must address raising the debt ceiling as well as the fate of the $2 trillion Build Back Better bill.

1 Source: Bureau of Labor Statistics

1 Source: https://www.federalreserve.gov/releases/g17/current/default.htm

Walmart veteran Biggs to step down as CFO next year

Published on Dec. 1, 2021

Jason Benowitz Featured in Reuters “Walmart veteran Biggs to step down as CFO next year”

“Bret Biggs was a candidate to ultimately succeed Doug McMillon as CEO, given his long tenure at the company and broad experience across business units and functions outside of finance,” “However, we expect McMillon to serve many more years at the helm,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.

Read the Full Article Here

The Employment Landscape | Equity Commentary

The Employment Landscape | Equity Commentary

Published on November 22nd, 2021

Overview

The Federal Reserve estimates that 1.5 million more boomers have retired during the pandemic period than would have otherwise.1  In a sense that extra 1.5 million appears meaningful because it was what drove the Federal Reserve to revise its definition of “full employment” – what it needs to see to raise interest rates.2 The old definition contemplated the total number of employed individuals returned to pre-pandemic levels.3 They are not making that a necessary condition to raise rates anymore.

However, the 1.5 million is not so meaningful, in our view, when compared to the total number of employed (154.0 million4 ) the total number of unemployed (7.4 million4 ) or the total job openings (10.4 million5 ).  We also think it is not so meaningful when compared to the 36% of U.S. adults who would not cover a $400 emergency expense using cash or its equivalent.6

Higher unemployment benefits may have kept 0.5 to 0.8 million people from finding jobs and these jobs may come back at 200 to 250 thousand jobs per month over the next several months.7 Similar to accelerated retirements, this is not so meaningful, in our view.

We think the biggest gap is in health and childcare concerns. This is visible in where the jobs have not come back – front-line work in hotels, restaurants, and leisure, and the wide employment gap between women and men, which is opposite of what is typical following a recession.Of course demand impact plays some role here as well. The Delta wave significantly interrupted the labor market recovery, which appears back on track for now, though with risk of a winter wave following holiday gatherings. We think the age 5 to 11 child vaccination may accelerate the labor market recovery. There are 28 million children in that age cohort, which is the largest unvaccinated cohort.However only 27% of parents plan to vaccinate their children quickly.9

The experience of the last economic cycle – in particular the second half of the last cycle, when unemployment was below 5%, as it is now – was that the Federal Reserve could keep policy easy for longer than it expected – and interest rates stayed lower, for longer than expected – because workers kept coming off the sidelines. This was true even as President Obama doubled eligibility for food stamps and made it easier to collect disability. That experience is a reason why we believe the Federal Reserve changed their framework to be more patient this time around. We attribute that experience to the hangover from the financial crisis, which created long-term unemployment, loss of skills for workers, and therefore required a really tight labor market to make employers hunt for sidelined workers who may have lost skills. This time the employers are hunting while the workers need to be cajoled, but we still think we can get back to where we were before, in the base case, assuming something doesn’t interrupt the expansion. We believe we can go even farther than before, because the widespread adoption of collaboration tools for remote work can unlock more labor force participation than in prior cycles, though it will take some time to get there.

 

 

1 Source: Federal Reserve Bank of Dallas. “The Labor Market May Be Tighter Than the Level of Employment Suggests.” May 27, 2021.

2 Source: Federal Open Market Committee. Press Conference. June 16, 2021.

3 Source: Federal Open Market Committee. Press Conference. September 16, 2020.

4 Source: Bureau of Labor Statistics. “Employment Situation Summary.” November 5, 2021.

5 Source: Bureau of Labor Statistics. “Job Openings and Labor Turnover Summary.” November 12, 2021.

6 Source: Federal Reserve. “Survey of Household Economics and Decision-Making.” May 17, 2021.

7 Source: Evercore ISI. “What Happens Now That Enhanced Unemployment Insurance is Over?” September 14, 2021.

8 Source: Centers for Disease Control and Prevention. “CDC Recommends Pediatric COVID-19 Vaccine for Children 5 to 11 Years.” November 2, 2021.

9 Source: Kaiser Family Foundation. “KFF Covid Vaccine Monitor.” October 28, 2021.

 

REGISTER NOW: Tim Hermann joins Kates-Boylston Publications for a Webinar “How to Navigate the Tax Landscape When Selling your Business and in Retirement”

Published on Nov. 18 2021

Kates-Boylston Publications Presents – How-To Webinar Series 2021 “How to Navigate the Tax Landscape When Selling your Business and in Retirement”

How to Navigate the Tax Landscape When Selling your Business and in Retirement

Webinar Date: Tue, Dec 7, 2021 1:00 PM – 2:30 PM EST

Funeral home owners often sell their business without realizing how much money from the sale will go to taxes and how much they may have saved in taxes with proper planning. With an uncertain tax environment in the years to come, having a plan in place is crucial.

Join Tim Hermann, vice president and senior wealth advisor at Roosevelt Investments, as he shares insight into different tax savings and retirement planning strategies owners may want to consider as they look to sell their business and transition into retirement.

Here Are The Winners of Metaverse Buzz

Published on Nov. 15, 2021

Jason Benowitz Featured in Yahoo “Here Are The Winners of Metaverse Buzz”

“Whatever the future looks like, it’s going to require accelerated computing,” “We keep thinking of new and better ways to utilize data and we wind up with tremendous growth in data transmission, which drives that cohort of companies whether or not the metaverse comes to reality.” said Jason Benowitz, senior portfolio manager at the Roosevelt Investment Group LLC in New York.

Read the Full Article Here

Musk sells nearly $7 bln worth of Tesla shares this week

Published on Nov. 15, 2021

Jason Benowitz Featured in Reuters “Musk sells nearly $7 bln worth of Tesla shares this week”

“We expect the share sales will continue, as Musk holds millions of options worth billions of dollars that would otherwise expire worthless, and he has also prearranged share sales under 10b5-1 plans,” said Jason Benowitz, senior portfolio manager at the Roosevelt Investment Group LLC in New York.

Read the Full Article Here

October 2021 | Equity Commentary

October 2021 | Equity Commentary

Published on November 10th, 2021

Market Overview

The U.S. equity market selloff was pronounced in September, with the S&P 500 recording a 5.1% decline from September 2 to October 4. The round trip back to all-time highs did not take long, however. In early October, the S&P 500 took just 12 trading days to reclaim the September 2 peak, and stocks have continued notching all-time highs since. The selloff in September may be attributed in part to seasonality, but also because of lingering concerns over supply chain issues, rising prices, and an economic slowdown in China. Those concerns remain in place today, but equity market and corporate earnings resilience in October may signal these issues are indeed temporary. 

