Roosevelt Investments is now CI Roosevelt Private Wealth

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 













As of October 31st, 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.



2 september#:~:text=The%20median%20federal%20funds%20rate,elevated%20at%202.9%25%20in%202025.







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.


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



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









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.









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

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.









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, 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.


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.








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.



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.






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


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: 
2 Source:
3 Source:

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








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

Yield Generating Considerations for Year-End

Yield Generating Considerations for Year-End

Published on December 10th, 2021


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:

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:

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


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.


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:

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


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.


1 11632907800?mod=markets_lead_pos10





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.







6 11630386778?reflink=desktopwebshare_permalink

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.”




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

May 2021 | Equity Commentary

Published on June 2nd, 2021

May 2021 | Equity Commentary

Marketing Overview

U.S. equity markets moved slightly higher in May but rising inflation concerns led to more volatility during the month. However, there is little doubt about the momentum of corporate fundamentals heading into summer. As of the end of May, nearly all of the S&P 500 companies had reported Q1 2021 earnings, with 87% posting positive earnings-per-share (EPS) surprises. That is the highest percentage beating estimates since at least 2008. European equities produced better returns than U.S. equities in May, as daily vaccination rates in Europe passed the U.S. for the first time. The ‘rolling’ global economic reopening that started with China and moved to the U.S. is now approaching Europe, which we believe bodes well for global economic growth forecasts in the quarters ahead.

Inflation took center stage as a headline risk in May, driving elevated volatility in the middle of the month, before Federal Reserve governors shared their views that inflation was likely transitory, and these comments appeared to calm markets. U.S. consumer prices jumped in April by 4.2% from a year earlier, marking the biggest 12-month increase since 2008. To be fair, April 2020 was early in the pandemic, so the base effect (comparing last year to this year) is a big reason for the steep jump. The more telling data point, in our view, is the 0.9% increase in core inflation from March to April, the biggest rise in monthly inflation since 1981.

Many readers have likely noticed signs of inflation in the economy. The national average for a gallon of gas crossed $3 a gallon for the first time since November 2014, lumber prices have more than doubled in 2021 to date, and copper prices are over 30% higher. For the first time ever, the average price paid for a used car rose above $25,000.

The housing market has also seen pronounced price pressures. The S&P CoreLogic Case-Shiller National Home Price Index jumped 13.2% from March 2020 to March 2021, which is the highest annual rate of price growth since December 2005. The U.S. Commerce Department reported that the median price of a new home sold in April was $372,400, which marked a 20.1% increase over the last year. That’s the biggest annual surge in new home prices since 1988.

Supply and demand imbalances in the housing market may ultimately correct themselves. Data over the last few months indicates that lack of inventory and higher prices are causing home sales to cool off – existing home sales have declined for three straight months and fell 2.7% from March to April. The share of consumers who said they plan to buy a house also fell to its lowest level since 2013. The pandemic catalyzed many structural changes in business and the economy, and it may have also fueled a rapid wave of migration that could abate in the coming quarters and years.
The Federal Reserve and the financial media seem to be in a tug-of-war over the inflation narrative. The Federal Reserve has been leaning into the ‘inflation as transitory’ narrative while some in the financial media have been framing long-term inflationary issues as a foregone conclusion. Both sides offer valid arguments, but investors may be better served to sidestep the debate and simply keep an eye on the 10-year U.S. Treasury Breakeven Inflation rate. This measure has seen a significant rise over the last year, but stalled in May at around 2.4%. We would attribute the pause to the rate of increase in previous months, a softening of long-term inflation expectations, and strong continued demand for government securities.

The U.S. economy continues its rapid recovery, supported by the reversion to normalized pre-pandemic activity, monetary accommodation, and fiscal stimulus. A key metric in U.S. labor markets, initial unemployment claims, fell to a new pandemic low at the end of May. Claims came in just above 400,000, better than most economists estimates and confirming a steady downward trend. Initial jobless claims are now at their lowest levels since the pandemic’s onset. Consumer confidence also remains on a upward trend, and while it has yet to reach pre-pandemic levels, appears poised to do so perhaps later this year.

Internationally, Europe appears to be turning a corner on the pandemic, with 30% of adults now vaccinated compared to about 50% in the U.S. Europe reached a new milestone in May, however, surpassing the U.S. in daily doses administered. As the E.U. emerges from recession and joins the U.S. and China in its return to growth, we expect the global economy to gain momentum as the year progresses. Overall, while we continue to keep a watchful eye on the risks posed by rising interest rates and inflation, we still believe the most prudent course for equity market participants is to remain broadly invested to capture the benefits of global reopening.

As of May 31, 2021

The Great Inflation Debate

The Great Inflation Debate

Published on May 17th, 2021

The S&P 500 declined 4.0% from May 10 to May 12, the largest three-day selloff in five months. The Nasdaq composite declined 5.2% and the Russell 2000 index of small capitalization stocks declined 6.0%. We believe investor concerns about inflation sparked the pullback.

On May 12, the U.S. Bureau of Labor Statistics reported that its widely followed Consumer Price Index increased 4.2% in April as compared to the year ago period.1 The CPI increased 0.8% as compared to the prior month, seasonally adjusted. These price increases were higher than expected.2 They were also an acceleration from the growth rates reported in March. The annual increase was the largest in twelve years.

Investors had been bracing for higher inflation to show up the data. One reason is that prices in the year ago comparison period were depressed by the pandemic, a phenomenon known as the base effect. But growth in the April price index as compared to the prior month also accelerated, which cannot be attributable to the base effect.

Most observers believe that inflation is picking up in the U.S. The great debate is whether this increase is transitory. Investors and policymakers typically pay little attention to one-time changes in the price level. But a persistent inflationary environment can be pernicious. It can grow out of control if left unchecked, eroding both consumer purchasing power and corporate profitability. It could weigh on the U.S. dollar, reducing the allure of the U.S. capital markets for foreign investors. And if monetary or fiscal policy is tightened to address runaway inflation, it could choke off the economic recovery.

We divide the current drivers of inflation into three categories. The first is the post-pandemic economic reopening. In April, airline fares increased 9.6%, hotel room rates increased 8.1%, and car rental rates increased 82.2%.1 These were driven by the base effect as prices were depressed a year ago. We expect travel and similarly impacted service industries to increase supply and catch up with demand in the coming months, suggesting this category is likely a source of transitory inflation.

The second category is the knock-on effect of supply chain bottlenecks. Winter Storm Uri shut Gulf Coast chemical plants in February. The Suez Canal was blocked for six days in March, distorting global trade flows. A fire at a Japanese semiconductor plant in March exacerbated a pandemic-induced chip shortage. We believe events like these contributed to a 21.0% increase in used car prices in April, as supply chain constraints prevented automakers from sufficiently replenishing new vehicle inventories at dealers, increasing the value of used vehicles.1 While there is a litany of supply chain issues, we expect most to be resolved in the coming months, suggesting this is another source of transitory inflation.

The final category is labor cost inflation. We believe this is the area of greatest concern, because wage increases tend to be sticky, and increasing labor supply may be more challenging than other inputs to production. Recently there have been signs that labor supply has not kept up with demand. On May 11, the Bureau of Labor Statistics reported that U.S. job openings in March reached 8.1 million, a record level.3 This occurred despite surprisingly anemic nonfarm payroll additions of 266,000 in April, also reported by the BLS on May 7.4 The increase in average hourly earnings in April was a meager 0.3%, but that is because a pronounced mix shift toward lower-wage workers masked more rapid wage inflation within categories.4 The tight labor market may have manifest itself in the 3.6% increase in restaurant prices recorded in April, as labor is the largest expense item at most restaurants, and, unlike other reopening beneficiaries, this category did not see price compression in the year ago period.1,5

Several unusual factors are coming together to suppress labor supply. Fortunately, these may be addressed in the coming months. Some able workers have left the labor force due to fear of contracting or spreading infection. But additional vaccine distribution, the steady reduction in new Covid cases since mid-April, and the May 13 relaxation of guidelines by the Centers for Disease Control and Prevention may give these workers the confidence to return to employment.6 Others have left to care for children, as about half of U.S. school districts remain in hybrid instruction mode.7 This could improve in the coming weeks as schools close for summer vacation and households with children transition to fully in-person options like day care or summer camp where necessary. Generous unemployment insurance may provide an incentive for some workers to remain unemployed.8 While the $300 weekly Federal Pandemic Unemployment Compensation benefit expires September 6, many states are reacting to the possible disincentive to work by ending it earlier, removing another potential obstacle to labor supply growth.9 

Recent comments by Federal Reserve committee members suggest the central bank leadership continues to view the recent pickup in inflation as a transitory development.10 We believe these comments have helped to calm the capital markets in recent days, as they indicate the Federal Reserve is unlikely to respond to the recent inflationary data releases by tightening monetary policy. This is consistent with the long-term policy framework revision the Federal Reserve adopted in August, in which it targets an average inflationary level of 2% over time.11 Under its revised framework, the Federal Reserve may aim to respond to persistent disinflation as occurred over the last ten years by engineering an overshoot, or price gains moderately above the average 2% target for some time.

Our point of view in the great debate is aligned with the Federal Reserve: We believe the recent pickup in inflation is likely to be transitory. That said, there are of several types of disconfirming evidence whose emergence might give us pause to reconsider. If CPI and other inflation measures continue to exceed expectations, and the sources of inflation broaden to include larger and stickier components of household spend, such as shelter and health care, it would suggest that inflation may persist. In the labor market, if job openings remain at record levels, nonfarm payroll additions stagnate, and wages accelerate, we would fear a pernicious wage-price spiral taking hold. In the capital markets, the forward inflation curve implied by Treasury Inflation Protected Securities remains inverted.12 If a selloff in long-term TIPS flattened the curve, removing the inversion, that would suggest fixed income investors are anticipating a prolonged inflationary period.

If investors fear inflation will persist, we believe they will favor value stocks, and interest rate sensitive stocks, such as banks. This was apparent in the three-day selloff, as value outperformed growth, and banks outperformed the broader market.2,12 Over the last year, we have been gradually repositioning our equity portfolios to benefit from the reopening trade. This included a shift toward value and interest rate sensitive stocks. Therefore, we are already somewhat prepared for a more sustainable inflationary environment. However, we also added to cyclical exposure as part of our reopening thesis. These stocks could be vulnerable should investors worry that tighter than expected monetary and fiscal policy could slow economic growth or even spark recession. From May 10 to May 12, the Russell 1000 Value declined 3.3%, the Russell 1000 Growth declined 4.8%, the BKX bank index declined 2.9%, and the S&P 500 declined 4.0%.

In our fixed income portfolios, we have been positioned for rising interest rates for some time. This includes holding a shorter duration than our benchmark, which reduces the portfolio’s sensitivity to rising rates. We have also invested in fixed-to-floating rate securities, which may hold their value or even appreciate as interest rates rise. In addition, higher interest rates enable us to invest the funds from maturing securities into higher yielding replacements, generating more income over time than would otherwise be possible, without taking on additional risk.

1Source: U.S. Bureau of Labor Statistics. Consumer Price Index Summary. May 12, 2021.

2Source: Bloomberg and Roosevelt Investments.

3Source: U.S. Bureau of Labor Statistics. Job Openings and Labor Turnover Summary. May 11, 2021.

4Source: Bureau of Labor Statistics. Employment Situation Summary. May 7, 2021.

5Source: Wall Street Journal. Some, But Not All, of the Price Jump is Transitory. May 12, 2021.

6Source: U.S. Centers for Disease Control and Prevention. Interim Public Health Guidelines for Fully Vaccinated People. May 13, 2021.

7Source: Davidson College. Return to Learn Tracker. May 14, 2021.

8Source: Wall Street Journal. More States to Reject Extra $300 Payment for Unemployed. May 11, 2021.

9Source: Wall Street Journal. Fed’s Clarida Surprised by Inflation Report, But Stresses Need to See More Data. May 11, 2021. Fed’s Waller Says Inflation Jump Likely Temporary, Urges Patience. May 13, 2021.

10Source: Federal Reserve. Federal Open Market Committee Announces Approval of Updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. August 27, 2020.

11Source: Federal Reserve Bank of St. Louis and Roosevelt Investments. On May 14, 2021, the TIPS implied five-year breakeven inflation rate was 2.68%, which was greater than the five-year, five-year forward inflation expectation rate of 2.34%.

12From May 10 to May 12, the Russell 1000 Value declined 3.3%, the Russell 1000 Growth declined 4.8%, the BKX bank index declined 2.9%, and the S&P 500 declined 4.0%.

April 2021 | Equity Commentary

Published on May 10th, 2021

April 2021 | Equity Commentary

Market Overview

The good news continued in April, with the S&P 500 index crossing 4,000 for the first time. The U.S. economy posted real GDP growth of 6.4% in Q1, nearly surpassing the pre-pandemic level of GDP. Earnings season in the U.S. is also off to a strong start, with better-than-expected results arriving as pandemic risks fade into the background. In our view, growing optimism is being reflected in sustained investor appetite for risk assets.

Earnings season is in full swing, and early signs indicate American corporations are in robust financial health. As of April 30, 87% of reporting S&P 500 companies delivered better-than-expected results, which is far higher than the historical average of 65%. Should the trend largely hold, corporate America could deliver the highest share of quarterly earnings beats since 1994.

Importantly, corporations are not just barely beating estimates—they are surprising significantly to the upside. According to data firm Refinitiv, corporations have historically beaten estimates by an average of 3.6%, but so far in Q1 2021, profits have been averaging 22.8% above expectations. All told, the recent string of strong results has S&P 500 companies on track to post their fastest rate of earnings growth since at least 2010. The caveat is that corporations have the benefit of coming off historically weak comparisons in 2020, but at the same time, earnings have rarely looked this good.

Retail sales and capital goods orders have surged beyond prior cycle peaks, which suggests more upside to S&P 500 revenue forecasts in the coming months. After the 2008 Financial Crisis, it took retail sales and capital goods orders 41 and 46 months, respectively, to pass prior peaks. In aggregate, these economic readings suggest the US economy is experiencing one of the strongest recoveries in decades.

The labor market is also showing signs of marked improvement, with the number of job openings very close to its pre-pandemic peak. Weekly unemployment claims and monthly layoff announcements have fallen to post-pandemic lows. In the Fed’s recently published Beige Book, a common theme emerged: employers were reporting shortages of workers, and many said they were having difficulty hiring. Among the areas reporting the most shortages: drivers, entry-level workers, childcare, nurses, and information technology. In other words, a fairly diverse range of jobs.

