Pennsylvania Trust

All posts tagged markets

State of the Markets – March 28

Comments Off on State of the Markets – March 28

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.

Market Movements

Comments Off on Market Movements

Fiscal-stimulus hopes led to the second consecutive day of strong gains pushing the S&P 500 Index to its biggest two-day increase since November 2008. In addition, the Dow Jones Industrial Average jump of more than 11% Tuesday was its biggest one-day gain since March 1933.

Trying to time the market is extremely difficult. While the recent market volatility understandably creates emotional moments, history has proven that a majority of the best days in the market come within two weeks of the worst days. Investing for the future, while managing this volatility, should result in a better outcome in the long run.


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.

Fed’s Move Highlights Risks To Economy

Comments Off on Fed’s Move Highlights Risks To Economy

As we all acknowledge, the coronavirus (COVID-19) has globally altered normal activities of all individuals and businesses. At this point, the crisis in the U.S. is expected to accelerate in the coming weeks, as the number of positive tests will likely increase exponentially. As a result, it is important to recognize that this pandemic is very different from prior economic shocks. 2008 was primarily centered around the financial industry and housing. The 2001 dot-com recession was due to an asset price bubble, and the oil embargo of 1973 was a geopolitical event.

Another factor that makes this unique is that the global economy was in an upswing at the time of the outbreak, and the U.S. specifically was experiencing its lowest unemployment in 50 years at the same time net worth was at an all-time high. Both should bode well for the economy’s ability to bounce back from what will be a dramatic decline in economic activity.

We now expect that this will generate an immediate contraction of economic activity, including consumption, production, and business investment spending, as well as a decline in employment. The ultimate scope of the drawdown will be determined in large part by the intensity and duration of the virus. We believe the shape of the recovery will depend on household and business confidence, among other factors. Our expectation is that some economic activities will be slow to recover, such that the overall rebound may not be as strong as the magnitude of the decline.

We applaud the Fed’s recent action. They have acted aggressively in lowering rates to 0.00-0.25%. Further, they are re-engaging in large-scale asset purchases ($700 billion) and other credit easing and liquidity provisions to ensure the banking industry continues to operate without major disruption. These actions reflect the committee’s concerns that the health crisis has the potential to become a financial crisis that would magnify the economic effect. Ultimately, while these measures may not be able to prevent a recession, they will aid in the eventual economic recovery.

In the subsequent news conference, Chairman Powell acknowledged that the crisis will need to be addressed with a combination of fiscal and monetary measures to help lessen the effect while supporting the health policies as they are introduced. In light of their emergency meeting today, the Fed canceled the regular meeting, which had been scheduled for March 19th.

Click here for further market perspectives.

 


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.

Weathering the Storm

Comments Off on Weathering the Storm

The trigger of recent volatility and the market sell-off that we’ve endured for the last several weeks is the convergence of two black swan events: the rapid spread of the coronavirus and the collapse of the oil price. As a result, this has been a shock to markets on two fronts.

  • First, it’s a supply shock. Initially, concern centered around China, where the virus originated. The shutdown of production facilities ultimately resulted in supply chain disruptions.
  • But as the virus spread globally, it has also spread to the demand side. And as we’ve seen over the last week or two, the responses by both the public and private sectors have enacted several risk mitigation policies to stem the tide of the virus.
    • Responses included canceling events, closing schools, travel bans, telecommuting, and the unprecedented move by the Italian government to lock down the entire country and attempt to stem the tide. This extreme but warranted measure will have a material impact on current economic activity.
  • The global reaction created a demand shock in the energy industry. At the same time, the OPEC+ Alliance collapsed, which caused Saudi Arabia and Russia into a “pricing war.” The result is a new supply shock as the Saudi’s announced they would increase supply by more than 2 million barrels per day.
  • This quickly became an issue for U.S. energy producers, who were already struggling to be profitable.