As expected, the Federal Reserve announced on November 3 its plans to gradually ‘taper’ its quantitative easing (QE) program. The equity and bond market response was largely muted, with the S&P 500 moving slightly higher and the 10-year U.S. Treasury bond yield rising 4 basis points on the day of the announcement, from 1.55% to 1.59%. Markets tend to pre-price widely known and expected events, and the Federal Reserve has been clearly telegraphing this move for months. In minutes from the Federal Reserves September meeting, it outlined the plan for “monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS).” November’s announcement followed this outline exactly, with the taper set to conclude in June 2022.

We believe consumer and investor sentiment appear somewhat anchored to supply chain and inflation worries, but corporate earnings and other gauges of economic activity continue to point to sustained levels of demand, production, and growth. There is arguably a growing disconnect between expectations for sustained inflation and holiday shopping shortages and the reality of record economic activity and profits. This disconnect appears likely to open the door for positive growth and earnings surprises, which have historically worked in equity markets’ favor.

The Institute for Supply Management’s services index rose to 66.7 in October from 61.9 in September, signaling very strong economic activity – readings above 50 indicate expansion. All 18 services industries reported growth, with new orders and business activity posting their highest readings since 1997. We believe this is a clear sign that the economy is accelerating as the Delta wave recedes. To be fair, we believe some of this activity is being driven by companies fast-tracking orders in anticipation of supply chain-induced delays. But strong demand – and the drive to increase production capacity to meet it – is clearly a priority across this significant part of the U.S. economy.

Labor shortages continue to weigh on business efforts to meet demand, but there are signs of continued improvement to the U.S. jobs picture. The Labor Department reported 531,000 new jobs added in October. Jobless claims also dropped to 290,000 at the end of October, which marks a new low in the pandemic recovery. Continuing claims, which measures how many people are still unemployed and receiving benefits, also fell to a post-pandemic low. The end of expanded federal unemployment benefits may continue nudging unemployed workers back into the labor force, and higher wages could make job-seeking more attractive. Wages rose 4.2% year-over-year in Q3, the fastest pace in 30 years.1

Rising labor and input costs have thus far had little noticeable effect on corporate earnings. As of this writing, 82% of the S&P 500’s market cap has reported Q3 results, and earnings are besting expectations by 10.5%, on average. 79% of reporting companies have reported better-than-expected results, with Financials generally posting the biggest beats. Supply chain issues, rising input costs, labor shortages, and wage pressures all pose challenges, but it appears corporations continue to demonstrate the ability to navigate them.

On the government spending front, the Biden administration’s Build Back Better agenda continues to face barriers in Congress, with Senate moderates Joe Manchin and Kyrsten Sinema objecting to key provisions and the overall price tag. What was once a $3.5 trillion bill has been slashed by 50% to $1.75 trillion, and even then, the fate of the bill is largely unknown. Spending at this level over a 10-year timeframe is likely to only have modest implications for the overall U.S. economy in our view, and the reductions in the overall size of the plan have taken many of the major tax increases down with them – reducing risk of a significant tax-related headwind.

Our concerns regarding the Chinese economy did not abate in October. The major property developer, Evergrande, avoided default in October by making a missed bond payment within a 30-day grace period, but its bonds continue to trade at about 25 cents on the dollar. Other property developers are also experiencing distress, and pressure is mounting on Beijing to manage an orderly industry-wide restructuring in this important sector of the economy. Energy shortages are also posing a problem across China, but the country has responded by reopening coal mines and reportedly resuming some imports from Australia, which they had previously banned.

Adding to these challenges, Covid-19 cases in China have flared up over the past month, which typically means lockdowns, quarantines and/or restrictions on travel and public gatherings.  In recent days, more than half of the flights at Beijing’s airports have been canceled. Collectively, these headwinds do not bode well for an economy that has seen slowing manufacturing activity since the spring. We continue to monitor developments in China closely for potential negative impacts elsewhere.

1 Source: https://www.wsj.com/articles/wages-and-prices-are-up-but-it-isnt-a-spiralyet-11635688981

Micron Earnings to Shed Light on Rare Weak Spot in Chip Stocks

Published on Nov. 4, 2021

Jason Benowitz Featured in Bloomberg “Micron Earnings to Shed Light on Rare Weak Spot in Chip Stocks”

While repurchases are likely to rise as economic growth continues, corporations may opt to allocate more cash to capital expenditures like technology and factories, according to Jason Benowitz, a senior portfolio manager at Roosevelt Investment Group. He’s not worried about the prospect of reduced buybacks weighing on the broader market. The Philadelphia semiconductor index has gained 23%, beating the S&P 500 Index and the Nasdaq 100 Stock Index. Makers of equipment used in the production of semiconductors have seen the biggest gains, led by Amkor Technology Inc. and ASML Holding. Micron shares are little changed on the year, while Western Digital has gained about 7%. Micron traded 0.9% lower in morning trading in New York.

“The outlook for global growth remains fairly strong for the second half of this year and 2022 once the delta variant subsides,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group. “Chip stock action reflects that.” Micron is projected to post revenue of $8.2 billion in its fiscal fourth quarter, an increase of 36% from the same period a year ago, according to the average of analyst estimates compiled by Bloomberg. Earnings excluding some items are expected to be $2.34 per share, more than twice what it was in the fourth quarter of 2020.

Read the Full Article Here

Should You Change Your Medicare Coverage During Open Enrollment?

Published on Nov. 4th, 2021

The Medicare Open Enrollment Period Begins

Overview

Many of our clients currently rely on Medicare plans for their health care coverage. They may have enrolled in Original Medicare or Medicare Advantage, and likely have prescription drug coverage as well. For those who rely on these plans the fall Medicare Open Enrollment

Period for 2022 Medicare coverage is going on now and lasts until December 7, 2021.

Depending on your circumstances, this may be the only time during the year that you may be able to enroll in or switch to another Medicare Advantage plan or Medicare Part D prescription drug plan or drop your plan and return to Original Medicare.

Below are some of the basics of these plans.  The attached flowchart will help guide you through a number of considerations when evaluating and comparing your Medicare options.  Covered topics include changes in health care needs, cost of premiums and deductibles, Access to specific providers, services and prescription drugs, out-of-state concerns as well as effective dates of any changes.

Original Medicare has 3 Basic Parts

Part A – Inpatient hospital Coverage, skilled nursing care facility care, hospice care, home health care, and some nursing home care (not long-term care)

The is free to all over 65 who have registered.