The labor force is estimated to be 5 million lower than it was before the pandemic, as many people dropped out of the labor force for a variety of reasons – boomers retiring, women staying home for childcare, people fearful of catching and spreading the virus, and/or folks who are content living on expanded unemployment benefits. But the large number of job openings—and employer frustration in filling them—may be best explained by the Economic Policy Institute’s Heidi Shierholz: “One reason is that in a system as large and complex as the U.S. labor market, there will always be pockets of bona fide labor shortages at any given time. But a more common reason is employers simply don’t want to raise wages high enough to attract workers. Employers post their too-low wages, can’t find workers to fill jobs at that pay level, and claim they’re facing a labor shortage.” April’s weaker-than-expected jobs report – with U.S. employers adding 266,000 jobs versus the expected 1 million – may be anecdotal evidence of Ms. Shierholz’s theory playing out.

Only a few weeks after the passage of the $1.9 trillion American Rescue Plan, President Biden is now pushing another $1.8 trillion package called the “American Families Plan” (this in addition to the $2.3 trillion infrastructure plan). This plan aims to expand educational opportunities and childcare, funded partly by the largest proposed tax increase on wealthy Americans in decades. The initial proposal for tax increases includes pushing the top marginal rate for individuals to 39.6%, increasing corporate taxes to 28% from 21%, and raising capital gains taxes to 43.4% for individuals who earn over $1 million annually, inclusive of the 3.8% net investment income surtax. Treasury Secretary Janet Yellen is also negotiating with foreign allies to institute a global minimum corporate tax.

It’s quite a bit to digest. Government spending feeds directly into GDP growth, but higher taxes can create distortions in the markets, particularly if the capital gains rate is doubled for a slice of the population. Efficient allocation of capital is another story altogether. At the end of the day, we know from history to watch what politicians do, not what they say. With a narrowly divided Congress, many of these proposals will likely be watered down if they make it to the finish line at all. The biggest risk to the markets in the interim, in our view, could be the legislative uncertainty to follow.

The U.S. has arguably turned a decisive corner in the battle against Covid-19. Hospitalizations in Michigan – the worst hot spot in the U.S. – are falling again, and some states are reporting zero new coronavirus deaths for the first time in a year. More than half of American adults, or close to 150 million people, have received at least one vaccine dose. In the EU, officials have finally accelerated the pace of vaccinations to the point where they are above the rate in the U.S., helping to spur a material downturn in new infections there. Brighter days look to be ahead.

As of April 30, 2021

April 15, 2021: Update on Financial Markets – 2021: The Year of Reopening

Published on Apr. 16, 2021

April 15, 2021: Update on Financial Markets – 2021: The Year of Reopening

Jason Benowitz, CFA, CMT®, Senior Portfolio Manager and Richard Konrad, CFA, CFP®, Director of Value Strategy, sit down to discuss:

  • Covid-19: the light at the end of the tunnel grows brighter
  • Fiscal Policy: short-term support and long-term debate
  • Interest Rates: you can have too much of a good thing

Jason Benowitz Featured in Reuters “US STOCKS-Wall St ticks lower in choppy trading ahead of Fed minutes”

Published on Apr. 8, 2021

Jason Benowitz Featured in Retuers “US STOCKS-Wall St ticks lower in choppy trading ahead of Fed minutes”

“The Fed leadership has generally not been concerned with the recent rise in interest rates, suggesting it reflects a pickup in growth rather than inflation. Any signs of inflation is … generally expected to be transitory,” said Jason Benowitz, senior portfolio manager at the Roosevelt Investment Group in New York.

Read the Full Article Here

March 2021 | Equity Commentary

Published on Apr 7, 2021

March 2021 | Equity Commentary

Market Overview

To say investors embraced “risk-on” sentiment in the first quarter may be an understatement. Most risk assets and equity categories moved higher, with value stocks and small-caps posting the biggest gains. Growth stocks moved higher, but continued to face growing headwinds from rising interest rates. We have noted in previous commentaries that extraordinary stimulus measures could result in excess liquidity sloshing around the financial markets. More liquidity supports higher prices, but it can also push investors too far out onto the risk curve (cryptocurrencies, GameStop, etc.). We believe it is important to focus on quality and to avoid “chasing” in this type of environment. For March, the S&P 500 was up about +4.4%, and this index returned +6.2% in the first quarter.

President Biden signed the $1.9 trillion ‘American Rescue Plan’ into law on March 11. The bill includes direct payments to most American households, a significant expansion to the child tax credit, an extra $300/week in unemployment benefits through September 6, and billions of dollars across state and local education, Covid-related public health measures, and additional business loans.

There is plenty more in the bill. To appreciate the scope of direct payments, consider a young, middle income family with three kids. By qualifying for the stimulus checks and the child tax credits, the family could receive perhaps $15,000 from the federal government. In short, the bill is massive, and a majority of dollars are making their way into the real economy.

The labor market continues to show signs of stabilizing. In the last week of March, just over 714,000 people filed for state unemployment benefits, which was up slightly from the week before, but still marks drastic improvement since the pandemic began. Overall hiring accelerated for the month, with U.S. employers adding a seasonally adjusted 916,000 jobs—the strongest gains since August 2020. There are more job seekers entering the labor market and more job postings available, a good sign the recovery is gaining momentum. The unemployment rate fell to 6.0%.

The tanker blocking the Suez Canal made major headlines last month, putting additional stress on already strained global supply chains. The Suez Canal is responsible for facilitating about 13% of global maritime trade and 10% of seaborne oil shipments, making any delays meaningful. The Suez bottleneck was not the only problem in March—in the ports of Los Angeles and Long Beach, dozens of container ships were continuously waiting to offload medical equipment, consumer electronics, fuel, and other goods. These two California ports handle over 30% of U.S. container imports, which helps explain delivery delays and issues with inventory restocks in the U.S.

Perhaps the most acute shortages are being seen in the supply of semiconductors, initially caused by manufacturers being caught off guard by surging demand, as the U.S. economy began its sharp recovery last spring. Demand typically declines in recessionary periods.

Supply issues were later exacerbated by even stronger demand as global economies recovered, and were dealt a further blow by a serious fire at a Japanese semiconductor manufacturer—which will likely curtail supply for at least a month. Semiconductors are used in cars, and several automakers have been forced to halt production of various makes and models due to lack of essential components. The end result is that factories are reporting the sharpest rise in prices for inputs they’ve seen in nearly 10 years, which could add to inflationary pressures this year.

The 10-year U.S. Treasury bond started the year yielding 0.9%, and as of April 1 yields 1.7%. A growing economy and expectations for higher inflation—two conditions present in the current environment—could continue pushing rates higher. We have long expected interest rate ‘normalization’ as the economy shifted back into growth mode, so rising rates do not necessarily send off any alarm bells. Rates are still very low in a historical context.

Looking ahead, inflation may be of more concern. Inflation can be pernicious if it ‘runs away’ or is left unchecked—it can suppress growth in the real economy and diminish medium- to long-term return expectations in the capital markets. In the U.S., however, the issue of the last decade has been not enough inflation, so in the short-term, higher inflation would arguably be welcomed. In a testimony to Congress this month, Chairman Powell seemed to err on the side of not worrying: “[The Fed] might see some upward pressure on prices. Our best view is that the effect on inflation will be neither particularly large nor persistent.” He also added that the Fed, for now, remains strongly committed to accommodative policy given the economic recovery still has plenty of runway.

Should inflation become an issue down the road, it is important to remember the Federal Reserve has a range of tools to combat rising prices. Raising the interest rate it pays banks on excess reserves, reducing or ending bond purchases, raising the federal funds rate—these are just a few examples of policy decisions the Fed could implement to fight inflation.

There are also deflationary forces still at work in the U.S. economy. Technological innovation has lowered the prices of many goods and services over the last few decades, and aging baby boomers are entering a period in their lives when people typically consume less, which could be a drag on demand. The pandemic appears to be accelerating retirement for many boomers, which could be another neutralizing force on price pressures.

Apart from the recent surge in Michigan and slightly higher case numbers nationally, pandemic news was largely good throughout the month. Hospitalizations and deaths continued on a downtrend, and better weather has created more spending opportunities for consumers. Air travel is also returning to levels not seen since the early days of the pandemic, underscoring the eagerness of Americans to return to normal life. Stocks have been wavering between the ‘reopening’ trade and the ‘shutdown’ trade, as investors grapple with whether companies that benefited last year during the shutdown will be able to grow as strongly now that economy is reopening.

Our largest concern about the pandemic over the past few months had been the potential for another wave of infections to sweep the country, necessitating additional shutdowns. However, with the dramatic decline in cases from the peak as well as accelerated vaccinations, we now believe it is unlikely we will see another significant wave. This, in addition to the improvement in economic data we have seen over the past month, gives us more optimism looking ahead.

What the Inflationistas May Be Missing

Published on Mar 18, 2021

What the Inflationistas May Be Missing


Investors are concerned that rising interest rates could choke off a nascent recovery. Many economists agree that long-term Treasury yields are rising because investors expect more growth and inflation. While these might be good things, you can have too much of a good thing. In particular, the pace of change matters: the roughly 75 basis point increase in the 10-year Treasury yield in the first ten weeks of this year is a rapid adjustment that creates the potential for disruption.

While we continue to monitor the situation, at this point our concerns have not reached the level where we find it necessary to safeguard our equity or fixed income portfolios from this risk beyond the natural diversification steps that we ordinarily take.

Presently, the potential for inflation is a source of angst in the investment community. But these inflationary fears come against a backdrop of decades of disappointingly low inflation, or disinflation. The drivers of disinflation have not gone away; indeed, some have intensified. Demographic pressures weigh on aggregate demand, as the proportion of U.S. residents past retirement age marches higher. Digital disruption pressures prices across the economy, with the pandemic accelerating this trend. On the other hand, globalization has stalled in recent years. While changes to trade policy may restore some global linkages, the post-pandemic priority of supply chain resilience over cost could reduce the disinflationary influence of this factor going forward.

Those who argue that we are on the cusp of outsize inflation typically focus on the nexus of fiscal stimulus, household savings, and pent-up consumer demand. However, this ignores the supply side of the economy, which will also grow with reopening. Supply growth may address shortages, relieving some pricing pressures. The nearly ten million unemployed U.S. workers is a lot of slack capacity in the labor market, which makes it difficult for pernicious inflation to sustain itself via a wage-price spiral.

Inflationistas further argue that price increases in commodities like crude oil, agricultural crops, copper, and lumber will be transmitted through the economy. But commodity prices similarly ran hot at the outset of the last economic recovery, while inflation did not follow. The U.S. economy is complex with many links in the chain that converts raw materials to finished goods. Higher corn prices on the farm are not sure to translate into higher cereal prices at the supermarket. Moreover, U.S. economic output under normal conditions is about 90% services and 10% goods. Goods inflation alone is therefore unlikely to have much of an impact on the overall economy.

There is also the unprecedented pace of asset purchases by the Federal Reserve, which has increased the money supply by about 25% from pre-pandemic levels. But the central bank purchased significant assets in the prior recovery without stoking inflation. One reason for not stirring up inflation was the payment of interest on excess reserves, a practice the Federal Reserve initiated in 2008, which creates an incentive for banks to deposit funds at the central bank, rather than lend them out. If the Federal Reserve were concerned about inflation today, it could raise the interest rate on excess reserves, which would slow the leakage of money supply growth into the real economy. This is a tool with little cost other than the political optics of paying out more to the banks. The Federal Reserve could go further if necessary, by tapering its asset purchases or raising its benchmark interest rate, but those steps would weigh on real economic activity.

Endorsing this view, Treasury Secretary Janet Yellen said last week that the Federal Reserve has learned how to manage inflation. Because of depressed comparisons in the year-ago period, inflation measures could accelerate in the coming months, generating headlines, but we expect those impacts to be transitory. Inflation expectations remain well anchored, as measured by Treasury Inflation Protected Securities, or TIPS, whose prices imply a slowdown in medium-term inflation after a near-term pickup, an inversion that is rare for this market.

Interest rates could move higher without inflation if investors anticipate a faster pace of real economic growth. If this shift were to happen slowly, with a modest accompanying rise in inflation expectations, it would be the Goldilocks scenario that the Federal Reserve wants to engineer. But if the adjustment came too rapidly, it would be self-defeating, weighing on the economy and capital markets.

Fortunately, the Federal Reserve also has tools to manage this scenario. The easiest is to shift the weighted average maturity of its asset purchases out farther along the yield curve, a maneuver that was known as Operation Twist when it was last employed in 2011. The Federal Reserve could go further if necessary, by initiating a yield curve control mechanism, as currently practiced by the Bank of Japan, by changing its forward guidance to forecast zero interest rate policy further into the future, or by increasing the overall pace of asset purchases, though these more extreme steps carry additional risks.

In analogous periods historically, rising interest rates early in economic recoveries left choppy equity markets in their wake without provoking bear market drawdowns. Bear markets typically follow the last interest rate increase by the Federal Reserve, rather than the first. In our view, there could be less equity market disruption from higher interest rates in this cycle, because the Federal Reserve is more transparent, offering substantial forward guidance, and holding press conferences after each committee meeting.

Recent easing actions by the Bank of Japan and the European Central Bank could reduce the near-term risk of dislocation because sovereign rates in these nations act as an anchor on U.S. Treasury yields. Moreover, after the rapid advance in Treasury yields over the last ten weeks, it seems reasonable there could be a pause for digestion. Lastly, in April, the Federal Reserve added a temporary exception to its supplementary leverage ratio rule for large banks, allowing the banks to own Treasury securities without holding capital against them. The exception is due to expire March 31, and large banks may be reducing their Treasury holdings in advance of this deadline, pushing yields higher. Though it has become politically fraught, we expect the Federal reserve to continue the exception for at least some Treasury holdings for some length of time, which may reduce this source of pressure on yields in the near term.

February 2021 | Equity Commentary

Published on Mar 8, 2021

February 2021 | Equity Commentary

Market Overview

Stocks rallied in the first half of February, with both the S&P 500 and the tech-heavy Nasdaq posting fresh all-time highs. Stocks were ushered higher by a strong Q4 earnings season and progressively better news regarding the availability and administration of vaccines. However, equities felt pressure later in the month from rising Treasury bond yields, which generally tends to drive volatility in high growth/high valuations stocks. The Nasdaq’s performance in February reflected the dynamic between bond yields and stocks—the index gained more on the upside during the month, but also lost more on the downside. We expect this type of volatility to persist until the market has fully adjusted to the new level of rates. In spite of the choppiness, the S&P 500 still finished February with a gain of 2.8%, while the Nasdaq finished up 1%.

