Pennsylvania Trust

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Unemployment Recap

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The number released this morning is obviously terrible as our economy is dependent on the consumer. What makes this number specifically bad is the magnitude and swiftness of the decline. On a positive side, not reflected in the numbers is the fact unemployment benefits have helped cushion the actual wealth effect of those laid off. It will be months (maybe years) before we can properly assess the consequences of Federal relief which included these unemployment benefits.

The number was actually a bit “less bad” when you look at the expectations. I think this was due to two reasons:

  1. There were five weeks of initial unemployment claims in April but the payroll data only encapsulates four weeks of actual data. (Claims picked up some of March’s decline.)
  2. Hiring in April did not drop to zero — grocery stores, delivery firms and the Amazon economy were hiring — so some of the people who filed initial jobless claims likely found new positions and will be a wash in the payroll numbers.

Finally, note that the collapse in payrolls triggered an astonishing spike in hourly earnings, because the data is not adjusted, and most of the job losses last month were in relatively low wage sectors… Average hourly earnings across the whole economy were $28.62 in March, but retail jobs paid an average of $20.26 and leisure and hospitality paid $16.83.

Expected Actual March December
Change in Nonfarm Payrolls

22mm

20.5mm -701k

+184k

Unemployment Rate

16%

14.70% 4.40%

3.50%

Underemployment Rate

N/A

22.80% 8.70%

6.70%

Average Hourly Earnings MoM

0.40%

4.70% 0.50%

0.10%

Labor Force Participation Rate

61.00%

60.2 62.70%

63.20%

Data from the Bureau of Labor Statistics


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

Will April Showers Bring May Flowers?

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Photo of Jon Heckscher

As we come to the end of April, we want to take time to look back at the economy, the markets and the opportunities that may be emerging.

“The two most powerful warriors are patience and time.” -Leo Tolstoy

Patience and time are key principles in an increasingly intertwined work/home paradox. The past two months have changed how we look at the economic landscape as well as the world around us. The speed and magnitude of the market moves have been unprecedented. Economies are facing an extreme “demand shock” combined with a category five hurricane-like supply shock, the repercussions of which are only now starting to be known. All being said, the combination of optimism on the health front and an unprecedented fiscal and monetary response have calmed global markets and improved investment psyche. It will take time to work through these issues, and with it, a great deal of patience as we expect continuing volatility.

“Don’t fight the Fed.” -Marty Zweig

At the same time, the monetary, fiscal and health response to the crisis has been equally as fast and significant. The U.S. alone has committed roughly $10 trillion in its efforts to insulate the economy from the COVID-19 pandemic, all the while allowing the Federal Reserve to redefine the role central banks play in fostering economic growth. From lending directly to businesses, states, and cities to extending credit globally, Jerome Powell’s Fed is more powerful (and likely effective) than any of the past. The Fed’s actions ultimately represent a level of cooperation with the Treasury and Congress not seen since World War II. Continuing to do so while remaining apolitical will be a harrowing act.

The Fed is now in a growth-at-any-price mode, and thus far, the S&P’s 30% rally from the March lows has once again demonstrated that investing in line with the Fed is more profitable than against the monetary policy.

“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” -Harry S. Truman

In the months ahead, unemployment will provide clues that will help forecast the depths of the recession and trajectory of future economic growth. On this front, we will focus on two key employment figures: unemployment claims and payroll tax withholding.

Initial jobless claims likely peaked at 6.9 million for the week ending March 28.  Since then, claims have declined four weeks in a row to a still ominous 3.8 million. Continuing unemployment claims, however, are still rising every week and will likely keep doing so until further restrictions are lifted. We feel the peak in continuing claims will be a key indicator that will allow us to anticipate the bottom of the recession.

Interrelated, we are following the daily release of the government’s receipts for withheld income and payroll taxes. While still declining and down 10% year over year, a trough in this number will further confirm an economic bottom, as this will signal that furloughed employees are back online.

“When you are unemployed, weekends are seven days long.” -Mokokoma Mokhonoana

Roughly 20 percent of the American workforce is currently collecting unemployment benefits. While this number is unimaginable, the recent CARES Act has made accommodations to unemployment benefits to keep most individuals from realizing a large decline in weekly wages. According to the Bureau of Labor Statistics, the median weekly earnings of the nation’s 115.9 million full-time wage and salary workers was $957 in the first quarter of 2020. With the recent addition of $600 per week in unemployment benefits, the range of unemployment checks will be between $813 (in Mississippi) and $1,155 (in Massachusetts). This phenomenon should prove valuable as the economy restarts.