Part B – Outpatient doctor and other health care provider services, preventative services, ambulance service, durable medical equipment, mental health, very limited outpatient drugs.

Monthly fee for 2021 starts at $148.50 and increases depending on your adjusted gross income.

Part D – Medicare Drug Plan

The cost depends on what prescriptions you are currently taking. The cost includes the premium, yearly deductible, co-payments, and coverage gap payment. There are many companies that offer drug plans, and you need to find the company that will provide your prescriptions at the lowest cost to you.

 

Medicare Supplement or Medigap Policies

A Medigap policy is health insurance sold by private insurance companies to fill the “gaps” in Original Medicare Plan coverage.

 

Medicare Advantage Plan

Medicare Advantage is a type of health insurance plan that provides Medicare benefits through a private sector health insurer.

In a Medicare Advantage plan, a Medicare beneficiary pays a monthly premium to a private insurance company for Part A and Part B. Advantage plans also include prescription drug benefits, Part D. Advantage plans can include additional benefits like eye exams, glasses, hearing aids.

Advantage plans have a limited universe of providers and going outside the program can be costly.

 

There are professionals who can help you choose the right medical coverage for you. They know all the particulars of both original Medicare and Advantage plan. Where you live, who are your current doctors, and what prescriptions you take will determine what advantage plan is right for you.

We at Roosevelt Investments can help you get the help you need to choose the right plan for you!

Third Quarter 2021 | Fixed Income Commentary

Published on October 25th, 2021

Third Quarter 2021 | Fixed Income Commentary

Market Overview

The Current Income Portfolio returned 0.1% gross during the third quarter, with corporate bonds gaining by 0.2% and preferred securities declining by 0.6%. Of the preferred securities, $25 par-value securities, which have both fixed, and fixed-to-floating, rate coupons, declined by 1.1%, and $1,000 par-value securities, which only have fixed-to-floating rate coupons, gained by 0.8%.

We believe the quarter’s relatively flat performance was driven by the modest increase of just two basis points in ten-year US Treasury yields, which opened the quarter at 1.47% and closed it at 1.49%. While the overall change in government yields was minimal, from quarter to quarter, interest rate movements intra-quarter were more significant.

Third Quarter 10Y US Treasury

Source: Bloomberg

At the start of the quarter, concerns over an uptick in cases of the delta variant, coupled with waning consumer confidence, supply chain disruptions that cause shortages and bottlenecks, and various other factors, effectively dampened projections for economic growth during the second half of the year. As a result, ten-year US Treasury yields, and ten-year US Real yields, which are an indication of the market’s long-term expectations for economic growth, fell by roughly 30 bps in July, while long-term economist expectations for inflation stayed roughly the same.

As the quarter progressed, pressures on government yields appeared to ease. Market expectations began to look through the temporary factors considered to be driving economic growth to decline. At the September Federal Reserve meeting, FOMC growth forecasts for U.S. GDP were revised downward to 5.9% from 7% for 2021, while forecasts for 2022 were simultaneously revised upward, from 3.3% to 3.8%. These moves in opposite directions reflect economist expectations for an even stronger economy once global supply-chain constraints, labor shortages and transportation issues subside. Moreover, projections for the personal consumption expenditure (PCE) price index, which is the Federal Reserve’s preferred method for tracking inflation, were revised upward by 0.8%, from 3.4% to 4.2%, in 2021, and by 0.1%, from 2.1% to 2.2%, in 2022, reinforcing our belief that price increases from shortages and bottlenecks are projected to be transitory.

At the September FOMC meeting, Federal Reserve officials also released expectations for monetary policy, with respect to the tapering of asset purchases as well as to “lift-off”, as depicted by the Federal Reserve’s “dot plot” for interest rate hikes. While the conditions necessary for tapering to begin have likely been met, the hurdle for raising interest rates has “all but been met” with respect to the Federal Reserve’s goal for employment. The Federal Reserve plans to keep interest rates at current levels until inflation moderately exceeds 2% for some time, on a sustainable basis, and maximum employment has been achieved. We believe this highlights the disconnect between timeline for asset purchases and the onset of raising interest rates, in that the two do not need to go together. While it is expected that the Federal Reserve could begin the tapering process as soon as November 2021, median expectations for the first interest rate hike are not until 2023.

The CIP portfolio continues to be defensively positioned with respect to both credit and interest rate risk. Credit quality across the portfolio is strong, leverage trends have been favorable and profit margins have been stable. CIP’s corporate bonds have a lower average duration than the intermediate-term corporate bond market, which reduces the portfolio’s relative sensitivity to rising interest rates. Moreover, the inclusion of fixed to floating rate coupons in CIP’s preferred securities allocation has helped to lower portfolio volatility from changes in interest rates.  The intent to enhance yield and reduce overall portfolio risk is unchanged, and the portfolio continues to be positioned to earn high current income, without extending duration or lowering our credit quality standards.

As of September 30, 2021

Short-Term Turbulence but Medium-Term Optimism: Our Thoughts Into Year End

Published on Oct. 15, 2021

October 14, 2021 – Short-Term Turbulence but Medium-Term Optimism: Our Thoughts Into Year End

John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, sat down to discuss the latest updates in the financial markets from this past quarter. In this webinar, they also discussed:
  • Disruptive Impacts: chaos in China, and other concerns for investors
  • Games of Chicken: legislating fiscal policy in the U.S. Congress
  • Prepare for Normalization: higher rates, slower growth, and Washington gridlock

September 2021 | Equity Commentary

September 2021 | Equity Commentary

Published on October 6th, 2021

Market Overview

September was a choppy month for stocks and bonds, as macroeconomic headwinds converged on the U.S. and global economy. Among the issues surfacing in September were consumer sentiment dipping on Delta concerns, the Federal Reserve giving clearer indication of ‘tapering’ plans later in the year, a debt ceiling standoff, and China dealing a range of uncertainties spanning real estate, energy, manufacturing, and state-driven economic reforms. The S&P 500 suffered its worst month since March 2020, sliding -4.7% in September. U.S. Treasuries also sold off during the month, likely in anticipation of upward pressure on interest rates tied to Federal Reserve tapering and longer-than-expected inflation pressures.

The surge of the highly contagious Delta variant seemed to temporarily hit the ‘pause’ button on the post-pandemic growth boom. Consumers trimmed spending on hospitality services and travel in July, and supply constraints—tied to worker and component shortages, reduced factory capacity in Asia, and ballooning shipping costs and delays—led many economists to mark down GDP growth estimates for Q3. Forecasting firm IHS Markit lowered their Q3 GDP forecast from 7.8% in July to 3.6% by late September.1

The Delta-induced blip in economic activity appears to be fleeting, however, and consumers appear to remain in a strong financial position. Households have a record $142 trillion in net worth, wages are on the rise, and there are still roughly as many job openings as there are unemployed Americans.2 Consumers seem to be paring spending on big ticket items, like vehicles and furniture, but they are spending more in areas like retail and services. In a sign that spending, and growth remain in an upward trend, personal outlays on goods and services rose 0.8% in August compared to July, according to the Commerce Department.