As of Thursday’s close, the S&P 500 traded down 23.5% from its all-time high in a matter of only 22 days. Before this episode, the fastest drawdowns of a similar scale were:

  • 28 days in 1929
  • 31 days in 1998
  • 38 days in 1987

In times like this, it’s easy to become emotional, which creates a tendency to focus on the very short-term. But even in a volatile climate, correctly diagnosing where the overall trend is going is paramount. To better understand the situation, we focus on four key areas:

1. What we do know:

  • Markets are repricing to reflect this growing risk and extreme uncertainty.
  • This is a classic flight to quality — defined as the indiscriminate selling of risk assets (in this case, global equities), and the buying of safe-haven assets in bulk.
  • Markets are trading on extreme uncertainty, emotion, and panic. 4% swings are nearly a daily occurrence. It is unprecedented.
  • Consumption is getting hit as households are adjusting their normal economic lives. The hardest-hit services segments are recreation, leisure and hospitality, and food.
  • Investors have not witnessed such extreme volatility since 2008, which we believe is easily contrasted by the relative health the economies exhibited entering this period. The economic environment, pre-coronavirus was on solid territory. Although it’s hard to assess where we are today, it is somewhat reassuring knowing that we entered this period of market stress from a position of strength. Unemployment is at record lows, and the financial system is much better capitalized than it was 12 years ago.

2. What we don’t know:

  • It is difficult to assess the ultimate impact both on the economy as well as markets since the situation is evolving quickly. The magnitude and duration are what is on investors’ minds, and other than knowing this virus will be transitory, we don’t know what impact the containment process will have on the economy.

3. What we expect:

  • We anticipate the spread will continue and should contribute to elevated market volatility that is likely to persist for several weeks. Thus, it is too early to make a call on the market bottom.
  • Concerning the government response, we think there are some crucial dynamics here that will unfold over the coming days that will incorporate fiscal and monetary policy measures.
  • On the monetary side, we anticipate further action to support economies globally. To date, we’ve seen several central banks take monetary policy action, including the U.S. last week as well as Canada. But we also expect more central banks to take decisive action, including the European Central Bank this week. The Fed could move quickly yet again; a meeting is scheduled for next week.
    • Not only do we expect them to cut rates, but we expect them to continue to expand liquidity (the Fed announced further Treasury buying in order to provide further liquidity) as well to the banking system and not just monetary policy but combined with fiscal policy.
  • On the fiscal side, to date, there has been around $54 billion in appropriated funds to fight the coronavirus. We expect there to be additional measures to be taken and more targeted. For instance, there’s some consideration of various cuts to taxes, but we think it could come in the form of a temporary expansion of the paid sick leave, tax rebates, or policies that are aimed at ensuring credit availability to small businesses that are feeling the full brunt of the event.
  • We also expect that there is the likelihood that the negative shock that currently is being experienced may prove to be largely temporary. At some point during the second half of the year, we expect a resumption of growth and consumption. We also believe that the long-term impact on growth rates may be modest. With the potential for fiscal and monetary policy along with low rates and low energy costs, this could be quite supportive of a resumption of growth. We have likely seen a little bit of the early signs of this dynamic unfolding in China.

4. What we need to focus on:

  • Long-term perspective
    • While always hard to do during these periods, we need to recognize the situation is fluid. It is headline-driven, and we must recognize that this is a moment in time and refrain from emotional and price-driven investment decisions.
  • Patience and stay the course
    • At this point, we think developments need to play out to assess both the immediate and long-term impacts on economic and corporate fundamentals. Short term disruptions are certainly going to cause economic pain, but this should prove transitory, and growth should resume once the oil conflict is resolved and the virus is contained.
  • Portfolio positioning
    • We are comfortable with our positioning on several fronts:
      • Pre-coronavirus, our outlook, positioning, and portfolios were reasonably cautious and defensive.
      • Our overemphasis on both quality and diversification — we know what we own. Our strategies focus on companies with strong cash flow and balance sheet strength that we believe will prevail during periods of market stress, such as those we are currently experiencing.
      • Pennsylvania Trust constructs balanced and diversified client portfolios that are intended to preserve and grow wealth over a long-term horizon. Clients should be well-positioned with their current allocations.