We will be paying careful attention to what consumers are doing with their unemployment benefits and stimulus checks. Early indications are that these checks are going directly into bank accounts as the money in the system has increased by reported 14% over the past four weeks. As the nation’s “stay at home” orders are relaxed, we expect this increase should translate into a measurable surge in the velocity of money (see definition) as consumers and businesses work through repressed demand. The result, while likely inflationary, will ultimately benefit GDP.

Velocity of money:
The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it’s the rate at which consumers and businesses in an economy collectively spend money. (Source: Investopedia)

Intuitively, the increase in money supply and the subsequent decline in interest rates will be supportive of equity markets as investors are offered more attractive returns in equities than other asset classes.

“Successful investing is about managing risk, not avoiding it.” -Benjamin Graham

Last month, we introduced the three phases we believe the markets will follow throughout the crisis. The first phase, dominated by elevated uncertainty and anxiety, was characterized by high volatility and unusual correlations (indiscriminate selling).

The recent introduction of plans to reopen commerce gradually has provided clues to the second phase of the crisis. We will look to the continued effectiveness of the health, monetary and fiscal responses to provide further cues. We understand that volatility will persist, and timing the exact bottom of markets is not possible, especially given the wide range of possibilities and the inherent unpredictability of the current situation. We remain underweight in global equities and favor U.S. large caps relative to international stocks. Our preference is for countries, markets and companies that were the strongest before the coronavirus crisis with the expectation that they will be best positioned to emerge in a post-virus world.

Numerous solutions created today to deal with the crisis will exacerbate and accelerate longer-term secular trends that will define global growth. These trends will transform the global economy by shifting societal priorities, driving innovation, and redefining business models. Finding the potential for structural change and investing in expected transformations will be a key driver of alpha as we enter a new economic cycle. We are actively pursuing opportunities to capitalize on long-term trends in areas such as technology, healthcare and ESG.

We look forward to working with you to navigate the markets as we seek to ensure that our portfolios reflect appropriate risk to meet long term goals. Given this framework, we continue to approach equities with patience as we look for prospects to upgrade individual holdings while being forward thinking, thematically adding to securities and asset classes as appropriate. Risk management techniques — such as asset class diversification, rebalancing, and being mindful of sector exposures and concentrations — remain critical as we navigate the current market landscape.

In this especially challenging time, we thank you for your confidence and trust in us. We encourage you to contact your relationship team with any investment questions, concerns, or perspectives as 2020 continues to unfold.

Mr. Heckscher is Senior Vice President, Director of Fixed Income, and Chief Investment Officer of Pennsylvania Trust.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

U.S. Economy Contracted At 4.8% Pace Amid COVID-19 Shutdown

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The record-long U.S. expansion is likely over as gross domestic product (GDP) declined for the first time since March of 2014. GDP shrank at a 4.8% annualized rate in the first quarter, as the COVID-19 pandemic shuttered economic activity. With dire estimates for the second quarter, the first-quarter figure effectively confirms that a recession has started.

The past two months have changed both the way we look at the economic landscape as well as the world around us. We have been faced with unprecedented moves in the market, both in speed and in magnitude. Economies are facing a depression-like demand shock combined with a category five hurricane supply shock of which the repercussions are only now starting to be known. All being said, the combination of optimism on the health front and an unprecedented fiscal and monetary response has calmed global markets and improved investment psyche.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

Low Oil Prices Create Further Uncertainty

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The extreme pressure on the WTI contract for May highlights ongoing concerns about the supply and demand dynamics plaguing the oil market.

