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.







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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

The United States appears to have decisively turned the corner on the Covid-19 pandemic, following a year mired by uncertainty and change. The U.S. jobs market is heating up, households are armed with savings, and U.S. corporations delivered better-than-expected earnings in Q1 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.”




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