Downward revisions to economic growth forecasts in Q3 have given way to rising forecasts for economic growth in Q4 2021 and beyond. The belief is that aggregate demand and future growth were not lost as a result of the Delta surge, but merely delayed by a few months. The Federal Reserve raised its full-year GDP growth forecast for 2022 to 3.8% in September, up from 3.3% in their June forecast.3

At a two-day meeting held in September, the Federal Reserve did not make any changes to policy but did set the stage to begin ‘tapering’ the quantitative easing program, potentially as soon as the November 2-3 meeting. Gradually trimming the $120 billion in monthly purchases is often framed as monetary tightening, which could have a deleterious effect on the stock market. But the reality will likely look much different, in our view. For one, the Federal Reserve clearly telegraphs plans well in advance, which greatly reduces the possibility of a negative surprise. Second, an underappreciated result of reducing bond purchases is that it places upward pressure on longer duration Treasury bond yields, which will arguably steepen the yield curve over the next several months. A steepening yield curve is generally a positive leading indicator for economic activity.

We believe another temporary macro headwind in September was the risk of a government shutdown that featured prominently in the headlines. Congress has since passed a small spending bill to keep the government open until at least early December. The narrow spending bill may have received bipartisan support (254 to 175 in the House, and 65 to 35 in the Senate), because it included funding for resettlement of Afghan refugees and disaster recovery funds for hurricane and wildfire damage here in the U.S.

The more consequential debt ceiling issue remains unresolved. Treasury Secretary Janet Yellen has warned that failing to raise the debt ceiling would mean ‘running out of money’ by October 18. We expect Congress to raise the debt ceiling and thereby avoid a default event. In our view, brinksmanship is likely to bring the issue to the 11th hour, however, with the potential to inject short-term volatility into the capital markets. The Democratic Party can resolve the issue unilaterally through the reconciliation process, which seems the most likely route, given Republican opposition in the closely divided Senate.

Finally, there is China, which has arguably been the biggest driver of September volatility. China’s headwinds appear to stem from multiple sources: a slowing economy, heavy-handed government intervention across a variety of sectors, an energy crunch, and the looming default of property developer Evergrande, the country’s largest high-yield issuer. The Chinese government has been tightening the spigot and reining-in debt and lending practices, which has stunted Evergrande’s cash flow and has the company at the brink of bankruptcy. 42% of Evergrande’s $89 billion in outstanding debt is reportedly due within the next year.4

The risk is sizable for China, but we do not expect the U.S. capital markets to suffer significant contagion from China for two reasons. First, we expect Beijing to act in order to prevent an Evergrande default from cascading into a financial crisis, as the state has the means and the political will to do so. 2022 is a key year for President Xi Jinping, when China hosts its twice-per-decade Communist Party congress and will decide whether to extend his leadership. Second, we are not seeing signs of the contagion in the usual channels: commodity prices remain high, and spreads remain tight in the U.S. high yield market, where the issuance window is wide open. In 2016, when turbulence in China impacted U.S. markets, commodity prices declined, and U.S. high yield spreads materially widened. We are not seeing these indicators today.

Source:

1https://www.wsj.com/articles/u-s-economy-set-to-pick-up-speed-after-delta-driven-downturn 11632907800?mod=markets_lead_pos10

2https://www.wsj.com/articles/u-s-economy-set-to-pick-up-speed-after-delta-driven-downturn-11632907800?mod=markets_lead_pos10

3https://www.atlantafed.org/cqer/research/gdpnow

3https://www.atlantafed.org/cqer/research/gdpnow

4 https://www.wsj.com/articles/evergrande-china-real-estate-debt-debacle-empty-buildings-cities-beijing-11633374710

September 2021 | Thoughts from our Equity Team

September 2021 | Thoughts from our Equity Team

Published on September 28th, 2021

We believe the risk of a market correction may be elevated in the near term. The economy appears to be slowing due to rise of the Delta variant and various disruptions to global supply chains.  The Federal Reserve is likely to begin tapering its asset purchases in the coming months, and since that event disrupted the capital markets in 2013, it is possible it could do so again. The U.S. government may shut down on October 1, but this is not a significant concern to us, because we believe any shutdown would be brief, and historically investors have looked through brief shutdowns. More concerning to us is the approach of the debt limit, which is possible as soon as mid-October, and for which markets sold off significantly in 2011, even though the ceiling was ultimately raised before an actual event of default. Finally, the risk of a correction is elevated because of negative seasonality, as September and October are the weakest months for stocks, on average.
 
The U.S. market declines last Friday and Monday, September 20th, we believe were sparked at least in part by concerns about China, which has a trifecta of issues: a slowing economy, heavy-handed government intervention across a variety of sectors, and the looming default of Evergrande, the nation’s largest high yield issuer, with over $90 billion in bonds outstanding. We do not expect the U.S. capital markets to suffer significant contagion from China for two reasons. First, we expect Beijing to act in order to prevent an Evergrande default from cascading into a financial crisis, because it has the means and the will to do so. We believe that China can hardly afford a financial crisis on top of its slowing economy and Covid risk. Just a few weeks ago, Beijing bailed out Huarong, a bank with significant holdings of troubled loans, which indicates it may act if called upon. President Xi Jinping wants to reduce risk and sail as smoothly as possible into his appointment to a third term next October. Second, we are not seeing signs of the contagion in the usual channels: commodity prices remain high, and spreads remain tight in the U.S. high yield market, where the issuance window is wide open. In 2016, when turbulence in China impacted U.S. markets, commodity prices declined, and U.S. high yield spreads materially widened, and these are both stable.
 
Having said all of that, we have not assumed an overly defensive posture, because we believe if there is a correction it is likely to be fairly short and shallow, and we think risky stocks may perform well coming out of it and through year end. The U.S. Delta wave appears to have peaked as the 7-day average of cases peaked on August 31 and has since declined by 11% as reported by the CDC. We expect this decline to continue based on Delta waves observed in other nations, before plateauing at a higher level due to winter seasonality. In the coming months, additional vaccinations, boosters for seniors, and authorization in children under 12, the largest pool of unvaccinated Americans, could set us up for normalization in 2022. We believe that Economic growth remains strong even if it has slowed somewhat, with the Wall Street consensus expecting 5% for the third quarter, down from 7% previously. 