By the beginning of March, nearly all companies in the S&P 500 had reported quarterly earnings, and the results were good. 77% of companies reported positive earnings and revenue surprises, with an average earnings surprise of +16%. If 77% holds, it would mark the third-highest percentage of positive earnings surprises in 12 years.

S&P 500 companies also generally raised guidance for current and future quarters, a sign that boardroom sentiment is improving. Bloomberg estimates that S&P 500 companies ended 2020 with around $2.6 trillion in cash reserves, the highest level since 2013. If the pandemic risk continues to fade and the economy pushes along the path of recovery, there’s good reason to believe some of this corporate cash buildup will be returned to shareholders in the form of dividends, buybacks, or both. We may also reasonably expect higher levels of private fixed investment, a trend which is likely to boost economic activity in the coming years.

More fiscal stimulus is on the way. The House of Representatives has already passed a version of the Biden administration’s $1.9 trillion American Rescue Plan, which includes another $1,400 in direct stimulus payments, an additional $1,000 child tax credit, and an extension of unemployment benefits to August 29. The Senate passed its own version of the bill, which the House can consider, but the price tag is not likely to change. While we still believe $1.9 trillion may be overkill relative to the current economic situation, it is difficult to make the case that additional stimulus will hurt stocks or the economic recovery in the near- to medium term. There’s the old saying that investors should not “fight the Fed.” We think that investors should not fight the federal government, either.

It is quite possible that all of the extraordinary monetary and fiscal policies, taken together, could drive inflation higher. All three Covid-19 stimulus packages featured transfer payments made by the government directly to American households and businesses, in the form of stimulus checks, expanded unemployment benefits, PPP loans, and other small business loans which effectively became grants. The M2 money supply is rising at an unprecedented 25% year-over-year rate.

Inflationary pressures are already starting to show up in the commodities markets and in US Treasury bond yields. The price per barrel of crude oil has rallied +30% year-to-date, copper prices are +50% over the past year, and the cost of shipping freight is up over +200% over the same period. Lumber prices have also doubled over the past year on the heels of a housing boom, adding materially to the cost of a new home. It seems the debate is no longer whether we are stuck in a deflationary pattern, but rather how much inflation could surprise to the upside.

While higher inflation in 2021 and beyond is certainly a rising possibility, it is not a foregone conclusion. Other conditions that tend to spur higher inflation—such as tight job markets and a lack of spare capacity in the economy—are currently missing. We believe the real risk with inflation is that it also raises the risk of monetary tightening, which could inject volatility and weigh on valuations across the capital markets. The upshot is that the Federal Reserve is more transparent than ever, with very clear and frequent forward guidance being offered to the markets. We think it is premature to expect this Federal Reserve to change course any time soon, as recent minutes indicate no appetite for monetary tightening in the near-term.

Pandemic data continues to improve. The average number of vaccine doses eclipsed 2 million per day for the first time beginning on March 3, underscoring improvement in the campaign’s organization and execution. At the beginning of February, the daily average was about 1.3 million. We expect the figures should only get better from here, as the Johnson & Johnson vaccine was cleared by the FDA, and as Pfizer and Moderna both increased production. The federal government also scored a victory by brokering a production deal between Johnson & Johnson and Merck, two companies that are otherwise rivals.

We continue to be concerned about variants of the virus, as there is little data to date about the vaccine’s efficacy against new strains. Of particular concern is the P.1 variant discovered in Brazil, which early data suggests is more contagious and may have the ability to infect even those who have already had Covid-19. All signs point to the vaccines being strong enough to mitigate the onset of an entirely new pandemic, but more data is needed to understand the scope of the risk.

Jason Benowitz Featured in TD Ameritrade Network “On the State of the Economic Recovery”

Published on Feb 12, 2021

Jason Benowitz Featured in TD Ameritrade Network “On the State of the Economic Recovery”

Jason Benowitz says that the path of the economy and capital markets will be determined by the path of the virus as the Fed and its global brethren continue to backstop the capital markets.

Watch the full video here
The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

January 2021 | Equity Commentary

Published on Feb 8, 2021

January 2021 | Equity Commentary

Market Overview

Stocks began the year with modest declines, as the S&P 500 fell by just over 1% during January. Investors continue to wrestle with the crosscurrents of the ongoing Covid crisis and its economic implications on the one hand, and copious amounts of fiscal and monetary stimulus on the other. While risks remain elevated, we are optimistic that the ongoing vaccination efforts can go a long way toward restoring a semblance of economic normalcy over the next several months.

Economic data has been mixed in recent weeks. Industries which tend to be more exposed to the pandemic, such as travel, leisure, and entertainment, have struggled, while more insulated areas of the economy have fared better. The December jobs report was illustrative of this dichotomy, as in the aggregate the economy shed 140,000 jobs, but strip away the 372,000 losses in restaurants and bars, and the rest of the picture appears brighter. The majority of industries added jobs during the month, and the unemployment rate held steady at 6.7%. Retail sales have weakened of late, as December marked the 3rd consecutive month of sequential declines. It is likely no coincidence that this weakness has transpired during a period in which Covid cases were rising precipitously. While the pandemic has impacted many businesses negatively, the housing market has been a notable exception, as it has benefitted from both deurbanization and nesting trends, as well as the historically low mortgage rates available in the aftermath of the Federal Reserve’s interest rate reductions and asset purchases. Single-family starts and permits were quite strong in December, just the latest in a long line of healthy housing market indicators over the past several months.

The Federal Reserve held its latest FOMC meeting last month, and our takeaway is that the committee remains quite dovish. The Federal Reserve downplayed near-term inflationary concerns and reiterated that it remains premature to begin tapering asset purchases. Its base case for the economy is that strong growth is likely to resume as vaccines become more widely available, though it noted the downside risks associated with a slow initial vaccination rollout and new Covid variants. In our view, the Federal Reserves’ risk assessment is more heavily weighted towards the near term, while its longer-term outlook is more bullish. We therefore think it is all the more important that Congress was able to pass the most recent $900 billion fiscal stimulus bill at the end of December, and we believe that more aid will be forthcoming with Democrats now in charge of the executive and legislative branches. Historically, the central bank has been prone to tighten policy in response to financial market instability, and in this regard, there was some concern that froth in certain pockets of the market might force the hand of the Federal Reserve. Federal Reserve Chairman Powell, however, allayed these concerns by making it clear that he is far more concerned with achieving his goal of maximum employment, the implication being that monetary policy is likely to remain highly accommodative for the foreseeable future.

President Biden recently proposed a $1.9 trillion fiscal stimulus plan, which is largely comprised of increased unemployment benefits, additional stimulus checks, support for state and local governments, and funding for coronavirus vaccinations and testing. Republicans have most recently countered with a $600 billion proposal of their own. While Democrats could use the budget reconciliation process to enact much of $1.9 trillion in support that they are seeking, President Biden has suggested that his preference would be to work with the GOP to reach a mutual agreement. Ultimately it appears highly likely that some degree of incremental stimulus will be passed. With today’s economy being significantly stronger than it was last year when the CARES act was enacted, we do not think that the full $1.9 trillion is necessary. In our view, any amount in between the range of the two proposals would be sufficient to support the economy and satisfy capital markets. We are cautious, however, that inflation could create challenges over the long term. Over time, as the economy fully reopens, the release of pent-up demand alongside of the lagged effects of historic amounts of fiscal and monetary stimulus could unleash a powerful growth phase. This could drive inflation higher and take bond market yields with it, creating a less favorable environment for stocks, in our view.

Covid remains a key risk factor for the economy and capital markets. The path of the pandemic will likely dictate the future course of the economy, and in this regard, we are concerned with the latest variants of the virus which may be more highly transmissible, and perhaps less vulnerable to the current generation of vaccines. It is therefore not out of the realm of possibility that we see yet another wave of infections, perhaps during the spring. That being said, it does appear that vaccines remain effective in reducing worst-case outcomes from the new coronavirus strains. That could make a potential next wave less problematic for the economy, as we assume that policy makers would be less likely to impose additional lockdowns if there was a lower probability that the health care system would be overburdened without them. While risks remain elevated, we are optimistic that between the vaccinations currently being administered, and those in various phases of development, that the resources are available to foster a return to normalcy over the near to intermediate term.

Reddit Mania Overshadows Outstanding Earnings Season for Tech

Published on Feb. 6, 2021

Febuary 2021 Jason Benowitz’s commentary featured in Bloomberg: “Reddit Mania Overshadows Outstanding Earnings Season for Tech”

Anyone distracted by the Reddit-fueled circus in stocks this month may have missed an important fundamental story: A stellar earnings season for technology companies that helped the group’s shares outperform the market once again.

Read the Full Article Here

Update on Financial Markets – A Stand-out Year – What We Think 2021 Will Bring

Published on Jan. 21, 2021

January 21, 2021: Update on Financial Markets – A Stand-out Year – What We Think 2021 Will Bring

John Roscoe, CFA, Chief Investment Officer and Senior Portfolio Manager and Sean Sokolowski, Investment Counselor, sit down to discuss:

  • Overview: Looking back at 2020 and an early outlook on the economy and markets in 2021
  • Covid-19: An update on our thoughts
  • U.S. Election: Ramifications for stocks and bonds

December 2020 | Equity Commentary

Published on Jan. 8, 2021

December 2020 | Equity Commentary

Market Overview

Stocks finished the year on a strong note, as the S&P 500 gained 3.7% for December and about 11.7% for the 4th quarter overall. We believe investor enthusiasm was largely driven by the FDA approval and initial roll-out of two highly efficacious COVID-19 vaccines, which have enabled markets to begin to price in a return to normalcy over the next several months. While coronavirus cases continue to surge and economic conditions may deteriorate in the near term, we remain optimistic that the new vaccines, alongside of copious amounts of fiscal and monetary stimulus, can act as meaningful support factors for the stock market.

Economic data appears to have cooled in recent weeks, though relative to economist expectations we think the economy has held up fairly well in the face of sharply rising coronavirus cases. Housing continues to be a bright spot, as the National Association of Home Builders housing market index remains close to all-time highs, and single-family starts and permits are at their best levels in over a decade. Other areas of the economy, however, have faced greater challenges. Weekly unemployment claims, which had been in a declining trend since the summer, ticked up again in December, suggesting that the increase in COVID cases and related shutdowns are once again negatively impacting employment. The monthly payroll data for November was aligned with this view, coming in well short of expectations and meaningfully below October’s reading. Retail sales also weakened in November, falling by 1.1% on a month-over-month basis, missing the consensus call for a 0.3% decline.

Coming off a robust rebound in the 3rd quarter, we expected that the economy would decelerate during the 4th. We think that the key issue for investors was not whether growth might slow, but rather to what extent. Given the sharp spike in COVID cases and the government’s inability to agree on a new fiscal stimulus bill until the end of December, we were quite pleased with the resiliency of the economy and are optimistic that it may continue to surprise to the upside into the new year. We view the $900 billion pandemic relief bill which was signed into law late last year as a key support factor for the economy, and think that it will help to sustain business activity over the next few months until vaccines are expected to be widely available. The bill should help to support consumers and small businesses through stimulus checks, enhanced unemployment benefits, and emergency lending programs. In our view, the prior stimulus bill had a significant impact during a period in which the economy was in a weaker state than it is currently, and we are therefore optimistic that this latest stimulus package can help to turbocharge an economy which has already been showing signs of resiliency. As well, the Democrat sweep of the Georgia senate election runoffs may result in additional fiscal relief, which, if it comes to pass, should provide even more support for the economy.

The Federal Reserve held its latest FOMC meeting last month, and our key takeaway is that while it slightly raised its economic forecast, interest rate guidance remained the same. This is significant, as it is an early indication that the Federal Reserve is staying true to the new policy framework announced last summer whereby it may allow the economy to run hotter than it previously would have before beginning to raise interest rates. We view this shift in strategy as dovish, and therefore were encouraged that this latest upgrade to its economic projections were not accompanied by a change in interest rate guidance. We think that this lends credibility to the idea that the Federal Reserve is in fact committed to adopting its new, more flexible, policy framework.

As we look ahead, COVID remains a key risk factor for markets. We are concerned that a new strain of the virus, which may be more contagious, could lead to more lockdowns and further inhibit economic activity. It is therefore that much more important that vaccines are rolled out expeditiously, though thus far this has not been the case. The initial rollout has been slower than expected, perhaps not too surprising given the challenges inherent in public-private partnerships along with the logistical complexities of this endeavor. We are optimistic, however, that the pace of the vaccination initiative will improve over time. Looking out over the medium term, there is some risk that a full reopening of the economy, pent-up demand, and the lagged effects of fiscal and monetary stimulus could lead to an economic boom causing inflationary pressures and sharp increases in yields, ultimately weighing on stocks.

Despite these significant risk factors, we see reasons for optimism. We think that the latest fiscal stimulus package can go a long way towards helping to sustain economic activity until vaccines are more widely available. As well, the FDA may approve additional vaccines for emergency use in the coming months, which would help to shorten this interim period of heightened economic vulnerability. The Federal Reserve continues to inject liquidity into the financial system through its $120 billion of monthly asset purchases, and has pledged to continue doing so until it sees substantial further progress towards its goals of maximum employment and price stability. The use of the word ‘further’ in its statement is noteworthy, as it clarifies that the Federal Reserve is looking for substantial progress from current conditions, as opposed to those during depths of the recession. In our view, it is therefore safe to assume that the Federal Reserve will continue to keep monetary policy highly accommodative for the foreseeable future. We expect that this combination of fiscal and monetary stimulus may continue to act as powerful tailwinds for stocks, particularly against the backdrop of an economy that has shown impressive resiliency, and optimism that we may finally be approaching the end of this pandemic-plagued period.

As of December 31, 2020

December 2020: Jason Benowitz, CFA Appeared on CNBC: Investors will be pleased U.S. stimulus package has passed, strategist says”

Published on Dec. 21, 2020

December 2020: Jason Benowitz, CFA Appeared on CNBC: Investors will be pleased U.S. stimulus package has passed, strategist says”

Jason Benowitz, senior portfolio manager at The Roosevelt Investment Group, discusses the U.S. stimulus package and the possible market reaction.

CNBC main video page here

“Wall Street Braces for 2021 Oddity: Tech Stocks in the Back Seat” Jason Benowitz’s commentary featured in Bloomberg

Published on Dec. 15, 2020

December 2020 Jason Benowitz’s commentary featured in Bloomberg: “Wall Street Braces for 2021 Oddity: Tech Stocks in the Back Seat”

As 2021 approaches, many on Wall Street are bracing for unfamiliar territory: A year when technology companies may not be the biggest stars of the stock market.