Summary

We have the conviction and confidence to weather the storm and, quite frankly, the ability to capitalize on opportunities that will inevitably present themselves over the period ahead. Being said, we always encourage clients to communicate with their wealth manager to discuss portfolio positioning and future liquidity needs.

Again, we would like to thank you for your relationship and interest in following our thoughts. We encourage you to contact your wealth management team with any investment questions, concerns, or perspectives as 2020 continues to unfold.


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.

OPEC/Russia Feud Adds Angst to Already Fragile Market

Comments Off on OPEC/Russia Feud Adds Angst to Already Fragile Market

Major equity indices experienced their worst single session since the 2008 financial crisis as a full-scale oil price war rattled financial markets already on edge over the spreading coronavirus. The S&P 500 was off 7.5%, the ten year Treasury yield declined to 0.55% (prices higher) while crude fell roughly 25%.

There is now an increased expectation that the U.S. Federal Reserve will provide further stimulus via another rate cut (and potentially asset purchasing) as central bankers do all they can to keep the coronavirus from spurring a more pronounced economic slump. In addition, the Trump administration is reportedly working on a fiscal stimulus package to help lessen the effect the virus is having on the economy.

A 20% correction is often referred to as the emergence of a bear market. While this may occur, it’s important to note that economic and equity fundamentals were sound prior to the emergence of coronavirus coupled with the unexpected collapse of the OPEC+ coalition led by Saudi Arabia and Russia. As a result, we believe the disruption should ultimately prove to be transitory and believe that we will look back at this as a cyclical correction (maybe bear market) within a long-term secular bull market.

As we have pointed out on pages 10 and 11 in our Economic Insights, stocks are inexpensive when compared to bonds, hence the recent volatility will eventually produce new opportunity. In addition, lower oil prices and lower interest rates should be supportive for the consumer in due time.

The Source of the Angst

The sell-off in oil revolves around OPEC failing to strike a deal with its allies, led by Russia, about oil production cuts. That breakup of the OPEC+ Alliance, in turn caused Saudi Arabia to cut its oil prices and announce a 2.5 million barrel per day increase in supply. When combined with the temporary demand hit from coronavirus’s effect on global growth, prices declined by the second-most on record.

Many investors now worry that the falling price of oil will hurt the economy more now than it has in prior years when lower oil prices were often viewed as an economic stimulus. While consumers may enjoy the savings related to filling cars and heating houses, the oil industry will likely see increased bankruptcies, loan defaults, job losses, and a disruption in capital spending.

Today’s market selloff was predicated on what this disruption may do to the overall economy.  Ultimately, while oil and gas extraction, pipeline operation, refining, along with support companies account for roughly 540,000 jobs, the industry now supports an estimated 10 million full-time and part-time jobs, which accounts for over 5% of total US employment (according to a study commissioned by the American Petroleum Institute and conducted by PwC LLP). The chart below details how the industry supports each state.


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.

Federal Reserve Cuts Rates By 50 Basis Points

Comments Off on Federal Reserve Cuts Rates By 50 Basis Points

As expected, as part of a coordinated global stimulus effort, the Fed cut interest rates this morning by 50 basis points. While the Fed was the first to take action, the European Central Bank, the Bank of England and the Bank of Canada are all likely to follow suit after each vowed to combat the economic threat with monetary tools.

While this might not prevent the economy slowing due to the coronavirus, it will ease the cost of capital for businesses if demand falters or supply chains lengthen.