We think Monetary policy remains accommodative, and it works with long and variable lags, such that the extremely easy policy of the last 18 months should continue to support economic activity and asset prices through next year. We expect the yield curve to steepen as quantitative easing is reduced. We believe the combination of declining Covid cases and a steepening yield curve should support those stocks that benefit most from reopening the economy. This cohort of stocks is riskier, which makes us reluctant to reduce our overall risk exposure, despite harboring some near-term concerns. In the last 50 years, there were 15 instances where stocks advanced by 15% or more in the first 8 months of the year. Stocks had positive returns in the final 4 months of the year in 13 of these 15 instances, with an average gain of 5%. A strong beginning and middle like we have experienced this year historically has portended a strong finish, which we believe the strategy is positioned to benefit from, should it come to pass.

August 2021 | Equity Commentary

August 2021 | Equity Commentary

Published on September 8th, 2021

Market Overview

The S&P 500 index rose about 3% in August, marking its seventh consecutive monthly increase. Year to date through August, the index made 53 new all-time highs—the most recorded since 1964. Since the March 2020 lows, the S&P 500 has more than doubled1, charting a “v-shaped” recovery often characteristic of event-driven bear markets. Ten- and 30-year U.S. Treasury bond yields remained relatively unchanged in August, which appeared to complement decelerating inflationary pressures and a still-dovish Federal Reserve.

Stocks’ summer rally coincided with a robust earnings season. A Wall Street Journal analysis found that more than 75% of U.S. companies reported higher revenues in Q2 2021 than Q2 20192, which offers insight into corporations’ ability to resume pre-pandemic growth trends. FactSet data from mid-August showed that of the 91% of reporting S&P 500 companies, a staggering 87% of them had delivered positive earnings-per-share and revenue surprises for the quarter.3

The U.S. economy continues expanding, but we believe there are a few signs growth may be cooling slightly. In August, factories and service providers – as measured by the IHS Markit surveys of purchasing managers – saw activity dip. On the service-sector side, the purchasing managers index fell to an 8-month low of 55.2, while the manufacturing index sank to a 4-month low of 61.2.4 These declines are noteworthy, though it’s worth recalling readings above 50.0 signal expansion. The economy appears to be still growing, just at a slower pace.

The Federal Reserve held its annual Jackson Hole symposium virtually for the second consecutive year. As ever, investors parsed Chairman Jerome Powell’s speech for clues regarding when, and how quickly, the Federal Reserve may begin tapering bond purchases and/or raising interest rates. Though opinions vary among FOMC members, Chairman Powell continues to tilt dovish and appears committed to moving slowly. Many market participants continue to link tapering with rate increases, but Chairman Powell has attempted to disassociate the two. His statements suggest tapering need not directly signal an impending rate hike in 2022.

Chairman Powell also seems less concerned about a tight labor market driving inflationary wage pressure than some of his more hawkish counterparts, who cite employers’ ongoing challenges finding workers. Though the Federal Reserve has no parameters defining ‘full employment,’ Chairman Powell seems fixated on employment being ~6 million jobs below its February 2020 level, with stubborn levels of slack in the services sector. He sees a low likelihood of a persistent wage-price spiral.

The Federal Reserve remains similarly dovish on inflation as it believes Covid-related supply chain disruptions are driving relatively narrow price gains—a view supported by longer-term inflation expectations, which remain relatively moderate. Chairman Powell has clearly stated his belief it would be a mistake for the Federal Reserved to respond to what it views as temporary price fluctuations, which makes interest rate increases very unlikely in 2021.

On the political front, the House of Representatives inched closer to passing Democrats’ economic centerpieces before adjourning for its August recess. A 220-212 party-line vote approved a $3.5 trillion budget framework (the American Families Plan) and advanced the $1.0 trillion infrastructure bill. The Senate already passed the budget framework, allowing House and Senate Democrats to craft a budget without Republican involvement (budget reconciliation only requires simple majorities in both chambers).

In exchange for moderate Democrats’ support for the reconciliation bill, Speaker Pelosi has committed to a vote on the infrastructure bill by September 27. As ever, the devil will be in the details, many of which are still missing and will likely prompt sharp debate among the various factions in the Democratic Party. Further complicating the legislative schedule is the impending debt ceiling, which the U.S. government may reach in September or October. All told, increased spending—which seems likely under most legislative scenarios—should provide a modest fiscal tailwind in future quarters.

Surging Covid-19 (Delta variant) cases in the U.S. have shown signs of weighing on consumer sentiment. The Conference Board’s consumer confidence index fell from 125.1 in July to 113.8 in August, pulling the index back to February 2021’s level (before the vaccine was widely available). Consumer spending growth in July was up just 0.3% from June levels—a considerable deceleration from May to June’s 1.1% growth.5 Some states and businesses have responded to rising cases by reintroducing indoor mask mandates and/or requiring proof of vaccination, and event cancellations and delays are becoming more common. Several high-profile corporations have also delayed office reopening plans.

August offers a single data point for consumer sentiment, and it’s worth noting sentiment data tend to be backward-looking. It does not offer much insight into where the economy may be headed, particularly if Delta ebbs as quickly as it has in countries like India and the U.K. Fading pandemic risk could unleash some additional spending as consumers return to more normal economic activity. We believe the odds favor a peak in new cases over the next 3-6 weeks, although students returning to the classroom could also spur a rise in new cases.  Ongoing fiscal stimulus is also bolstering the economy in the near term, as child tax credit starting hitting accounts in July. Fiscal stimulus contributed to a 1.1% July increase in household income (according to the U.S. Commerce Department), marking the biggest jump since March 2021.  

Globally, rising cases—particularly in Southeast Asia—are disrupting production and prolonging supply chain issues. Malaysia, an important if underappreciated link in the semiconductor supply chain, has struggled with a recent surge in cases, prompting staff shortages and introducing yet another hiccup in semiconductor production. China’s economy is also showing signs of ongoing Covid-related strains: that country’s services sector purchasing managers index (PMI) contracted in August for the first time since February 2020, while manufacturing PMI barely eked out a positive reading (50.1), with the new orders sub-index modestly contracting (49.6).6

Finally, the geopolitical situation in Afghanistan reached a climax in late August with the full U.S. troop withdrawal. The market effect appeared negligible, despite the tragic loss of life. The tail risk in the U.S. revolves around domestic policy—e.g., if the Afghanistan unraveling were to disrupt the Biden administration’s pursuit of other economic policy objectives, like the aforementioned spending packages.