Read the Full Article Here

November 2020 | Equity Commentary

Published on Dec. 8, 2020

November 2020 | Equity Commentary

Market Overview

Markets enjoyed an historic November, with multiple indices hitting all-time records, including the S&P 500 which was about 11% higher for the month. Investors were likely encouraged by better than expected results from Covid-19 vaccine trials, and it now appears likely that a vaccine may be available on a widespread basis by the middle of next year. We also think that investors were pleased with the U.S. election, which looks to have resulted in a divided government, though some uncertainty remains as the balance of power in the Senate will not be resolved until the Georgia runoffs in early January.

Stocks showed strength during November. The Russell 2000 advanced just over 16%, its best monthly performance since the index began in 1984, and the S&P 500’s 11% gain marked its strongest November since 1928.We believe the key catalyst for these gains was progress on the coronavirus vaccine, as there finally appears to be some light at the end of this dark, pandemic plagued period. For the first time in a while, economists may be able to project a return to normalcy, perhaps over the next several months as vaccines are rolled out on a widespread basis.

To be sure, current conditions remain challenging. In the U.S., new cases and hospitalizations are shattering prior peaks from earlier in the year, and it seems likely that conditions will continue to deteriorate over the near term. Still, there are reasons to believe that capital markets can endure this interim period, particularly if economic activity continues to hold up well. Prior peaks ultimately receded after people adapted their behavior to reduce infection risk. These behaviors also provided health care professionals, policy makers, and corporations valuable experience in managing their way through the pandemic. We are therefore optimistic that despite the difficult conditions that are likely to persist over the next few months, stocks need not suffer the same fate as earlier in the year when markets crashed during the beginnings of the pandemic.

We have been impressed with the resiliency of economic activity over the last several weeks. Our expectation was that growth was likely to decelerate with coronavirus conditions worsening and the stimulative effects from the CARES Act waning. However, it appears that the economy has held up rather well. Markit’s November composite PMI, which aggregates the service and manufacturing sectors, came in at a healthy 57.9, the best mark in over 5 years. Housing remains robust, with continued strength in existing home sales and a record high NAHB homebuilder survey aided by very low mortgage rates. This may also bode well for future expenditures on renovation and repair activity. While November’s monthly jobs report missed expectations, we believe that this may increase the odds of an agreement on a fiscal stimulus package before year end.

Heading into last month’s election, our view was that a key risk factor was the possibility of a sustained period of uncertainty given the potential for a contested result, perhaps similar to what transpired during the 2000 presidential contest. In this regard, while President Trump has yet to concede and there are still lawsuits working their way through the courts, all indications are that come January Joe Biden will be inaugurated as the 46th president of the United States of America. There remains uncertainty in the Senate however, where the balance of power will not be determined until the Georgia runoffs next month. Still, with Democrats having to take both races to secure the majority, we think the most likely outcome, and the one which is currently baked into markets, is a divided government with a Democratic president and House majority, and Republicans maintaining control of the Senate. We think that this scenario would have mixed implications for capital markets. It is unlikely that much would change with regards to U.S. tax policy, which we view as market friendly. However, we think that the likelihood of another large round of fiscal stimulus next year may be lower should Republicans hold the Senate majority.

We do expect that at some point, should these risks moderate and the expansion prove sustainable, that these aforementioned sectors of the market will begin to out perform. A successful passage of an additional stimulus bill would also likely benefit these types of stocks disproportionately, in our view. However, we believe that the most prudent strategy to navigate these turbulent currents is to take a diversified, balanced approach. We continue to own shares of companies that we expect should perform well as economic growth recovers, but we also maintain positions in companies that we think would be relative out performers should rising COVID-19 cases necessitate further shutdowns, resulting in weaker economic activity.

The key debate for investors going forward, in our view, is whether and to what extent an air pocket may develop in the coming months, whereby worsening coronavirus conditions derail the economy prior to vaccines becoming widely available. The early indications from a capital markets perspective in this regard have been quite positive, as stocks soared last month on favorable vaccine news despite the sharp increase in new COVID case counts and hospitalizations. Investors have at least thus far been looking through the deteriorating near-term circumstances and have focused instead on the potential for a return to normalcy.

We see reasons for optimism that investor sentiment may remain constructive in the coming months, as we are confident that monetary policy will stay highly accommodative, and we continue to expect at least some degree of additional fiscal stimulus. Moreover, the economy has thus far been quite resilient despite the challenging environment, and multiple forecasts that we track are calling for a strong 4th quarter. Still, risks remain elevated, and it is certainly possible that economic activity may yet fall victim to this latest, most severe wave of the pandemic. In our assessment, however, progress on vaccines and the likelihood of forth coming stimulus should continue to counteract these risks and serve as powerful support factors for stocks, as investors anticipate a hoped-for return to normalcy next year.

As of November 30, 2020

After a Challenging Year, It’s Time to Prepare for 2021

Published on Dec. 8, 2020

After a Challenging Year, It’s Time to Prepare for 2021

2020 has been a difficult year for many families, particularly those directly affected by the pandemic. The U.S. presidential election also weighed heavily on many, no matter the outcome. At the end of the day, just about every American is ready to turn the page and get positioned for a fresh start to the new year.

For investors, that means now is a good time to start making preparations, and Roosevelt Investments has five suggestions for getting ahead.

Read the Full Article Here

“Clash of consoles: New PlayStation and Xbox enter $150 billion games arena – fight!” Jason Benowitz’s commentary featured in Reuters

Published on Nov 30, 2020

November 2020 Jason Benowitz’s commentary featured in Retuers: “Clash of consoles: New PlayStation and Xbox enter $150 billion games arena – fight!”

Think Michelangelo vs Da Vinci. Muhammad Ali and Joe Frazier. Batman v Superman. Another epic rivalry is rejoined this week when Sony and Microsoft go head-to-head with the next generation of their blockbuster video-game consoles.

Read the Full Article Here

October 2020 | Equity Commentary

Published on Oct. 31, 2020

October 2020 | Equity Commentary

Market Overview

Stocks finished lower during October, as the S&P 500 declined about 3% for the month. While the economy continues to heal, markets have been buffeted by the sharp increase in coronavirus cases in the U.S. and Europe, and the lack of progress on a new stimulus bill. Moreover, the period leading up to an election can be volatile even in less uncertain times. Nevertheless, we see reasons for optimism. A stimulus bill may be easier to pass following the election, the Federal Reserve may step up its accommodation, and numerous phase III trials are currently underway in the race to discover an effective vaccine for COVID-19.

Economic data continued to firm in recent weeks. Third quarter GDP rebounded at a 33.1% annualized pace, coming off an historically weak, pandemic-plagued second quarter. The housing market remains quite strong. While both new and pending home sales cooled slightly in September, the NAHB homebuilder survey notched another record high and the latest reading of single-family starts and permits hit levels not seen since 2007. Durable goods orders for September beat consensus expectations and now sit above pre-pandemic levels. The labor market has also shown signs of improvement, with initial unemployment claims recently falling to the lowest level in several months, though they do remain quite high by historical standards.

One aspect of the third quarter recovery that we were particularly encouraged by was the strength in newly formed businesses. New businesses formation in the U.S. increased by 77% to a record level during the quarter. We attribute this to a confluence of factors, including the skyrocketing unemployment in the wake of the pandemic, the on average $1,200 payments received by many households as part of the CARES act, and the abundance of online tools currently available to assist the would-be entrepreneur in starting a business. We see this as confirmation of the resiliency of the U.S. economy, and expect that it should help to support economic activity moving forward.

Third quarter earnings season looks to be off to a strong start. With approximately 60% of the S&P 500 having reported as of this writing, 81% of companies have exceeded earnings expectations. While aggregate earnings per share are down 12.5% on a year-over-year basis, this compares quite favorably with analysts’ forecasts for declines of greater than 20%. Most importantly, as investors base stock values on future cash flows, earnings expectations for the coming year have been trending higher.

Elections can be key sources of uncertainty for capital markets. We have noted that historically stocks tend to weaken prior to, and strengthen following, elections as investors gain more clarity and insight into the political landscape. The biggest risk factor pertaining to the election might be the potential for a significantly delayed result. In our view, markets are likely to shrug off a few additional days of uncertainty, but a longer delay could derail stocks as was the case following the 2000 Presidential contest during which the S&P 500 declined by about 8.4% from November 7th through December 15th when Al Gore ultimately conceded. We do note, however, that the implied future volatility in both equity and foreign exchange derivatives has come down over the last month, suggesting that investors are becoming less concerned about the immediate aftermath of the election.

Another risk facing investors is the lack of progress on a new stimulus bill, particularly in light of the worsening coronavirus conditions across much of the country. The decline in the personal savings rate in recent months suggests that more stimulus will likely be needed to sustain consumption, a key cog of the U.S. economy. We remain optimistic, however, that the prospects for getting a deal done should brighten once the election results are in, and the negotiating parties know better where they stand. Should the pandemic conditions deteriorate further, it would likely put more pressure on politicians to reach an agreement.

Uncertainty may be reaching a crescendo, as investors wrestle with a new wave of infections across the country and the polarizing political landscape. However, we see multiple countervailing factors which keep us from taking too bearish an outlook. There are currently multiple phase III trials underway as pharmaceutical companies continue to work towards developing a vaccine for COVID-19. We would expect that approval of a highly efficacious vaccine would go a long way towards boosting investor spirits as it would considerably lessen a major risk to economic activity and provide light at the end of a long tunnel. We also think that the initial wave of the pandemic which hit the U.S. in the spring has given policy makers and corporations some experience in managing through lockdown conditions, perhaps enabling future restrictions to be more targeted and less detrimental to corporate profitability. Similarly, hospitals appear to be having more success treating patients.

Another key support valve for markets, in our view, is the Federal Reserve, which we believe has more dry powder at its disposal to help to boost the economy. We think that more can be done to backstop credit markets through the Federal Reserve’s various lending facilities, and asset purchases can be ramped up should conditions warrant such actions. Moreover, as noted above, we do expect that ultimately another fiscal stimulus bill will get passed. As we manage through these various crosscurrents, we continue to believe that a balanced portfolio is the best approach. We therefore continue to bifurcate our portfolios with allocations to companies that could do well in lockdown scenarios, as well as to those that we would expect to outperform under better growth conditions.

As of October 31, 2020

Update on Financial Markets – Investing Into Year End and Initial Thoughts on 2021

Published on Oct. 15, 2020

October 15, 2020: Update on Financial Markets – Investing Into Year End and Initial Thoughts on 2021

Jason Benowitz, CFA, Senior Portfolio Manager and Sean Sokolowski, Investment Counselor, sit down to discuss Roosevelt Investments’ thoughts on:

  • Update: financial markets
  • COVID-19: lockdown, reopening, and second wave risk
  • U.S. Election: the run up and the aftermath
  • Fed Policy: from crisis management to recovery support

September 2020 | Equity Commentary

Published on Oct. 9, 2020

September 2020 | Equity Commentary

Market Overview

Overall, markets enjoyed a strong third quarter, with the S&P 500 returning close to 9% for the period. While July and August saw robust gains, the index closed out the quarter on a weaker note, falling nearly 4% during September. In our view, this reflects an economy which is transitioning from a strong rebound phase following the pandemic-plagued second quarter, to a slower, more normalized pace. With the election just around the corner, the political environment remains highly uncertain and volatility is elevated. We continue to believe that a balanced, well diversified portfolio is the best way to navigate today’s capital markets.

Recent economic data releases have generally been favorable, in our view. The housing market continues to be robust. The NAHB home builder survey and pending home sales recently hit all-time highs, and existing and new home sales are at their best levels since 2006. We do think that low housing inventories may be a constraining factor going forward, but for the moment the market remains quite strong. Consumer confidence is also strengthening, as both the University of Michigan and The Conference Board indicators for September came in at the best levels since the pandemic hit the U.S. We are also seeing continued improvement in the automotive industry, as vehicle sales have exceeded expectations every month since April.

Other releases have been more mixed. September manufacturing surveys indicate that growth may be moderating as both the ISM and Markit surveys came in below consensus expectations. However, they remained in the mid-50s range, a healthy level, in our view. ISM’s service sector reading for September looked relatively stronger, as it surprised to the upside and came in near its post-pandemic high. The September jobs released is appointed, as job creation slowed to about 661,000 for the month. However ,much of the decline was in government employment, while the private sector fared better.

We believe these indicators collectively suggest that the economy may now be in a transition phase, perhaps regressing back towards the low single digit GDP growth that has been typical in recent years. We expect that GDP growth for the third quarter will be exceptional, but certainly not sustainable, as it will reflect there bound from the historically weak second quarter. Therefore, the recent deceleration in job growth and manufacturing should not be viewed as anything beyond what one would normally expect from an economy which is transitioning from a sharp rebound phase to a more normalized, lower growth environment.

The Federal Reserve held its latest FOMC meeting last month, and our takeaway is that the committee was dovish on interest rates, but perhaps less so with regards to asset purchases. On rates, the Federal Reserve noted its intention to maintain its current stance until maximum employment was reached, and inflation was on track to exceed 2% for a sustained period. Given that the committee doesn’t expect these conditions to be met until the latter part of 2023, the implication is that interest rates are likely to remain near zero for the next couple of years. There was some disappointment, however, that the Federal Reserve did not provide additional guidance

around its pace and scope of asset purchases. We think that it’s possible that committee members refrained from doing so to maintain pressure on Congress to pass another stimulus bill. Inaction may also reflect a view that further monetary stimulus is less impactful while new U.S. cases are elevated, which might push the Federal Reserve to conserve its firepower. Still, we do expect that should the economy weaken, that the Federal Reserve would ultimately ramp up its asset purchases, so as to advance its mandate of promoting maximum employment.

Typically, at this point early in an economic recovery, we would expect small cap, value, and cyclical stocks to be leading the market, but for the most part this has not been the case. We think that the reason is the high degree of uncertainty in the current environment, given the turbulent political landscape as we approach the election, and the persistence of COVID-19. On the former, the uncertainty has only increased with the recent passing of Justice Ruth Bader Ginsburg and the on going attempt to confirm her successor on the Supreme Court, and President Trump’s hospitalization for the coronavirus. Moreover, with COVID-19 case counts again on the rise across much of the country, it remains possible that economic activity will continue to be impacted. In this regard we note that several states are currently in the process of reversing prior re-openings due to worsening coronavirus conditions. On the other hand, we are optimistic that an effective vaccine would give a material boost to economic activity and market sentiment.