  • It was the first time the Fed lowered rates inter-meeting and the first time it has cut by more than 25 basis points since 2008.
  • While the move was clearly predicated on the increasing economic risk posed by the virus, the Fed subsequently stated that the “fundamentals of the U.S. economy remain strong.”
  • Many believe the 50 basis point cut will soon be followed by further stimulus from both the Fed (e.g., bond-buying and further cuts) as well as the government (e.g., a payroll tax holiday).


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.

A Few Charts Regarding Market Volatility

Comments Off on A Few Charts Regarding Market Volatility

While volatility in the market understandably causes investor angst, market timing is not a prudent strategy. Large drawdowns as we have seen recently often result in emotional decision making. Investing for the long term while managing volatility historically results in better long term results. The below chart demonstrates the importance of staying invested while also emphasizing that large up days tend to come soon after large down days.

We continue to encourage diversified portfolios that are intended to preserve and grow wealth over a long-term horizon. As this chart highlights, investors who live through the more volatile short term (left) are rewarded with a less volatile return profile (right).

The S&P 500 (stock) and Bloomberg Barclays Aggregate (bond) are used in this example.


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.

Turbulent Times

Comments Off on Turbulent Times

Photo of George McFarlandQ1 Recap

In our 2018 Investment Outlook published last December, we forecast “markedly higher volatility” accompanied by market pullbacks that would “become more frequent and pronounced” – albeit within the context of a stock bull market that still had more room to run. As it turned out, this is exactly what happened during the first quarter as market turbulence replaced the market calm of 2017.

As to market volatility, according to Strategas Research Partners, over 55% of the trading days in the first quarter saw the S&P 500 move at least 1% higher or lower intraday. To be precise, there were 34 trading days during the January-March period when this happened – compared to just 10 days total in 2017. Also of note, during the quarter, the CBOE S&P 500 Volatility Index (or “VIX”) spiked to levels not seen since 2015, and finished the quarter about 80% higher than where it began.

Pullbacks, too, within the context of an ongoing stock bull market, characterized the first quarter. After logging 14 record-high closing levels during January, the S&P 500 peaked on January 26th. By February 9th, the index reversed course, falling 10% from its January 26th highs and entering its first correction in two years. This sharp pullback, caused by inflation fears that proved to be premature, slowly dissipated (reducing February’s losses) as March arrived. Just when the correction looked to be over, and we celebrated the 9th anniversary of the bull market that began on March 9, 2009, as well as a new record Nasdaq intraday high on March 13th, the pullback resumed as inflation fears were replaced by new worries: fears of a trade war given newly-announced restrictive trade policies by the Trump Administration; fears of rising borrowing costs as the Federal Reserve again raised interest rates; and fears of increased federal government scrutiny and regulation of big technology companies in the aftermath of the Facebook data privacy issues.

When all the dust settled, the S&P 500 finished the first quarter down 0.8% on a total return basis. Of the eleven sectors in the S&P 500, only the Technology and Consumer Discretionary sectors posted positive returns for the quarter. The worst performing sector was Telecommunications, down over 7%. By style, growth outperformed value across the various market capitalizations while small-cap stocks generally outperformed large-cap. Not surprisingly, small-cap growth had the best quarterly returns, up +2.3%, while large-cap value fared the worst, down 2.8%.

International stocks were mixed. Developed market equities, represented by the MSCI EAFE Index, lost 1.4% during the first quarter. Emerging market stocks, however, gained 1.5%.

Given the rising interest rate climate, bonds did not have a good quarter. The overall U.S. investment-grade taxable bond market, as measured by the U.S. Barclays Aggregate Index, declined 1.5%. High yield did somewhat better, off 0.9%.

Partially reflecting the impact of a falling U.S. dollar, which declined over 2%, certain commodities such as crude oil and gold managed to end the quarter with gains.

What’s Next

We enter the second quarter with greater economic, political, and geopolitical uncertainty. Fears of a trade war with China dominate the headlines. The Federal Reserve may well raise interest rates again in June, and the midterm elections will begin to draw greater attention. This uncertainty likely will lead to continued stock market volatility ahead.