Source:

1https://www.nytimes.com/2021/08/31/business/stock-market-record.html?referringSource=articleShare

2https://www.wsj.com/articles/how-the-biggest-companies-have-fared-during-the-covid-19-pandemic-11630229403

3https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_081321A.pdf

4https://www.markiteconomics.com/Public/Release/PressReleases

5https://conference-board.org/data/consumerconfidence.cfm

6https://www.wsj.com/articles/covid-19-delta-variant-pummels-chinas-services-sector 11630386778?reflink=desktopwebshare_permalink

The Three Pillars of an Exit Plan – A Post-Pandemic Tune-Up

The Three Pillars of an Exit Plan – A Post-Pandemic Tune-Up

Published on Aug. 25, 2021

Investors, businesses, and consumers are focused on the future, and that’s great news.

Over the past few months, I have been talking to family, friends, colleagues, and clients in funeral service about lessons they have learned in the past year. I’m curious how folks think the future will look different. Interestingly, just about everyone gives a different answer about the future of work, life, and daily interactions. To me, the variety of responses is the clearest indication that the uncertainties of the past year have given way to uncertainties about the future.

To me, there is no better way to counter uncertainty than by making a thoughtful, detailed, and ultimately written plan. For many funeral service and cemetery professionals, this may mean taking a look at your business, its value, and your personal financial goals to ensure you have a clear vision for what you want the future to look like. In other words, now is the time to give your financial plan and your exit plan a post-pandemic tune up. I’ll focus on what you need to know for your exit plan here.

The Three Pillars of an Exit Plan

The three pillars of an exit plan are really three sets of questions that funeral service and cemetery business owners need to ask themselves.

Question 1: In order to leave or sell your business, how much would you need to receive in equity and/or after-tax proceeds?

Within the context of the pandemic and the past year, a key data point for all business owners is figuring out how much your business valuation changed. Did the pandemic cause it to increase or decrease? Do you think pandemic-driven forces – like changes to real estate prices, the jobs market, technology’s effect on how businesses offer services, and the changing wants and needs of client families  – bode well for the future of your business or work against it?

Answering these questions will not only give business owners a sense of what their business is worth today, it can also begin to address key questions about how the business’s valuation could change in the years ahead.

Another critical issue to think about here is what could happen to the value of your business if tax rates move higher. While we are not tax experts and we urge you to speak to your tax advisor about these issues, here is a hypothetical example to consider:

  • Scenario 1: Business owner sells his business in 2021 for $1,500,000. Using 20% federal capital gains rates, the owner receives $1,200,000 net of taxes.
  • Scenario 2: Business owner sells his business in 2023 for $1,500,000. By then, capital gains rates have increased to match ordinary income rates (39.6%) for those who earn more than $1,000,000. In this scenario, the owner receives $906,000 net of taxes.

The $300,000 difference between the two scenarios is not a small sum, which is precisely why these types of issues should be front-and-center in exit planning today.  

Question #2: When do you want to leave or sell your business?

The decision whether to sell now versus later can be dictated by tax expectations, as demonstrated above. But owners also need to consider the conditions throughout the profession and personal circumstances.

In the funeral service and cemetery profession, an owner may want to strongly consider selling during a period of heightened consolidation, attractively-priced deals, and low cost of capital (for example). The macroeconomic environment also plays a role – if the economy is in growth mode and expanding, there may be more years left in the cycle to accumulate additional value.

On the personal side, many owners need to weigh factors like lifestyle needs, desire to retire versus to work, family life, and/or desire to pursue philanthropic pursuits. At the end of the day, what the business owner wants for themselves personally needs to play a decisive role in how an exit plan is shaped.

Question #3: Who are the possible successors or acquirers of the business?

In all likelihood, the pandemic revealed new information about prospective successors or buyers for the business. Maybe the key employees you had in mind to take over the business struggled to meet the challenges posed by the pandemic. On the flip side, maybe you were surprised by how a family member or a third party stepped up over the past year, shifting your thinking completely about who is best suited to take over the business.

At the end of the day, finding and training a successor is almost certainly a multiyear process, requiring a lot of attention and energy. Owners should consider whether the pandemic made it more – or less – clear who is qualified to lead the business into the future.  

The last point to make is that exit planning is a dynamic, methodical, ongoing process – it is not a single event! Owners should not expect to make an exit plan once and never revisit it. Over time, financial situations change, timelines change, personal needs change, taxes change, and the economics of funeral service changes. The pandemic, of course, was a catalyst for change – which to me means owners and investors need to respond by tuning up your financial and exit plan now.

Read the full article

Source: Published in Memento Mori magazine

July 2021 | Equity Commentary

July 2021 | Equity Commentary

Published on August 10th, 2021

Market Overview

U.S. stocks continued trending higher in July, with the S&P 500 ticking about 2.4% higher. Longer duration U.S. Treasury bond yields fell during the month, which may signal the market’s expectation for moderating growth and inflation in the second half of 2021. The Bureau of Economic Analysis reported the U.S. economy grew at an annualized pace of 6.5% (“advance” estimate) in the second quarter, which while strong, still fell below the  8+% consensus estimate. The Bureau also confirmed the 2020 pandemic-induced recession officially ended in April 2020, meaning the economic downturn lasted only two months. As it were, when the recession was officially declared in June 2020, it was already over. 

The U.S. economy is now back above its pre-pandemic size. Consumer spending persists as the lead driver of the expansion, with spending up 11.8%  in the three months ending June 30—the second-best performance since 1952.1 Business investment also rose 8%, adding 1.1%1 to the total GDP  number.  

Data suggests business spending growth could persist in the second half of the year. Corporate clients of J.P. Morgan and Bank of America have nearly $1 trillion (combined) in unused credit lines, and many have been asking the banks to increase them further. J.P. Morgan recently conducted a  survey of corporate clients and found 46% want to ramp-up capital spending later this year, with 38% indicating a desire to increase credit lines.2 

The drag on U.S. economic growth in the second quarter came from a combination of inventory drawdowns, which subtracted 1.1% from GDP,  rising imports, and a decrease in federal government spending.3 According to the Bureau of Economic Analysis, nondefense spending on intermediate goods and services fell the most, largely due to a drop-off in Paycheck Protection Program (PPP) loans. 

The Covid-19 Delta variant is spreading rapidly in the United States and in many countries abroad. Case studies of India and the United Kingdom suggest the Delta wave could last a few weeks and taper off, but this disease continues to be unpredictable even for the world’s foremost scientists.  With regards to equity markets, the central question is whether governments reinstate lockdowns in an effort to stem the spread. We believe that here in the U.S., the risk of another lockdown remains low. 