We do expect that at some point, should these risks moderate and the expansion prove sustainable, that these aforementioned sectors of the market will begin to out perform. A successful passage of an additional stimulus bill would also likely benefit these types of stocks disproportionately, in our view. However, we believe that the most prudent strategy to navigate these turbulent currents is to take a diversified, balanced approach. We continue to own shares of companies that we expect should perform well as economic growth recovers, but we also maintain positions in companies that we think would be relative out performers should rising COVID-19 cases necessitate further shutdowns, resulting in weaker economic activity.

As of September 30, 2020

Weighing the Impact of a Historic U.S. Presidential Election

Published on Oct. 1, 2020

Weighing the Impact of a Historic U.S. Presidential Election

The 2020 U.S. presidential election is fast approaching. No matter what your political orientation, this election cycle probably feels highly consequential and filled with uncertainties. And as if the election wasn’t enough, there is still a pandemic looming in the backdrop with an economy fighting to regain footing.

As the old saying goes, never a dull moment.

Read the Full Article Here

Thoughts Ahead of the Federal Reserve Meeting

Published on Sep. 9, 2020

Thoughts Ahead of the Federal Reserve Meeting

We believe there may be more uncertainty around the Federal Reserve’s upcoming mid-September Open Market Committee meeting than is typical. It will be the first committee meeting since last month’s virtual Jackson Hole meeting, at which the Federal Reserve announced revisions to its statement on longer-run goals and monetary policy strategy, and it is the last scheduled meeting before the U.S. election in November. We see four main possibilities as to what actions the Federal Reserve may take at this meeting: (a) provide forward guidance on the Federal Reserve Funds rate; (b) provide forward guidance on its asset purchase program; (c) provide both; or, (d) do nothing. We believe any forward guidance provided would be outcomes-based, meaning it would commit the Federal Reserve to an action until an economic target is achieved, rather than until a specified time has elapsed. The purpose of any Federal Reserve action would likely be to pivot from crisis management to a policy that may support and sustain the nascent economic recovery.

Read the Full Article Here

August 2020 | Equity Commentary

Published on Sep. 9, 2020

August 2020 | Equity Commentary

Market Overview

Stocks continued their ascent during August, as the S&P 500 surged about 7% for the month. We believe that a resilient economy, better than expected corporate earnings, and improving trends in new COVID-19 cases were likely all factors helping to propel the market to new highs. The Federal Reserve most likely buoyed investor spirits by introducing a new dovish policy framework, effectively confirming the prevailing view that interest rates are likely to remain at historically low levels for some time to come.

We were encouraged by the economic data released during August. Most national surveys of the manufacturing and service sectors continued to trend favorably, and the July jobs number came in ahead of expectations with nonfarm payrolls increasing by 1.76 million. The housing market continued to impress us with the latest tally of starts and permits increasing by 22.6% and 18.8% respectively on a month-over-month basis. July new home sales came in at the best level since 2006, and the NAHB homebuilder survey matched a record high. It seems evident to us that extremely low mortgage rates are helping to propel a robust housing market.

We believe while resilient and even quite strong in certain areas, the economy is by no means firing on all cylinders, though that is to be expected amid the COVID-19 pandemic. The most recent Empire and Philly Fed regional manufacturing surveys missed consensus expectations, and the Conference Board’s consumer confidence reading for August declined to its lowest level since 2014. New claims for unemployment have stalled at around 1 million per week, and while this is below recent peaks it remains materially above the pre-pandemic high of about 695,000 reached back in October of ’82. While this raises some questions about the health of the labor market, we do note that total unemployment claims have been trending favorably, perhaps indicating that new hiring has been able to mitigate the stubbornly high level of new claims.

A potential hurdle facing the economy and capital markets is the lack of progress on another stimulus bill. While the Trump administration did attempt to step into this breach with a series of executive actions, it appears likely that legal and operational challenges could minimize their effectiveness. We have seen estimates that these measures will provide less than $100 billion of economic support, compared with expectations for over $1 trillion from an additional fiscal stimulus bill. As a result, there are concerns among investors that the economy may be at risk for another slowdown. However, we have yet to see evidence of this in the economic data.

Federal Reserve Chairman Jerome Powell delivered a notable speech at the annual Jackson Hole Economic Symposium, detailing key takeaways from the central bank’s recently completed framework review. We think the principal message was that the Fed will allow unemployment to fall below its estimate of the natural rate (of unemployment) without necessarily raising interest rates, which previously would have been its typical policy response. It is also moving towards an average inflation objective, a change from its past practice of targeting a specific rate of 2%. It will accept somewhat higher than targeted levels of inflation given that they occur following periods that fell below trend. We believe the earlier Fed will generally attempt to be more flexible with its policy responses in these regards. This new framework was adopted than expected in a unanimous vote by the Federal Open Market Committee. We view these changes as dovish insofar as they can be taken as confirmation that rates are unlikely to be moving higher at any time soon.


Growth stocks continued to outperform value in August, as was the case in June and July. While we believe that this trend is likely to shift and favor value stocks as the economy recovers, to date this has not occurred since the market’s rebound from the March low. This may be in part due to the lack of a fiscal stimulus bill, which had it been passed, we believe would have disproportionately benefitted more cyclically oriented companies. Still, we are comfortable with our current portfolio positioning which we believe is well balanced on both a style and capitalization basis. It is our view that small cap companies and value companies are likely to outperform in a positive scenario whereby the coronavirus continues to trend downward, and economic growth continues to recover. Conversely, we would expect larger cap stocks and growth stocks to be relative outperformers should another wave of the virus lead to more lockdowns and weaker economic conditions. We continue to view either scenario as well within the realm of possibility, and therefore believe that our current positioning is the most prudent means of navigating today’s capital markets.

As of August 31, 2020

“Not Even Thinking About Raising Rates”

Published on Aug. 27, 2020

“Not Even Thinking About Raising Rates”

Thus said Fed Chair Jay Powell this past June. But what exactly does this mean and why did he say it?

It’s all about inflation. That is, the inflation we don’t have. Missing in action. The Fed actually desires some inflation, at least a little, generally defined as 2%. Those old enough to recall serious thinking about inflation during Paul Volcker’s tenure in Powell’s seat at the Fed remember inflation being described as a catastrophe. Nothing crushes bond holder returns like unexpected inflation. Nothing damages consumer spending like inflation when personal income is constrained. Facing this, Volcker used the interest rate tool to crush it. Further, he broadcast the message that the Fed always stood ready to do so again. Given that, realistically, inflation hasn’t made much of an appearance since that period from the late 1970s to the early 1980s.

Why would the Fed want to rekindle it?

Read the Full Article Here

“Crown shareholders express patience amid activist pressure for fiber sale” Jason Benowitz’s commentary featured in DealReporter

Published on Aug 26, 2020

August 2020 Jason Benowitz’s commentary featured in Dealreporter: “Crown shareholders express patience amid activist pressure fiber sale”

Source: Dealreporter, An Acuris company

Read the Full Article Here

The 2020 Retirees’ Dilemma: Low Yields, Low Income

Published on Aug. 19, 2020

The 2020 Retirees’ Dilemma: Low Yields, Low Income

We live in a world of rock-bottom interest rates.

During and after the 2008 Global Financial Crisis, central banks around the world lowered interest rates to the zero bound, in an effort to get the economy moving again. In the decade that followed, the global economy grew, but not at a pace that allowed central banks to push interest rates materially higher. Going into 2020, interest rates were still relatively low compared to the needs of many retirees to generate meaningful, low-risk income.

Then Covid-19 happened.

Read the Full Article Here

July 2020 | Equity Commentary

Published on Aug. 11, 2020

July 2020 | Equity Commentary

Market Overview

Stocks began the 3rd quarter on a strong note, with the S&P 500 returning about 5.6% for July. We believe that economic data continued to stabilize during the month, and 2nd quarter corporate earnings have thus far come in well ahead of investor expectations. Covid-19 remains a key risk factor for stocks and the economy moving forward. While uncertainty remains elevated, we expect that Congress will soon pass another round of fiscal stimulus, and we believe that the Federal Reserve will maintain its accommodative monetary policies for the foreseeable future.

Most key economic data releases have exceeded consensus expectations over the last several weeks. July ISM surveys (both manufacturing and non-manufacturing) made month-over-month gains, continuing the trend of June’s improvement, and moving back to levels we believe to be consistent with economic expansion. This strength looks to have been confirmed by the Federal Reserve’s regional manufacturing surveys for July which came in at robust levels. Moreover, recent readings on industrial production, durable goods orders, and retail sales have all come in ahead of economists’ projections.

In our opinion the housing market also appears quite healthy. While housing typically lags during recessions, the increased time spent at home due to Covid-19 has motivated many consumers to make meaningful investments in their homes. We have also seen that Covid-19 has led to an increase in demand for houses in the suburbs and more rural areas. These factors, along with the significant decline in mortgage rates, appear to be a boon for the industry. This is not only showing up in the economic data, with metrics such as the NAHB homebuilder survey and existing home sales showing strength, but we are also hearing positive indications from housing suppliers. Paint producers, pool companies, and HVAC systems providers are a few examples of housing-related businesses which have noted the robust condition of their end markets on recent industry conference calls.

Not all the economic data has been positive. A headline grabber was the recently released 2nd quarter GDP, which came in at an historically weak approximate 32.9% annualized decline. However, we were not overly concerned by this reading given that it was widely expected and is also a backward-looking indicator. Clearly the 2nd quarter was an ugly one due to Covid-19-related shutdowns, but it also seems evident that the economy has strengthened considerably since then. Perhaps of greater concern are the weekly unemployment claims numbers, which have remained stubbornly high, and have in fact increased in recent weeks after having been steadily declining since late March. We believe the volatility in weekly unemployment data is likely the result of the jump in new Covid-19 cases which began during the latter part of June and continued to increase through July. It seems evident to us, that Covid-19 continues to impact economic activity. Fortunately, the growth in new cases and hospitalizations appear to have declined during the latter part of July, and we are optimistic that the economy can resume its rebound should this favorable trend prove to be sustainable.

With a large majority of S&P 500 companies having reported their 2nd quarter profits, aggregate earnings are coming in well ahead of what were admittedly very weak expectations. Companies appear to be exceeding top line estimates by a couple of percentage points, but the highlight to us, is on the bottom line where average corporate earnings are beating expectations by over 25 percentage points. Many companies have also noted the positive linearity of the quarter, whereby there was sequential improvement in business conditions each month. Still, many companies have not given forward guidance, highlighting the fact that the environment remains quite challenging to predict due to the lingering pandemic.

As we look forward, we note that conditions remain highly uncertain. Clearly Covid-19 is playing a large role in this uncertainty, but other factors are at play as well. As of this writing, Congress has yet to agree on another Covid-19 relief package. We think that it is crucial that another bill is passed to support the consumer as well as state and local governments, and that economic activity is likely to suffer otherwise. While it is unfortunate that the issue remains unresolved, we do expect that there will be a favorable resolution in the near term.

The election represents another source of uncertainty and volatility for investors. The outlook for tax, regulatory, and other policies will vary materially depending on the outcome. Markets tend to weaken prior to and strengthen in the aftermath of elections. In our view this is likely a function of the greater clarity that investors gain once the election is over and leadership is established.

As a result of these uncertainties, we continue to think that a diversified portfolio is the best approach to navigating capital markets. In our view, the two most likely scenarios for markets going forward include one in which economic activity continues to improve, and another characterized by weakness resulting from the continued spread of Covid-19. Under the first scenario, we would expect that cyclical stocks would be among the winners, while we believe that tech stocks with secular tailwinds, and more traditional defensive holdings would outperform under the 2nd, weaker growth scenario. Given the difficulty of predicting the future course of Covid-19, we maintain our barbell approach whereby we are investing for both outcomes, focusing our efforts on ensuring that our portfolios can do well under either scenario, as opposed to making a large macro bet one way or the other.

As of July 31, 2020

Update on the Financial Markets & Economic Impact of COVID-19

Published on Jul. 29, 2020

Update on the Financial Markets & Economic Impact of COVID-19

In our quarterly update, John Roscoe, CFA, Chief Investment Officer and Senior Portfolio Manager, discussed our thoughts on the financial markets, the evolving impact of the COVID-19 pandemic, and answered questions live.

John Roscoe, CFA, Chief Investment Officer and Senior Portfolio Manager and Sean Sokolowski, Investment Counselor, sit down to discuss:

  • Our thoughts on the financial markets
  • The evolving impact of the COVID-19 pandemic

Second Quarter 2020 | Equity Commentary

Published on Jul. 8, 2020

Second Quarter 2020 | Equity Commentary

Market Overview

Stocks enjoyed a strong 2nd quarter, with the S&P 500 returning just over 20% for the period. We believe fiscal and monetary stimulus, along with improving economic data, helped to drive this rebound following a difficult start to the year. While we are encouraged by the litany of data points which suggest that economic activity has strengthened over the past few months, the rising number of COVID-19 cases across much of the country is disconcerting, and in our view remains a key risk factor for capital markets moving forward.

The majority of economic data released over the last several weeks suggest that after contracting earlier in the year, the economy has entered a recovery phase. Following a decline in April, retail sales rebounded in May with an approximate 17.7% advance. Household spending also grew by about 8.2%. Surveys of both the manufacturing and service sectors also improved in May relative to April, though at a more modest pace. Economic activity appears to have continued to strengthen into June, as regional Federal Reserve manufacturing surveys for the month showed robust gains, with the Empire, Philly, and Dallas surveys being particular standouts, to us. June’s progress was not limited to the manufacturing space, as consumer sentiment ticked up for the month as well. The Citi Surprise Index, which quantifies how actual economic data is faring relative to consensus expectations, has surged of late, marking an all-time high after having plunged to record lows just a couple of months ago.

In our view, these improvements are a function of fiscal and monetary stimulus initiatives, along with the release of pent-up consumer demand. Earlier in the year, social distancing mandates and lock downs, implemented in order to counter the spread of COVID-19, effectively shut down a significant portion of the economy. As states began to allow businesses to reopen, pent-up consumer demand, alongside direct payments to households and enhanced unemployment benefits, we believe helped to generate the upside economic surprises noted above.

While the US has provided trillions of dollars in both fiscal and monetary stimulus, we continue to believe that more needs to be done to support the economy amid the coronavirus pandemic. We think that state and local governments in particular will need additional federal support. This would help to mitigate the tax increases and reductions of services that would otherwise take place, dampening growth, as those entities seek to balance their budgets. Federal Reserve Chairman Jerome Powell has been consistent in his message in recent months that more fiscal support is needed in this regard. Moreover, while the Federal Reserve has intimated that it is willing to take further action, it is our view that it would prefer to wait for Congress to act first. We think that the Federal Reserve is also waiting to assess the path of viral transmissions and economic growth, and possibly for the results of its formal review of monetary policy strategy, tools and communications, which could inform any additional steps it may take.