  • While the front end futures contract briefly traded below $0 per barrel, the value of oil is NOT negative
    • The current contract reflects the lack of storage capacity for deliverable oil in May.
      Futures Prices as of 4/20/2020
      May 2020 Contract ($38)
      June 2020 Contract $20
      November 2020 Contract $31
      May 2021 Contract $34
  • Being said, lower oil prices mean less drilling and exploration activity because most of the new oil driving the economic activity is unconventional and has a higher cost per barrel than a conventional source of oil. Less activity leads to lower productivity, increased bankruptcies and ultimately layoffs, which will hurt the local businesses that catered to these workers.
    • According to a PriceWaterhouseCooper LLC report, some 10.3 million Americans have jobs that are directly in, or support, the US oil and gas industry. Furthermore, an additional 2.7 million jobs could not exist if it weren’t for this industry. That equates to ~6% percent of the nation’s total employment. And those people who have jobs in the oil and gas industries bring home a combined $714 billion.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

Oil Deal Should Help Restore A Supply/Demand Balance (Sort Of)

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The world’s top oil producers (called the OPEC+ Alliance) pulled off a unprecedented deal to cut global output by nearly 10%. The deal is likely not enough to offset the impact of the COVID-19 pandemic.

  • OPEC+ will cut 9.7 million barrels a day.
    • Prior to this historic cut, OPEC’s single largest cut was in December 2008: 2.2 million barrels a day, according to IHS data.
  • Other nations, including the U.S., Norway and Canada also announce supply cuts.

The decline in global oil demand this month alone — 25 million barrels a day — is roughly seven times larger than the biggest decline after the 2008 economic crash, according to data by IHS Markit. Demand is down roughly 22% YOY.

Prices:

Oil prices are hovering near 20 year lows, with U.S. prices (WTI) closer to $25 and International based Brent around $30. Year to Date, national gasoline prices have fallen from $2.60/ gallon to $1.86/ gallon while sub $1/ gallon gas is now being found in Kentucky, Ohio, Oklahoma and Texas.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

Don’t Fight The Fed

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Over the course of the last month, the Fed has initiated aggressive actions to help fight off the economic effects of the COVID-19 and oil market contraction. The magnitude of the stimulus, now a staggering $8.5 trillion, has lowered investor angst and help the markets rebound roughly 25% from the March lows.

The initial packages included:

  • Cutting rates twice in March to near 0%
  • Participating in the overnight commercial paper markets to make sure there is ample liquidity in the money markets
  • Launching $700 billion quantitative easing program targeted at buying U.S. Treasury and mortgage backed bonds
  • Announcing they would provide up to $300 billion in new financing to small businesses
  • Extending lines of credit to companies
  • Extending swap lines to various countries

Additional expanded facilities were announced today in addition to the announcement that the Fed will facilitate several programs from the CARES Act.  These include:

  • Facilitating up to $2.3 Trillion in loans to businesses of all sizes, as well as to struggling city and state governments
  • Providing up to $500 Billion in short term liquidity facilities for main street and municipalities
  • Expanding the primary and secondary corporate debt facilities and TALF (Term Asset-Backed Securities Loan Facility) to $850 Billion. High Yield ETF’s will now be included in the program

Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

Jobless Claims Continue to Soar

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Earlier today, the Department of Labor confirmed that between March 14th ad March 28th, almost 10 million people filed for unemployment benefits representing more than 6% of the entire U.S. labor force. The monthly jobs report tomorrow is unlikely to show the full extent of these layoffs as the reference period will only capture the beginning of the COVID-19-related shutdown.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

State of the Markets – March 28

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Market indices rebounded this week by roughly 10% as Congress passed, and the President signed into law the CARES Act. In addition, the Federal Reserve increased its response and has committed “whatever it takes” to ensure the financial markets remain stable. While COVID-19 cases are clearly escalating domestically at an alarming pace, we believe the market has priced in much of the potential damage to the U.S. economy. As seen this week, stocks may be forming a bottoming pattern, but as in past bear markets, volatility should be expected, and the markets may retest the lower bounds.

While we believe the economy is in a recession, 2020 should be different than 2008-2009. The unemployment numbers are undoubtedly shocking. However, the areas currently affected — mainly retail, travel and leisure, and hospitality — represent a considerably smaller share of GDP than the finance and housing industries did then.

The trajectory of the recovery will depend on three factors:

  1. The spread of the virus
  2. The extent of damage mandatory closures and “social distancing” inflict on the economy
  3. The effectiveness of health, fiscal and monetary policy in mitigating the damage

In last week’s note, we introduced the three phases we believe the markets will follow throughout the crisis. The first phase, dominated by elevated uncertainty and anxiety, has been characterized by high volatility and unusual correlations (indiscriminate selling). We now feel that we are nearing the end of this phase and will look to episodic leveling and the effectiveness of the monetary and fiscal responses to provide cues.