Vaccines are universally available to U.S. adults, which makes current risk far different than in previous stages of the pandemic. Mitigation measures, such as masking and social distancing, are also widely understood and can be carried out without shutting down major parts of the economy. Corporations, state and local governments, and the federal government, are also experimenting with mandates as a means to control risk,  while staying open. 

For example, General Motors, Ford Motor, and Stellantis (the maker of Jeep and Dodge), have reinstated mask mandates for all factory and office workers, regardless of vaccination status. Stanley Black & Decker has done the same. Facebook, Google, and even Tyson Foods have said they would require vaccinations for their entire U.S. workforce. Louisiana has introduced indoor mask mandates, while New York City will require people to show proof of vaccination for indoor activities like dining, gyms, and events with large groups. More examples exist across the economy,  but the bottom line is that as long as the vaccines remain highly effective at protecting against serious illness, there can be ways to address the ongoing crisis without shutting down. 

The widely-watched infrastructure bill passed a key hurdle in July. The bill must move through a very difficult amendment process in the Senate before moving over to the House, where it will likely be met with Democratic critics and mild support from Republicans. In other words, final passage is far from assured.  

Even so, it is worth summarizing key features of the proposed legislation, as winners and losers are often minted in big government spending  programs: 

• $110 billion for traditional infrastructure, i.e., repairing and improving roads and bridges 

• $39 billion to modernize public transit, including introduction of a zero-emission bus fleet 

• $66 billion for passenger freight and rail systems 

• $7.5 billion for a national network of electric vehicle charging stations 

• $17 billion for ports and $25 billion for airports 

• $65 billion expansion of broadband Internet access 

• $55 billion for clean drinking water 

• $73 billion in clean energy transmission 

Finally, the Labor Department reported a 5.4% (4.5% core) CPI increase in June from the previous year. The base effect still applies since the U.S.  economy was heavily restricted last summer, but when compared to June 2019 inflation still rose by a stout 3%. In his July testimony to Congress,  Federal Reserve Chairman Jerome Powell seemed less confident than usual: “This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And, of course, we’re not comfortable with that.”

1https://www.reuters.com/world/us/us-consumer-spending-rises-strongly-june-inflation-increases-2021-07-30/ 

2https://www.wsj.com/articles/businesses-are-loading-up-on-credit-spending-could-follow-11628069581 

3https://www.bea.gov/news/2021/gross-domestic-product-second-quarter-2021-advance-estimate-and-annual-update

Nicki Price Adams is the Face of Wealth Management in American Funeral Director

Published on Jul. 16 2021

July 2021: Nicki Price Adams is the Face of Wealth Management in American Funeral Director

Read the Full Article Here

Second Quarter 2021 | Fixed Income Commentary

Published on July 16th, 2021

Second Quarter 2021 | Fixed Income Commentary

Market Overview

Fixed income markets climbed higher throughout the second quarter as declining US Treasury yields supported valuations. Roosevelt’s Current Income Portfolio returned 1.7% gross, with corporate bond and preferred securities gaining by 1.4% and 3.0%, respectively. By comparison, the Bloomberg Barclays Intermediate Corporate Bond Index returned 1.7% and the ICE BofA Fixed Rate Preferred Securities Index returned 3.0%.

During the quarter, the Consumer Price Index surprised investors to the upside and rose by 4.2% in April. The largest advances were concentrated in areas most affected by the pandemic such as air fares, lodging and used car prices, which support the FOMC’s narrative that the building inflationary pressures are transitory. Moreover, retail sales and employment data have fallen short of expectations, spending on durable goods moderated, and housing starts declined sequentially, as rising input costs and labor shortages began to take hold. After rising during April and peaking in early May, lumber prices declined by month end.  Taken together, incoming data throughout the quarter may have softened inflationary concerns somewhat and caused 10Y US Breakeven Inflation levels, which are indicators of expectations for future inflation, to decline by 3 bps.

In June, the Federal Reserve sent a hawkish signal in the FOMC meeting by discussing the potential tapering of asset purchases sooner than previously expected and by updating dot plot expectations to reflect two 25 bp interest rate hikes in 2023. The unexpected shift from the Federal Reserve’s previous stance on “FAIT” (Flexible Average Inflation Targeting), whereby the FOMC would let the economy run hot with an inflation target above 2%, to average ~2% over time, put into question just how much the Federal Reserve is willing to let inflation go before taking steps to curtail economic growth. Expectations of an earlier lift-off by the Federal Reserve in raising interest rates, coupled with continued slowing consumer demand, mixed employment data, and concerns over new cases of the delta variant, have slightly dampened the economic growth outlook . As a result, 10Y US Real Yields have fallen by 24 bps and contributed to most of the decline in 10Y US Treasury yields as well as in the spread between 2Y and 10Y US Treasury yields, which fell by 27 bps and 23 bps, respectively.

Second Quarter 2021 decline 10Y US Treasury and 10Y US Real Yields:

Source: Bloomberg

Lower government yields, and a flatter overall yield curve, have led longer duration securities to outperform. Corporate bonds with maturities in the 5-10 year range gained by over 1% this quarter and recovered some of their losses from earlier in the year. In addition, retail, $25 par, predominantly fixed-rate coupon preferred securities gained by 3.3% during the quarter, while institutional, $1,000 par, fixed-to-floating rate coupon preferred securities saw gains of 2.5%.

The resulting flatter yield curve, however, has also made attractive reinvestment opportunities in fixed income markets harder to find, as there is less incentive to take on duration risk for only modestly higher yield compensation. Nevertheless, we continue to fund portfolios with attractive yields and a shorter duration than benchmark intermediate-term investment grade corporate bond and preferred securities markets. We also continue to favor high coupon, low duration, fixed-rate coupon preferred securities, in addition to fixed-to-floating rate coupon preferred securities, to diversify our interest rate risk exposure and protect against the potential for rates to go higher. Our goal to enhance yield and reduce risk is unchanged, and we believe the portfolio is defensively positioned to withstand potential volatility and earn reliable income regardless of the underlying economic environment, expectations for inflation or the path of interest rates in the future.

As of June 30, 2021

June 2021 | Equity Commentary

Published on July 13th, 2021

June 2021 | Equity Commentary

Market Overview

We believe the United States is very close to full reopening, with nearly all 50 states removing pandemic-related restrictions for vaccinated adults. Stocks may have largely priced in the economic rebound, but better-than-expected earnings and growth outcomes—combined with a still-dovish Federal Reserve and a retreat in longer-duration Treasury bond yields—continue providing upward support for equities. Approximately 80% of stocks in the S&P 500 Index are in an uptrend, underscoring the healthy breadth in the stock market. The S&P 500 added another 2.3% for the month, bringing year-to-date gains (through June 30) to 15.2%.