As we look ahead, we are encouraged by the spate of improving economic data. However, the pertinent issue at the moment is the sustainability of the recovery. Our primary concern over the last few months has been the potential for another surge in COVID-19 cases to an extent which would impact economic activity. With numerous states now having paused or rolled back at least certain aspects of their reopening plans, it appears that that there may be some degree of economic impact, but to what extent remains an open question. With equity markets having had a strong run during the 2nd quarter, we think that stocks are implying a steady continuation of the economic recovery, which may be overly optimistic. We also worry that politics could delay or reduce the next tranche of fiscal stimulus that is expected in late July, ahead of the expiration of enhanced unemployment benefits and before Congress’ scheduled August recess. We have therefore recently taken actions to slightly de-risk our portfolios should the resurgence of the coronavirus ultimately derail the economic improvement seen in recent months.

We note, however, that we have not yet seen much weakness in the economic data from this latest spike in coronavirus cases, and there are other factors keeping us from taking an overly defensive posture for now. These include the potential for further fiscal and monetary stimulus, which we think becomes more likely the worse the spread of the coronavirus gets. While we will let the data inform our decision making, at the moment we feel that a bifurcated approach to portfolio construction remains optimal, whereby we are maintaining exposure to early cycle holdings that we believe will do well should the recovery prove sustainable, while at the same time keeping some defensive holdings in place to help guard against potential market declines in the event that there is a pause in the economic recovery.

May 27, 2020: Jason Benowitz, CFA was quoted in the Bloomberg article, “Wall Street Banks Get a Surprise: Investors Like Virtual Events”

Published on May 27, 2020

May 27, 2020: Jason Benowitz, CFA was quoted in the Bloomberg article, “Wall Street Banks Get a Surprise: Investors Like Virtual Events”

Read the Full Article Here

Jason Benowitz, CFA was quoted in the Reuters article, “Stocks Rally, S&P Crosses 3000 Barrier, Oil Gains”

Published on May 25, 2020

May 25, 2020: Jason Benowitz, CFA was quoted in the Reuters article, “Stocks Rally, S&P Crosses 3000 Barrier, Oil Gains”

Read the Full Article Here

May 2020 | Equity Commentary

Published on May 31, 2020

May 2020 | Equity Commentary

Watch a short three minute summary of our thoughts on market activity in May.

Market Overview

Stocks moved higher during May as the S&P 500 returned about 4% for the month. While it appears economic data remained weak in absolute terms, we saw signs of improvement relative to April. Investors appear to seem optimistic that activity will continue to rebound as more states start to allow an increasing number of businesses to reopen.

There are reasons to believe that the worst of the economic damage from the coronavirus may be behind us. While the data in general remain weak in our opinion, several key indices did show improvement in May on a month-over-month basis. Examples include the NAHB homebuilder index, consumer sentiment indices from both the Conference Board and the University of Michigan, and regional Fed manufacturing surveys. The labor market too, which has seen unprecedented dislocations, may be healing. While still elevated, initial unemployment claims have been trending steadily downward over the last several weeks, and continuing claims improved for the 1st time since the job market began to deteriorate in late March. To be sure, much of the economic data remains depressed, and we expect that certain areas of the economy will remain challenged for a prolonged period. Still, we are encouraged by these improvements, particularly given that they tended to occur in metrics that we view as being more forward looking, and therefore better indicators of future activity.

We continue to believe that more fiscal stimulus is necessary to help fully repair the economy, and we think this is the consensus view among investors. Federal Reserve Chairman Powell, at a recent speech, noted that without more support a painful recession could be in store. In our view, some of the recent stock market gains have come in anticipation of more policy action, on both the fiscal and monetary fronts, and we therefore think that stocks could be at risk should politics get in the way of additional stimulus bills. In this regard we were encouraged by Senator Mitch McConell’s recent comments suggesting he agrees that more government support is needed. We will be keeping a close eye on stimulus negotiations as we believe that capital markets may be quite sensitive to them.

We continue to monitor relations between the US and China, as tensions may again be mounting, this time apparently due to the political fallout from the coronavirus. The Trump administration in recent weeks has considered mandating that the Federal Government’s Thrift Savings Plan not invest in Chinese stocks, and has also contemplated imposing further restrictions on Huawei Technologies. We are encouraged though, that President Trump has thus far avoided taking significant actions which may worsen trade relations between the two countries. We think that he is sensitive to the political consequences of further jeopardizing an already vulnerable economy by reigniting a trade war with China, particularly so close to an election. We view this situation as being somewhat analogous to late last year, when despite concerns that the administration was considering additional tariffs on Chinese goods, they ultimately were able to strike a phase I deal.

As we look ahead, we continue to see a plausible scenario whereby stocks can continue to move higher on the heels of an economic rebound. With all 50 states now having begun to ease restrictions on certain business activities, we would expect some economic improvement to follow. We also see the potential for the release of a certain amount pent-up consumer demand as more businesses reopen. In this regard we note that the savings rate is currently quite elevated, and consumer net worth appears to be near all-time highs. These conditions could bode well for a strong 2nd half recovery.

A potential resurgence of the coronavirus is a key risk factor for stocks. Evidence is already beginning to show an increase in cases in some states. We think that the market can handle an increase in new cases if it doesn’t rise to the point which would require further rounds of business closures and social distancing mandates. In this regard, we do have some concerns that the protests over the death of George Floyd and related social activity could exacerbate the spread of the coronavirus, thereby posing a risk to capital markets which we will be closely monitoring.

April 2020 | Equity Commentary

Published on May 12, 2020

April 2020 | Equity Commentary

Market Overview

Stocks rebounded in April as the S&P 500 gained over 12.5%, marking its best month since January 1987. Investors looked past dismal economic data and instead focused on the potential for improving conditions as many states took initial steps to reopen their economies and progress appears to have been made with regard to a potential coronavirus treatment. Additional rounds of fiscal and monetary stimulus also look to have buoyed investor spirits.

The US government and Federal Reserve continued to expand their various initiatives to support the economy over the last several weeks. The Federal Reserve announced that it would provide up to an additional $2.3 trillion in credit to businesses and state and local governments. This includes $600 billion for its Main Street Lending Program whereby the Federal Reserve will partner with commercial banks to provide loans to small and mid- sized businesses. In addition, Congress authorized an incremental $484 billion in fiscal stimulus, the majority of which will be allocated to its own small business lending program, which had already exhausted its initial $350 billion in funding.

There have been challenges associated with the rollout of these various programs. This is not surprising to us given the speed with which they have been implemented. Examples include certain publicly traded and/or higher profile companies which were able to access funds that were intended for smaller businesses. In our view, speed was of the essence here. The government and Federal Reserve had to act quickly in order to stave off a potential economic calamity, and we view the trade-off of a faster, yet imperfect rollout as being acceptable, all things considered. A bigger concern is that more will likely be needed in order to support states and local governments. Given the requirement that states maintain balanced budgets, massive cutbacks will likely be in store if the Federal government does not provide more financial assistance. While we understand that each additional round of government stimulus becomes more politically challenging to implement, we think the alternative of forcing states and local governments to slash budgets would be a mistake, and counterproductive towards the goal of supporting economic activity.

Economic data released during the month was, as expected, weak. Many key economic indicators experienced their largest ever recorded monthly declines, including consumer and small business confidence, and retail sales. Aggregate jobless claims spiked to an unprecedented 30 million over the six weeks ending April 25th. As a point of comparison, the four-week moving average of unemployment claims through the 1st week of March was approximately 220,000. While there were few silver linings to be found among April’s data releases, judging by the financial market’s performance during the month, investors were clearly able to look past these numbers. We believe that this was in part a function of very low expectations given that so many businesses have been forced to at least temporarily shut down or operate at reduced capacity to help slow the spread of Covid-19. Moreover, with many states having already begun to take initial steps towards reopening their economies, we believe that investors are optimistic that business activity will rebound materially over the back half of the year.

We believe the path ahead for capital markets and the economy will likely hinge on the extent to which the coronavirus continues to spread. New case numbers in many parts of the country have started to trend favorably, which gives us reason for optimism that the worst of the economic damage may already be behind us. Moreover, there has been some progress made with regard to potential coronavirus treatments and vaccines, and the FDA has been proactive in removing hurdles which would otherwise slow the potential time to market for such therapies. We are also seeing inflections in financial market indicators which suggest that the investment climate may be improving. In addition to the equity market’s strength last month, other risk metrics such as credit spreads and the volatility index have improved considerably. Finally, we note that China’s economy has begun to rebound, which should have positive implications for the US multinational corporations that do business there.

We believe a bear case would likely be a function of a resurgence of the virus, either due to states allowing businesses to reopen prematurely, or as some experts have predicted, from another wave of infections that may ensue during the fall. Under this scenario, economic activity would likely be impacted for longer than investors currently expect, and stocks could be at risk for further declines. Moreover, the material uptick in unemployment could negatively impact consumption for a prolonged period, igniting a vicious cycle whereby businesses see further declines in revenues, necessitating additional rounds of job cuts. While we would ascribe a higher probability to the upside case, we think the potential for further market declines is plausible enough to warrant a barbell approach to portfolio construction. In this regard, we have been adding to stocks that we expect would outperform in upward trending markets, but we continue to maintain sizeable allocations to more stable and defensive holdings that we believe would help to preserve capital should market conditions deteriorate.

Equity Markets Up, Economy Down?

Published on Apr. 24, 2020

Equity Markets Up, Economy Down?

Could the financial markets have seen the shortest bear market in history or could equity markets re-test their March 23rd lows? It appears that the stock market’s own outlook is that it has already “put in a low” based upon the dramatic rebound we’ve seen. However, this rebound is in sharp contrast to what we have observed in global and U.S. economic indicators. This is a wonderful demonstration of the stock market’s discounting mechanism and how forward-looking it tends to be. In our view, in order to explain the disconnect between the indicators and the market, it’s important to look at the progress that is being made in the war against the coronavirus.

The rapid response of fiscal and monetary policies to this crisis has been impressive and stabilizing. The Federal spending and lending programs have their flaws, but together they have started to carpet bomb the streets with money in support of consumers, small companies, investors in all types of bonds from government to high yield, and issuers of municipal bonds, not to mention targeted industries like the airlines. While it is not perfect, it does appear that the “fix is in”. As a result, equity markets have rallied sharply, and fixed income credit spreads have narrowed. For investors, it is now back to “risk on”. Don’t fight the Fed!

It appears that financial markets are starting to price the shutdown as if it may be coming to an end sooner rather than later; perhaps sooner than the many more months believed in some early forecasts. And indeed, more recent political arguments are about the pace of reopening businesses, rather than closing them down. There is some evidence, albeit still limited, that more people than widely believed may be walking around with antibodies to the virus, implying that they’ve already been infected but were asymptomatic. Regardless, coronavirus curves appear to be flattening and some states are putting target dates on re-opening in some way. There are many stories about why some hot spots may need to reopen at a much slower pace.

With the apparent progress on the virus and the turn in the financial markets, the expectation is that the economy may be on the upswing later this year. Maybe the recovery won’t look like a “V” and it’ll look more like a “U”, but we are all getting cabin fever. There could be an explosion of consumer spending and a surge of cap ex as supply chains are re-jiggered. There also could be post-crisis aftershocks, because everything won’t come back online at once. There will still be cautious approaches to gathering in public places and some consumers may have to eventually start saving more, which would reduce spending.

It is impossible to know exactly to what extent, and for how long, the pandemic will dampen economic activity, but we believe in the resilience of the American economy, and despite the potential for short-term volatility, we remain optimistic over the medium term.

Vicki Fillet Appeared in a Panel Discussion on Webinar: Wealth Planning Strategies For Turbulent Markets

Published on Apr. 22, 2020

April 22, 2020: Vicki Fillet Appeared in a Panel Discussion on Webinar: Wealth Planning Strategies For Turbulent Markets

Watch Here

Update on the COVID-19 Pandemic & Financial Markets

Published on Apr. 22, 2020

Update on the COVID-19 Pandemic & Financial Markets

On April 22, 2020, Jason Benowitz, CFA, Senior Portfolio Manager, discussed updates on the financial markets, the widespread effects of the COVID-19 pandemic, and answered questions live.

Watch Here

March 2020 | Equity Commentary

Published on Mar. 31, 2020

March 2020 | Equity Commentary

Market Overview

Stocks had a tumultuous start to the year, as coronavirus-driven fears took the S&P 500 down about 20% for the 1stquarter. We are optimistic that fiscal and monetary stimulus programs should help to mitigate financial and economic stress. Still, we think it is likely that financial markets will remain volatile until investors gain comfort that the pandemic has begun to run its course.

Capital markets took their cues from the continuing spread of Covid-19 during the first quarter, as stocks declined and Treasury yields plunged to all-time lows. We believe investors were repricing markets to account for the increasing likelihood of recession, as large parts of the economy remain on pause due to the social distancing and other preventative measures that governments have enacted. Economists are currently forecasting mid-single digit GDP declines for the US for the 1stquarter, and much steeper drops, potentially 20% or greater for the 2ndquarter. Many economist projections are calling for a sharp rebound over the back half of the year, though we believe this will largely depend on the duration and extent to which the virus curtails business activity.

The duration of the pandemic is the key variable in our view. The longer that the virus takes to run its course, the deeper the recession is likely to be, which could start a vicious cycle whereby consumers minimize spending which further weakens businesses, leading to less corporate expenditures and hiring. However, if the social distancing measures currently in place are effective in minimizing the spread of the virus, we think a bull case scenario is possible whereby economic activity is largely back on track over the medium term.

We are encouraged by the fiscal and monetary stimulus programs which have been put in place. We think that the federal government and central bank have learned valuable lessons from the 2008 financial crisis, when in our view they could have acted sooner and more aggressively. In response to the impacts of Covid-19, the Federal Reserve quickly brought interest rates down to near zero, and enacted a litany of programs to improve the flow of credit to the economy and support liquidity in financial markets. The Federal Reserve’s unrestrained quantitative easing program is unprecedented in the history of US monetary policy, as are the newly implemented plans to make direct loans to, and purchase bonds issued by, investment grade corporations. We are already seeing the benefits of these actions as liquidity has improved materially in fixed income markets. With regards to the $2.2 trillion fiscal stimulus plan, we think direct payments and the increase in unemployment benefits will work to quickly deploy funds to consumers in need during this period when so many are at least temporarily unemployed. We also think it is crucial to support small businesses and are therefore encouraged that the fiscal package includes about $350 billion of loan guarantees via the SBA as well as almost $450 billion of funds to support Federal Reserve credit facilities, including an expected Main Street Business Lending Program for small and mid-size companies.