Despite the recent and expected market turbulence, we continue to believe the path of stocks will be higher over the next 12 months. (To be sure, the path will not be straight, and may well be bumpy.) Underlying this outlook is still a very healthy U.S economy. The housing market – as measured by new and existing home sales – remains near post-recession highs. The manufacturing and services industries are strong. Unemployment is near record lows (the number of persons collecting unemployment benefits fell to a 45-year low in March) and consumer confidence remains at 14-year highs. While the Federal Reserve is reducing its monetary stimulus to the economy, Congress is adding substantial fiscal stimulus, both through the tax cuts passed in late 2017 and more recently through the $1.3 trillion spending bill enacted in March.

Another fundamental basis for our belief that the bull market in stocks will keep going is continued strong corporate earnings. During the last three months, companies reported 2017 Q4 results. Of the S&P 500 companies, roughly 75% beat analyst earnings estimates and almost 70% beat revenue estimates. S&P 500 earnings rose approximately 18% on a bottom-up basis (year over year) in Q4. Most importantly, more double-digit earnings growth is forecast for 2018, driven by strong revenue growth.

As we have noted before, we are in the midst of a synchronized global economic expansion. While threats exist to the continuation of this global expansion – most notably if a true trade war were to emerge – no recession is likely in the next 12 months. Equity valuations have become more reasonable as a result of the recent market pullbacks and increased earnings expectations. These factors should support stocks through what likely will be a choppy second quarter. While we have a more modest outlook for bonds, given our expectation of gradually rising yields, we still view bonds as an important part of a diversified investment portfolio, as a hedge on stock market volatility.

As always, we encourage you to reach out to us with any questions, concerns, or perspectives you may have. Please contact your portfolio manager, or you may reach us at 610-975-4300, or email info@penntrust.com.

Mr. McFarland is President, Chief Executive Officer, and Chief Investment Officer of Pennsylvania Trust.


Disclosure: Data is for informational purposes only and should not be considered as marketing for any Pennsylvania Trust mandate or service and should not be considered a solicitation or an offer to provide any Pennsylvania Trust service in any jurisdiction where it would be unlawful to do so. The views expressed represent the opinions of Pennsylvania Trust and are not intended as a forecast or guarantee of future results. The sectors, industries, countries and regions discussed herein should not be perceived as investment recommendations and may no longer be held in an account’s portfolio. Sector/industry weights and country and regional allocations of any particular client portfolio may vary based on investment restrictions applicable to the account. There may be additional risks associated with international investments. International securities may be subject to market/currency fluctuations, investment risks, and other risks involving foreign economic, political, monetary, taxation, auditing and other legal factors. These risks may be magnified in emerging markets. Pennsylvania Trust believes that transactions in any option, future, commodity, or other derivative product are not suitable for all persons, and that accordingly, clients should be aware of the risks involved in trading such instruments. There may be significant risks which should be considered prior to investing. All securities trading, whether in stocks, options or other investment vehicles, is speculative in nature and involves substantial risk of loss. Indices are unmanaged and not available for direct investment. Past performance is no guarantee of future results.

The U.S. Fed Uses “Blue Dots” to Send a Signal

Comments Off on The U.S. Fed Uses “Blue Dots” to Send a Signal

Photo of Jonathan Heckscher.While the Federal Reserve did not surprise anyone by electing to continue its measured tapering of the balance sheet (reducing its asset buying to $55 billion per month), they gave themselves room to keep borrowing costs low, at least until next year, by dropping a linkage between the benchmark interest rate and a specific level of unemployment.  Read more

Another Perspective on the Market

Comments Off on Another Perspective on the Market

Photo of Gip Bartels.Last year’s huge gains lead naturally into the question of what the stock market might conceivably do for an encore. Every year at this time it seems the Wall Street consensus is for a 10% rise, a call that never varies no matter how well or poorly stocks performed in the prior year. Read more