The U.S. economy appears to be humming. Consumers are largely driving the growth, armed with accumulated savings from the past year. According to the Bureau of Economic Analysis, pending volume on consumer goods is over 10% higher than pre-pandemic levels, and early data suggests consumers are now shifting their dollars to services. Spending on leisure and discretionary services (travel, restaurants, etc.) rose 0.7% from April to May, while spending on furniture and cars fell by 2.8% over the same period.

Business investment is also trending favorably, in our opinion. Data from the Federal Reserve Bank of St. Louis shows that nonresidential private fixed investment, which is a proxy for business investment, increased at a seasonally adjusted annual rate of 11.7% in Q1, following double-digit increases in Q3 and Q4 of last year. Following the “Great Recession” of 2008-09, businesses seemed more reluctant to invest in capital and equipment, and labor was cheap. In the current economic recovery/expansion, labor is tight and wages are rising, so it appears that businesses are opting to increase spending on computers, equipment, software, and other technology infrastructure in an effort to drive productivity. There is also apparently greater desire in the business community to build supply chain resiliency and to ‘on-shore’ more production, all of which is being helped along by historically cheap borrowing costs.

In the first six months of the year, the U.S. economy added about 3.3 million jobs, but is still 7.6 million jobs shy of the employment level attained prior to the pandemic. Perhaps unsurprisingly, new jobs at restaurants, hotels, stores, salons, and other in-person service industry roles accounted for nearly half of all payroll gains since the start of the year. Even though millions of Americans remain unemployed, the labor market is tight, which has created headaches for businesses while giving workers some leverage—according to ZipRecruiter, about 20% of all June job postings offered a bonus, up from 2% of jobs advertised in March. Wages are also being pressured higher.

In May, the median existing home price crossed $350,000 for the first time ever, marking a 23.6% jump from the previous year. In fact, it was only 11 months ago that the median existing home price topped $300,000 for the first time1, underscoring sharp price pressure as many urban workers migrate around the country and buy homes for remote work setups. Persistently low mortgage rates and a fairly drastic supply/demand imbalance (where demand far outweighs supply of homes) are also pushing home prices up. A 2021 report from the National Association of Realtors found that home construction over the last 20 years has fallen 5.5 million units short of historical trends. 

These are all key factors driving home prices higher, but the depth and breadth of housing demand may be best explained by demographics. A large share of workers under 40 (millennials) have jobs that allow hybrid/remote work, and many are first-time homebuyers. But there are also just a lot of millennials in America—according to the U.S. Census Bureau, the largest age cohort in 2020 was individuals between the ages of 25 and 35.

Oil prices have soared past $70 a barrel, approaching a six-year high and putting pressure on gas prices across the country. Demand has returned to the global economy and to the U.S. faster than supply has kept up. Last year, OPEC cut output by 9.7 million barrels a day, but they have only brought back about 4 million barrels since then. In OPEC’s June meeting, the United Arab Emirates (UAE) balked at an agreement to increase overall production by 400,000 barrels a day each month through late 2022, largely because the UAE wants much of that production for itself. OPEC data suggests the market needs an additional 2 million barrels a day by the end of the year. Without additional supply, oil prices could remain at elevated levels in the months ahead.

By the narrowest of margins, in June President Biden and a group of 10 centrist senators agreed to a roughly $1 trillion infrastructure package. According to a list distributed by the White House, the bipartisan spending bill includes agreement to the transportation-related items on Biden’s priority list, with new investments in the electrical grid, transit, roads, bridges, and other forms of infrastructure. The cost of the spending would be covered by “repurposing existing federal funds, public-private partnerships and revenue collected from enhanced enforcement at the Internal Revenue Service.” Within days, however, the deal’s passage was in jeopardy, as President Biden alluded to wanting the $1 trillion package to be accompanied by an anti-poverty bill and other parts of his $4 trillion American Jobs Plan. Republicans balked and Biden walked back his comments, reminding us how fragile any bipartisan agreement on spending will ultimately be. It is reported that Congress will be working towards a deal on this legislation in the coming weeks, prior to the August recess.

Market leadership started to shift over the last month or so. From the late last year through the middle of May, the so-called ‘reflation trade’ outperformed; cyclicals, value stocks, and the shares of many companies believed to benefit most from the reopening of the economy led the market—the Russell 1000 Value index rose +15% compared to just +2% for the Russell 1000 Growth index. But since then that trade has reversed, with growth stocks outperforming value stocks (+2%). This rotation in equity markets was commensurate with a rally in U.S. Treasury bonds, which saw the 10-year Treasury bond yield decline from around 1.7% to around 1.4%. This decline in Treasury yields marked a reversal from the sharp rise early in the year, and may be sending a signal about falling investor expectations for economic growth and inflation going forward. It is too early to tell how this story plays out, but equity market leadership could be choppy as we get more clues from the economic data about inflationary trends.

As of June 30, 2021

Walmart’s Flipkart raises fresh funds for $38 billion valuation as IPO looms

Published on Jul. 12, 2021

Jason Benowitz Featured in Reuters “Walmart’s Flipkart raises fresh funds for $38 billion valuation as IPO looms”

“It is a triumph for Walmart as investors were initially skeptical of the U.S. retailer’s tie-up with Flipkart,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group. He added the success of Flipkart bolsters India as a destination for foreign investment. Read the Full Article Here

Midyear Check-in: Navigating An Early Cycle Economy

Published on Jul. 20, 2021

July 19, 2021 – Midyear Check-in: Navigating An Early Cycle Economy

John Roscoe, CFA, Chief Investment Officer, and Jason Benowitz, CFA, CMT, Senior Portfolio Manager, sat down to discuss the latest updates in the financial markets from this past quarter. In this webinar, they also discussed:

  • Reopening: driving economic activity, corporate earnings, and market returns
  • Inflation: the great debate, and the Fed reaction function
  • Washington: advancing plans to tax, spend, and regulate

Corporate Buybacks Gain Steam With Banks Poised to Boost Buying

Published on Jul. 6, 2021

Jason Benowitz Featured in Bloomberg “Corporate Buybacks Gain Steam With Banks Poised to Boost Buying”

While repurchases are likely to rise as economic growth continues, corporations may opt to allocate more cash to capital expenditures like technology and factories, according to Jason Benowitz, a senior portfolio manager at Roosevelt Investment Group. He’s not worried about the prospect of reduced buybacks weighing on the broader market.

Read the Full Article Here
Roosevelt Investments