We caution, however, that providing relief for small businesses across the country will be no easy task. The sheer number of companies in dire need will make the logistics of disbursing loans quite challenging. Moreover, we think that the application process needs to be as simple and streamlined as possible so as not to exclude companies that do not have the time or resources to devote to filling out pages of financial questions. It is also conceivable that the amount currently allocated to support these loan guarantees will be insufficient and we would therefore not be surprised if further rounds of stimulus are required. A final note to consider is that while these stimulus programs are intended to buffer the economy, we think it is highly unlikely that they will enable it to avoid a recession. An economic contraction seems largely unavoidable at this point, though we think that its duration and magnitude will be far less severe than what would have been the case without government and central bank intervention. This potential recession could be the first in history which came about not as the result of an economic slowdown but because it was effectively mandated by the government in its efforts to slow the spread of a pandemic.

While these are challenging times to be navigating capital markets, we do not see any reason to be selling indiscriminately. Just as the stock market’s recent decline was sudden and sharp, we believe that as signs of the pandemic abating emerge, the rebound could be similarly rapid. We entered the quarter with a defensive tilt to our portfolios, which we modestly increased in early February, and we continue to believe that is a prudent way to be positioned given the inherent uncertainties in the current environment. However, we have also begun to take new positions, or add exposure to holdings of companies whose stocks have sold off with the market and that we believe are now trading at attractive prices. It is impossible to know exactly to what extent, and for how long, the pandemic will dampen economic activity. We need to be cognizant of this uncertainty while making our investment decisions, but we also believe in the resilience of the American economy, and despite the potential for more short-term volatility, we maintain our optimism on US stocks over the medium term.

Financial Planning Opportunities in Times of Market Upheaval

Published on Mar. 31, 2020

Financial Planning Opportunities in Times of Market Upheaval

In the middle of difficulty lies opportunity.

– Albert Einstein

In times of market volatility, many people become nervous about how the financial markets will play out and wonder how their personal and business finances will be affected. We believe that it is ok to be nervous; it is natural. Our job as a financial advisor is to guide you through periods like this. Additionally, we can help identify opportunities that come about from different financial market environments.

Learn about seven financial planning opportunities to consider in our article, “Financial Planning Opportunities in Times of Market Upheaval”

Read the Full Article Here

This Too Shall Pass

Published on Mar. 26, 2020

This Too Shall Pass

We believe several markers are in place suggesting it may be an attractive time to invest in fixed income and equity markets, albeit in a conservative fashion. In our opinion, the financial markets have been dislocated. Prices have largely fallen considerably from where they were a month ago. Liquidity seized across fixed income markets and is only beginning to mildly thaw in the wake of massive Federal Reserve intervention. We believe that this suggests a buying opportunity, but of course these lower prices must be compared to the fundamentals of the companies.

The pandemic and the public health response have suddenly and severely curtailed demand for many goods and services. In the next few weeks, we believe that there will be massive additions to the unemployment rolls, and scenes of healthcare rationing may be streamed into our living rooms. The widening of corporate spreads and the bear market in stocks reflect these grim realities. But we believe the impact on corporate earnings will be temporary. A successful pharmaceutical intervention is possible from one of the many antiviral or antibody therapies currently being trialed. We are encouraged that social distancing will slow the spread of COVID-19, as it has in other nations. We believe that the monetary and fiscal stimulus packages are large enough to matter, though not a cure-all, and we expect to see more actions in the coming weeks. America’s collective ability to endure a “lockdown” economy has limits. We therefore expect that this too shall pass.

We believe it is important to invest where balance sheets can withstand a recession, which is why capital must be deployed conservatively. Fortunately, securities issued by many leading companies with solid finances were also marked down in this maelstrom. Our approach is not to attempt to be heroic, but instead to purchase the fixed income and equity securities of attractive issuers at discounted valuations. When the pandemic crisis abates, there will be catch-up purchasing of durable goods that were delayed in the downturn, while monetary and fiscal stimulus will not be curtailed as quickly as it was introduced. Though we do not expect a “V”-shaped recovery, we do expect a meaningful acceleration in activity off of the low prices. We believe that financial markets will anticipate this: Markets often peak while the economy is still in expansion, and they often trough while the economy is still in recession. In our view, putting some capital to work today properly anticipates this reality.

Unlimited Quantitative Easing

Published on Mar. 24, 2020

Unlimited Quantitative Easing

The Federal Reserve announced a number of actions Monday morning, several of which appear to be unprecedented. Overall, in our view, these are steps in the right direction.

The Federal Reserve expanded its authority to purchase U.S. Treasury and agency mortgage-backed securities in unlimited amounts. The Federal Reserve also added agency corporate mortgage-backed securities to this program, which are loans against multifamily housing units. It similarly broadened its Money Market Liquidity Facility to include more complex municipal debt structures that were not initially covered.

The Federal Reserve also revived the Term Asset-Backed Securities Loan Facility (TALF), a tool it used in the 2008 financial crisis. This facility lends against consumer debt including credit card, auto and student loans, as well as qualified Small Business Administration loans. This will enable banks to continue to lend to consumers, since it knows it can pledge these loans as collateral to the Federal Reserve.

To support the investment grade corporate bond market, the Federal Reserve created two new facilities: one to lend to investment grade corporate borrowers, and another to purchase investment grade corporate bonds and exchange-traded funds that hold those bonds. This is unprecedented. But we know from our own experience at Roosevelt that these markets are not functioning properly. Earlier steps to improve functioning in related fixed income markets were not enough to restore liquidity.

We believe it was appropriate to include exchange-traded funds in this program, since they are an important conduit for liquidity in this market.

We do have concerns that the TALF, corporate bond and ETF facilities may not be enough to stabilize these large markets, and therefore, we believe it is possible the Federal Reserve will have to expand these programs. As a result, we believe it may be necessary for Congress to appropriate more crisis funds for the Treasury to use as it expands these programs.

In Monday morning’s statement, the Federal Reserve alluded to a Main Street Lending facility for small and midsize businesses. We believe this facility, or something like it, will be crucial to mitigating damage to the U.S. economy during the pandemic disruption. In our opinion, such an action is best implemented via the banking system, such as through a Main Street facility, whereby the Fed accepts these loans as collateral with Treasury absorbing the losses. Congress is currently negotiating the size and form of such a package, as one of many items in its $1+ trillion stimulus bill.

The size of any stimulus bill is critical in softening the blow to the economy. We therefore expect additional Federal Reserve actions in the coming days and weeks, some in conjunction with Treasury, and others possibly by Congress.

Our Most Recent Market Thoughts

Published on Mar. 20, 2020

Our Most Recent Market Thoughts

As of Tuesday March 17, the S&P 500 has declined about 25% from its peak on February 19, and about 20% from the start of the year. Volatility is at highly elevated levels, and we’ve seen similar extremes in other financial market indicators we follow, such as the interest rate premium charged to risky borrowers, and the proportion of stocks with prices below their 200-day average. These are highly unusual times in the capital markets.

Economists and strategists are trying to determine what the impact to corporate earnings will be from the pandemic, both in terms of timing and magnitude. At this point, our best guess is that economic activity will be depressed for a quarter or two, after which a rebound is likely.

If we look back to prior pandemics over the past two decades, the stock market has already exceeded its average decline when investors grew concerned regarding the impacts of SARS, MERS, swine flu, bird flu, and Ebola. Those declines averaged about 7%, and, on average, the market rebounded to higher levels over the next six months. We believe that making this episode worse is that some industries will be impacted quite negatively by consumers curtailing their activities in ways we did not see in the past.

We believe that service-oriented industries such as restaurants, hotels, and other travel-related companies will be particularly hard hit, as conferences, athletic events and other gatherings have been cancelled. These sectors will most likely endure severe revenue impacts that may never be recouped. The damage may be limited in other areas to a near-term pause in revenue that is partially recouped in future periods. This may occur in industries such as manufacturing, transportation of goods, healthcare, and technology. Some firms may see little impact at all on their business. A lucky few may even benefit. (More on this below.)

As a result of the pandemic and the steps being taken to slow the spread of the virus, it now seems likely that the U.S. could experience a period of decline, followed by a catch-up which recoups some but not all of what was lost before. And then, perhaps a year from now, growth could revert to its prior trajectory before the pandemic struck.

Fortunately, we believe the U.S. economy entered this episode from a place of strength, with low unemployment and a consumer that on average has been confident, saving money and improving their finances. But in other parts of the world, particularly in Europe, economic growth has been far slower, and it is possible that the pressures from this pandemic will push the global economy into recession. We think that the U.S. may experience a mild recession as well, if the pandemic lasts longer than the second quarter before growth resumes. This is using the technical definition of recession, which is more than one quarter of negative growth. If recession strikes the U.S., we believe it will be short-lived.

The recent failure of OPEC and Russia to agree on oil production cutbacks, despite the pandemic’s impact on demand, has caused the price of crude oil to plummet into the $30s per barrel, a level not seen in about five years. This has added to pressures on capital markets, since many shale oil producers are not able to achieve profitability at such low prices. But we believe that the resulting lower gasoline prices will put more discretionary income in the pockets of consumers, precisely at a time when it may be most needed. A lower oil price will also help many companies achieve lower costs to the extent oil is an input, such as for transportation.

To date, we think that the global fiscal and monetary response to the pandemic has been inadequate to calm investor fears, as the lack of coordination between central banks in the U.S. and internationally has weighed on security prices and sent bond yields to record lows.

Upcoming U.S. elections may be a secondary factor impacting market volatility. The rise and subsequent fall of the Sanders campaign first weighed on and then supported the stock market. More recently the Trump administration’s missteps in managing the crisis may be weighing upon the stock market as well. Successfully dealing with this unprecedented pandemic could become an existential issue for Trump’s re-election, and reduced investor confidence in a Trump re-election may also be weighing on the market.

In similar periods in the past, we have seen that extreme volatility often marks peak pessimism; it eventually passes, and then more normal conditions return. We’ve seen this play out before, whether in the depths of the December 2018 decline, the 2016 pullback relating to the sharp decline in the price of crude oil, the summer 2011 pullback after S&P downgraded US debt, and even the financial crisis of 2008-09. Particularly after the market has experienced a sharp pullback such as we’ve experienced in these last few weeks, being too bearish at this juncture seems unwise to us.

In those past market episodes, government officials and central bankers understood that strong measures were needed to help maintain confidence in the system. As a result, the odds have increased that we may get a ‘shock and awe’ type of policy response, even though so far investors have been underwhelmed by what we have seen. There have been many proposals and half measures, but, as of yet, nothing on the scale of what will probably be needed. Though dysfunction in Washington is prolonging the process, we expect the government to eventually act as necessary, because it is in all parties’ best interests to do so.

It is also possible that some pharmaceutical solution might be discovered that is successful at treating the most difficult cases, which would be good news that could materially change the views of many investors with concerns about the pandemic’s ultimate impact. Relatedly, the spring season will be upon us soon. As we have seen with the flu each year, warmer weather tends to curtail the number of new infections. It has been theorized that the arrival of warmer spring weather could help to slow or stop the COVID-19 outbreak.

Lastly, China, South Korea and Japan are all further along in the progress of the outbreak. If we see a material downtrend in new infections being reported by those countries, it may bode well for the outcome of the pandemic and the ultimate number of cases which are reported in the U.S. This might also provide relief to investors concerned about the ultimate scale of the outbreak here.

One last thing to consider is that, at the firm level, in times of market or economic stress, the best-positioned companies often make significant gains in market share. We expect to see similar winners this time around. Consider Amazon, a company that had already moved aggressively into same-day delivery of goods, including groceries, from its Whole Foods stores as well as its Amazon Pantry offering. In addition, Amazon Web Services is one of the leading providers of cloud computing, which enables software-based services to be delivered over the Internet. As the pandemic forces retailers to close stores and office employees to work from home, consumers may purchase more goods online, and companies may rely more on the cloud. As these groups make greater use of Amazon’s services, some portion of them will discover just how easy and efficient Amazon makes their lives, and they will not return fully to prior ways of shopping and working.

Another example may be digital payments. As many of us now obsessively wash our hands and avoid contact with things we didn’t even think twice about touching a week or two ago, one thing that some now consider ‘dirty’ is cash, since it may be a means to transmit infection. As some consumers discover just how easy it is to use digital payments services, offered by companies including Apple, MasterCard, Visa and PayPal, some portion of them may shift their payment habits to digital.

Finally, as colleges and schools close down to help try and mitigate the spread of the virus, parents and students are being forced to shift to digital tools to enable online classroom learning. There are many software companies that will now be in the spotlight as demand for such products increases, as well as for hardware to enable the digital learning sessions. In China there is already a shortage of Apple’s iPads because so many parents have purchased them for their child. We may see similar trends here in the U.S. Volatility may be with us for the time to come, but we believe that this too shall pass.

Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy warns of profit, sales hit on coronavirus fallout”

Published on Feb. 27, 2020

February 27, 2020: Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy warns of profit, sales hit on coronavirus fallout”

Read the Full Article Here

Coronavirus – Market Update

Published on Feb. 25, 2020

Coronavirus – Market Update

The stock market started out strong in 2020, but the past few days have seen significant weakness. It is our view that this is due to two primary factors. First, it appears the stock market is reacting to growing concerns about the Coronavirus epidemic in China and the increasing odds that it may become a global pandemic. We also feel the market may be responding negatively to what appear to be increasing odds that Bernie Sanders could be the Democratic nominee for this fall’s presidential elections. Sanders, a United States Senator from Vermont, is a self-avowed democratic-socialist who advocates radical change across U.S. society.

While the virus outbreak in China appears to have peaked in terms of the growth rate of new cases being reported to the World Health Organization (WHO) and the U.S. Centers for Disease Control (CDC), we are now unfortunately seeing new cases spike in other countries, such as Korea and Japan, as well as Italy. Investors appear to be increasingly concerned that the virus cannot be contained within the countries currently impacted, and that a more widespread pandemic appears likely.

Unfortunately, we know from experience that we cannot necessarily trust as accurate the data we are seeing from China. The WHO does have personnel in China, and we can only hope that its presence will shine a bright light on what is happening and push the authorities to disclose all of the available information.