Given this framework, we continue to approach equities with patience but acknowledge that the volatility will create opportunities. As a result, we continue to look for occasions to upgrade individual holdings. At the same time, risk management techniques — such as rebalancing and being mindful of sector exposures and concentrations — remain critical as we navigate the current market landscape.

Please feel free to reach out to anyone on your team with perspectives or questions you have. Remember to check Twitter, LinkedIn, and our blog. We will continue to email more comprehensive views as this environment develops.

We thank you for your ongoing trust and partnership and wish you and your family good health.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.

CARES Act Highlights

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Today, the U.S. House of Representatives passed, and the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act is designed to boost the economy by providing over $2 trillion in relief, ranging from individual rebates to increased unemployment benefits to tax breaks. Here are some highlights of the CARES Act (the “Act”), with more detail to follow.

Recovery Rebates for Individuals

The Act provides for payments of $1,200 for singles and heads of households ($2,400 for married couples filing joint returns), and a $500 payment per qualifying child dependent under age 17. The rebates phase out at a 5% rate above the following adjusted gross income (AGI) levels: $75,000 (single)/$112,500 (head of household)/$150,000 (joint). Eligibility will be determined based upon 2019 (if filed) or 2018 tax returns, or in the absence of a return being filed, the Social Security Benefit Statement (Form SSA-1099). The payments will not be counted as taxable income because the rebate is a credit against tax liability. An individual who is claimed as a dependent on another individual’s tax return is not eligible for the payment.

Special Rules Regarding Retirement Funds

  • Required Minimum Distributions (RMDs): RMDs are waived for 2020. The waiver includes RMDs that must be taken by April 1, 2020 due to the account owner turning 70 ½ in 2019. The recently passed SECURE Act raised the age that individuals must begin taking distributions from 70 ½ to 72, but this change does not apply to individuals who turned 70 ½ in 2019. Distributions from inherited IRAs are also waived for 2020.
  • Hardship Distributions from IRAs and 401(k)s: People affected by the coronavirus can access up to $100,000 of their retirement savings without being subject to the 10% penalty that normally applies to distributions taken before age 59 ½. These so-called hardship withdrawals are taxable to the account owner, but the tax can be paid over three years, rather than in the first year. Alternatively, the owner can repay the distribution to the retirement plan within three years and avoid having to pay tax. To qualify for a hardship withdrawal, the account owner or his or her spouse or dependent must have been diagnosed with the coronavirus or lost income due to a business closure, layoff, quarantine, reduction in hours or inability to work due to lack of childcare.
  • Loans from 401(k) Plans: Participants in 401(k) or similar plans who have been diagnosed with the coronavirus or affected by economic losses related to the virus can take a loan from the plan over the next six months up to the lower of $100,000 or 10% of the account balance. This is an increase of the existing $50,000 loan limit. Individuals with existing 401(k) loans can delay repaying any loans due in 2020 for one year.

Changes to Charitable Contributions

The Act added an above-the-line deduction of up to $300 for charitable contributions made in cash by individuals who do not itemize deductions, in addition to the standard deduction. This provision is applicable for the tax year 2020 and beyond.

For individual taxpayers that itemize deductions, cash contributions made during 2020 will not be subject to AGI limitations. Prior to tax year 2020, an individual’s charitable contributions made in cash were limited to 60% of their AGI.

For corporate taxpayers, charitable contributions will be limited to 25% of taxable income, as opposed to the current 10% limitation.

Please contact any member of your Pennsylvania Trust team if you have any questions about the CARES Act, or other recent coronavirus-related legislation and how it might impact you.

 

Francis X. Mehaffey is Senior Vice President and Director of Tax Services for Pennsylvania Trust.
Contributing author: Leslie Gillin Bohner, Esq., Executive Vice President, Chief Fiduciary Officer and General Counsel of Pennsylvania Trust.

COVID-19 Lockdown Leads To Largest Jump In Initial Jobless Claims Ever

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According to the Labor Department, the number of Americans filing for unemployment benefits climbed to a record 3.28 million in the week ended March 21, as businesses temporarily closed and furloughed workers in the fallout from the coronavirus. The figures far exceed the previous weekly high of 695,000 set in 1982 and the 665,000 set in March of 2009.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.