Global economies have become so interdependent in terms of trade and supply chains that it is hard to envision a scenario where the Coronavirus doesn’t have a negative economic impact. As we see it, the question at this point is how quick the recovery will be. Major companies such as Apple have already said that the Chinese outbreak will cause them to miss their expected earnings for the March quarter due to the temporary closure of Chinese factories serving their supply chain. In addition, Apple’s Chinese retail stores were closed for a period of time, and some may remain closed.

With some products, it seems likely that ultimate purchase by consumers will merely be delayed. Apple’s iPhone and other iconic products would appear to fit into this category. But there are other more service-oriented purchases for which lost sales might not ever be recouped. One example of this would be the annual mobile phone conference held in Barcelona (The Mobile World Congress). Last year, over 100,000 attendees came to Barcelona for the annual conference. That is a lot of economic activity taking place over the course of about a week; think of the taxi drivers, cooks, maid and laundry staff in the hotels, waiters, etc. etc. who provided service to those conference attendees. This year, the conference was cancelled due to concerns about the potential spread of the virus, and the conference won’t be held again until 2021. Similarly, the Tokyo marathon was recently canceled except for elite class runners who will still be allowed to compete, with some 38,000 attendees being asked to stay away.

There are no simple precedents to examine for a guide as to how this may play out in terms of its market or economic impact. We have a good idea of the impact SARS had in 2003, but at that time China’s economy was far smaller in an absolute sense, and since then it has become far more integrated with the rest of the world. Our current thinking, which is subject to change, is that most of the economic impact is likely to be felt in the first quarter, and that much of the growth lost in will be recouped in subsequent quarters. So far, the number of cases in the U.S. is exceedingly low (about 35 confirmed), and a majority of the U.S. cases (21) are quarantined repatriated people who have come in on recent evacuation flights from China and Japan. Another 329 patients from the Diamond Princess cruise ship who were repatriated from Japan to the U.S. remain under quarantine, and the CDC believes some of those people are likely to come down with the virus.

The CDC recently asked labs in six U.S. cities to start testing laboratory samples from any patients with flu-like symptoms to determine whether the coronavirus may already be established in the U.S. If the virus is established in the U.S., we are concerned that we could see much more of an impact than we have to date on people avoiding large public gatherings, airline travel, restaurants, etc., and the follow-on impact upon domestic economic activity in general.

Even before this virus outbreak, global economies were experiencing significant monetary and fiscal stimulus, and the outbreak may even accelerate this sort of activity. It’s important to keep in mind that despite the scary headlines, this too will eventually pass, and our economy remains quite healthy among all developed economies globally. Interest rates and unemployment are both exceptionally low today, and inflation remains largely absent. These benign conditions should help support a continuation of the economic expansion that we’ve had since the end of the financial crisis in 2009.

We believe that the market may be in for some rough weather in the near term, as investors digest reports about the spread of the virus and its likely impact upon global economic growth. At this time we do not expect to make major changes in our investment portfolio as a result of the virus outbreak, although that could change. We believe that our portfolios have the ability to weather virus-related weakness, and we will continue to monitor developments.

Where Next?

Published on Feb. 10, 2020

Where Next?

Year-to-date, Roosevelt Investments has seen equities move sharply higher and then drop, likely due in part to the shivers of the coronavirus. Bond yields have declined, providing price performance, but the yield curve also inverted briefly. We believe that this is either a sign of economic fragility, or a mixed signal of flight to quality in an uncertain world.

While investors would love another year of continued economic growth, low inflation, and positive market returns, January appeared to include much data to both support and challenge this potential. Economic data has been good, but global and domestic challenges remain.

In the Middle East, an escalated conflict with Iran may have looked evident, then it eased off just as quickly. Meanwhile, the US and Israel proposed a new peace plan for the Palestinians, which is backed by some Arab countries. As always, this is a developing situation, overall the news of a new peace plan seems to be a move in a positive direction.

We believe China is a bigger story. While we are starting to get more clarity on the coronavirus, economists have also been marking down China’s growth. More confounding than an epidemic is contemplating how much more the world’s second largest economy might become isolated from the rest of the world.

We believe China is a bigger story. While we are starting to get more clarity on the coronavirus, economists have also been marking down China’s growth. More confounding than an epidemic is contemplating how much more the world’s second largest economy might become isolated from the rest of the world.

In the US, we saw that job creation in 2019 continued to be greater than population growth. Because of this we believe that most investors have expected that the US economy will continue along a 2% growth path for 2020. The recent “phase one” trade deal with China alleviated one of the biggest threats to domestic economic growth, as we see it. The Chinese agreed to buy soybeans and pork from the US and the US agreed not to raise tariffs on a substantial number of Chinese exports. We believe that even though the deal lacked as much progress as was needed, it set the right tone and the two countries are seemingly talking to each other.

All evidence seems to indicate that the Federal Reserve’s default position is to remain on the sidelines until glimmers of inflation appear. We think that the bond market has perplexed investors for years, as historically low rates have remained. Much of this is a global phenomenon of limited inflation coupled with aggressive central bank policies to stimulate borrowing and investing, in our opinion. Cross-border economic flows being what they are, we think that the US cannot isolate itself from these issues. Interest rates may have difficulty climbing higher for some time.

However, the path of a virus threatening global growth wasn’t in the markets’ initial 2020 calculations. Could we actually expect the Federal Reserve to ease rates? The market pressures of ten-year US Treasury yields trading on top of the effective Fed funds rate – meaning there is no slope to the yield curve – could lead to rates easing. A decision by the Federal Reserve to ease rates could depend on the breadth and duration of our global viral pandemic.

The oil market may provide some clues of an interest rate decision by the Federal Reserve, with crude prices down about 20% in the last month. While oil prices had been volatile when tensions with Iran were more obvious, we think that oil prices are also a good coincident indicator of the global economic outlook. With the Saudis apparently contemplating an output reduction, we think the signal of a rise in oil prices should be taken seriously.

However, much of this is about a virus literally passing through the system. At some point, it will. We believe that the underlying profitability of firms, an environment of low inflation, and an accommodative Federal Reserve will be seen as supportive to the economy and to market valuations.

Equity Commentary | January 2020

Published on Feb. 10, 2020

Equity Commentary | January 2020

Stocks were flat during January, as gains early in the month may have been subsequently offset by concerns over the developing coronavirus pandemic. Economists have already begun reducing first quarter GDP estimates for China as a result of work stoppages and travel restrictions implemented by the Chinese government. It is difficult to ascertain the ultimate impact that the outbreak will have on China’s economy, as well as business activity globally, but our analysis of prior epidemics may be useful in this regard. During the SARS outbreak of 2002-03, which also originated in China, the economic impact was largely contained to one quarter, and due to a rebound in subsequent quarters, Chinese GDP for the full period was largely unaffected, in our opinion. SARS did not appear to have much of an impact on US economic activity, although there was a temporary decline in certain confidence surveys.

In assessing the stock market impact of prior epidemics, including SARS, MERS, Ebola, and the avian flu, the typical pattern was an initial selloff, followed by a fairly quick recovery. However, there are a number of important differences between the current outbreak and the precedent examples. First, the Chinese economy is far larger than it was during the time of the SARS epidemic, in absolute terms and in terms of its portion of global GDP. Second, global supply chains have become tightly integrated over the past decade and China plays a key role in supplying goods to the rest of the world. Third, with the total cases of coronavirus within China now exceeding 30,000 (and growing), this outbreak is far larger than the number of known SARS cases, which was believed to be approximately 8,000. Finally, we don’t have a good read on the accuracy of the data coming from China on the extent of the outbreak. Some believe the true numbers are far higher. For these reasons it is difficult at this point to predict the ultimate economic impact of the outbreak, though we will continue to closely monitor the situation.

The phase I trade agreement between the US and China was signed during January. As part of the deal, China agreed to purchase an incremental $200 billion of US goods and services, while also committing to protect intellectual property rights and further open up its financial markets. While the majority of the tariffs imposed by the US on Chinese imports will remain in place, the tariff rate on the $120 billion of Chinese imports which were implemented in September will be halved from about 15% to 7.5%. President Trump has noted that the rest of the tariffs may be rescinded as part of a potential future phase II agreement.

Some financial analysts have been skeptical regarding the deal due to a lack of enforcement mechanisms should China not fulfill its obligations. In our view, however, the fact that the majority of the tariffs are still in place will act as a strong incentive for China to cooperate. We think the key risk to markets currently in this regard is that there now appears to be a good deal of positive investor sentiment on trade, perhaps bordering on complacency. While we are encouraged that the initial phase of an agreement is in place, we think that there are significant uncertainties regarding next steps. Little has been revealed regarding the timing and substance of a potential phase II agreement, and, given how the negotiations have played out thus far, it is conceivable that talks could again turn contentious and additional tariffs could be threatened. We are however, encouraged by the potential boost from increased Chinese purchases of US agricultural products. The domestic farm supply chain has been depressed for some time now, and we believe that a significant increase in exports to China could materially enhance the growth profile of the industry.

US economic data was mixed in January, as we saw indications that the manufacturing sector continued to struggle while much of the remainder of the economy appears to be in better shape. December’s ISM manufacturing survey was particularly weak, coming in at the lowest level since 2009. The employment and new order components of the survey also were at multi-year lows. However, more recent data has shown an improvement, along with regional Federal Reserve manufacturing surveys for January which in aggregate came in well ahead of analyst expectations. The service sector looks to be in much better shape as both the ISM and Markit’s gauges of industry activity for December exceeded expectations and came in at levels consistent with modest growth.

The housing industry also appears to be healthy, as it continues to benefit from low mortgage rates. Housing starts and existing home sales for December each bested analysts’ projections, and according to the NAHB homebuilder survey for January, prospective buyer traffic reached a high for the current economic cycle. While new and pending home sales did miss consensus expectations for December, we believe that much of the shortfall was the result of inventory constraints, as opposed to any reduction in demand. With momentum carrying over into January, we believe that 2020 is shaping up to be a good year for the housing market, and we are optimistic that this may create a tailwind for broader economic activity as well.

Fourth Quarter 2019 | Equity Commentary

Published on Jan. 28, 2020

Fourth Quarter 2019 | Equity Commentary

Stocks closed out 2019 in robust fashion with the S&P 500 gaining 8.5% for the fourth quarter. We believe that investors were encouraged by the fact the US and China announced that they have reached a phase I trade deal, as well as indications from the Federal Reserve that monetary policy will likely remain accommodative for some time. Positive economic data also helped to support stocks, and eased investor concerns that a recession may be on the horizon.

In December, the US and China announced that they appear to have reached an agreement on a phase I trade deal. While the deal has yet to be signed, expectations are that a signing will take place this month. Highlights of the agreement include increased Chinese purchases of US agricultural products. We also believe this deal requires China to end its practice of requiring foreign companies to transfer their technologies to domestic businesses in order to gain local market access. In return, the US will halve the current 15% tariff rate on about $120 billion of Chinese imported goods. We think that this is particularly noteworthy, as this would be the first time since the trade war began that the Trump administrationhas rescinded any tariffs. Also of significance, the key tranche of tariffs that were set to go into effect on December 15thwere not implemented. This would have included duties on consumer products such as cell phones and laptops which in our view could have negatively impacted US holiday sales.

While we see this initial agreement as positive for capital markets, we believe that it only reduces rather than eliminates trade-related uncertainties. There are still many unknowns regarding how and when the next phase of negotiations will play out. Moreover, certain thornier issues such as industrial subsidies remain unsettled. We would not be surprised if more tariffs are threatened during the subsequent round of talks, which could trigger further volatility for capital markets.Therefore, while we are encouraged that some progress has been made, we still think that there is plenty of work to be done before a comprehensive, lasting solution is reached.

The Federal Reserve helped to support stocks during the quarter with a rate cut in October and subsequent messaging that interest rates are unlikely to move higher any time soon. Following the Federal Open Market Committee’s (FOMC) December meeting, Chairman Powell noted that he would only support a rate hike after inflation had moved persistently and significantly higher. Similarly, the Fed’s closely watched dot plot, which depicts committee members’ interest rate projections, indicates that the FOMC does not currently anticipate raising rates at all this year. A prolonged pause would be significant, and stimulative for equities, in our view, given that the fed funds rate currently sits below core inflation. Put another way, real interest rates are negative and could remain so for some time. The Fed has also materially expanded the size of its balance sheet in recent months, which also tends to be positive for equities. With negative real rates likely to persist for an extended period and a growing Federal Reserve balance sheet, we view the current state of monetary policy as being quite accommodative.

Recent economic data have been encouraging, particularly regarding the consumer. The November employment report came in ahead of expectations with 266,000 jobs added, and estimates were revised upwards for both September and October. Moreover, the unemployment rate dropped to 3.5% which marked a low for the current economic cycle. The housing market continues to strengthen, with the preponderance of industry data coming in ahead of economist’s projections, and there are reasons to believe that the momentum will continue into the new year. Changes in mortgage rates typically impact housing with a lag, and we therefore expect that the approximate 100 basis point reduction in rates over the past year could bode well for continued strength in housing activity during 2020. Consumer sentiment also appears healthy. The University of Michigan’s latest reading topped expectations and remained near the best levels in a year.

The manufacturing sector, however, has been challenged as it has struggled with trade related uncertainties and a strong dollar. The ISM’s December manufacturing survey was weak and consistent with a contracting growth environment, though other indicators, such as Markit’s manufacturing PMI fared better. Despite this disconnect, we are encouraged that the yield curve has steepened meaningfully of late, and credit spreads have contracted. These market indicators, along with the healthy state of the consumer, suggest to us that overall the economy is in good shape. A near-term recession, which had seemed plausible up until just a few months ago, now seems less likely. We think that this perception has been a key factor in driving stocks higher.

Over the course of the 4th quarter we gradually adjusted some of our portfolio weightings to reduce the risk that a factor rotation towards more value and cyclically-oriented shares and away from higher quality and growth companies might pressure our investment performance. We incrementally reduced exposure to growth, momentum, and defensive holdings in favor of stocks with characteristics of greater cyclicality and value. Given some of the positive economic data noted above along with an accommodative Fed, we believe that the shares of companies with these characteristics may continue to perform well, particularly given that value stocks have been trading at extreme valuation discounts. We are not making a strong relative call on value and cyclicals over high quality and growth stocks, but we see the former as being valued attractively enough that given the current fundamental landscape, we wanted to reduce our underweighting in these areas.

Jason Benowitz, CFA was quoted in the Wall Street Transcript’s article, “5G Stock is One of Many Top Picks from this Veteran Portfolio Manager”

Published on Dec. 16, 2019

December 16, 2019: Jason Benowitz, CFA was quoted in the Wall Street Transcript’s article, “5G Stock is One of Many Top Picks from this Veteran Portfolio Manager”

Read the Full Article Here