Weekly Economic Update

Economic Update 1-25-2021

  • Economic data for the holiday-shortened week included a sharp rise in manufacturing, and improvements in several housing metrics—the latter continuing a trend higher from recent months.
  • Equity markets in the U.S. and abroad gained last week as the new Biden administration looks to pass additional stimulus legislation. Bonds were little changed, as interest rates leveled off. Commodities were mixed, with metals gaining a bit, and energy falling slightly.
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Weekly Economic Update

Economic Update 1-19-2021

  • Economic data for the week included a deeper-than-expected decline in retail sales, weaker Empire state manufacturing, and an unexpected rise in jobless claims. Producer and consumer inflation measures rose slightly, in keeping with recent trend. Industrial production, on the other hand, continued to increase.
  • Global stock markets declined last week, with mixed economic data resulting from continued high Covid cases. Bonds were little changed in the U.S. in keeping with slower rises in interest rates, while foreign bonds were hampered by a stronger U.S. dollar last week. Commodities were mixed to neutral in several key areas, such as energy, but agricultural prices saw a spike due to rising demand.
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Weekly Economic Update

Economic Update 1-11-2021

  • Economic data for the week included stronger reports for ISM manufacturing and services, while the employment situation for December weakened more than expected.
  • Equity markets rose several percent globally, with the U.K. and emerging markets leading other regions, with hopes for larger U.S. stimulus upon the victory of both Georgia Democratic Senate candidates, and in spite of a riot at the U.S. Capitol. Bond prices fell back as interest rates ticked higher based on additional stimulus expectations. Commodities rose, with continued recovery gains in crude oil—which rose back above $50/barrel.

U.S. stocks began 2021 on a down note Monday, with rising Covid cases nationwide and uncertainty over Georgia’s dual-runoff Senate elections the following day beginning to concern investors, as polls showed far tighter races than expected. In a strange twist of fate, market results turned positive Wednesday despite the narrow Democratic victory (as discussed above), as well as when the chaos at the U.S. Capitol ended with a formal electoral certification of Joe Biden as President. As is often the case with domestic civil strife, markets were little affected directly. Later in the week, a disappointing jobs report added hope for another fiscal aid package led by Democrats.

By sector, cyclical energy and materials led with gains well over 5% each, followed by consumer discretionary stocks and financials. Defensive utilities and consumer staples lagged with minor declines. Small caps outperformed large caps by several percent, in keeping with the strength in cyclical assets. However, real estate also lost ground as interest rates ticked higher.

Foreign stocks outperformed U.S. stocks last week, led by the U.K. and emerging markets. Strong industrial results in Germany, as well as relief sentiment in the U.K. post-Brexit appeared to be primary catalysts for continued gains. As in the last few weeks, hopes for an improved post-Covid environment as vaccine distribution ramps up appears to be driving investor moods, as opposed to any differentiating factors regionally.

U.S. bonds fell back sharply last week, up to a percent or more in total return as interest rates ticked higher. However, treasuries outperformed investment-grade corporates. The bellwether 10-year treasury note yield crept back over the 1.0% level as the Georgia election results raised expectations for more government spending (as noted earlier). Floating rate bank loans ended the week as one of the few bond groups with positive returns in the U.S. Foreign bonds declined in both developed and emerging markets, as the U.S. again re-strengthened.

Commodities ticked higher along with other cyclical assets, bucking the headwind of the slightly stronger dollar. Energy led, coupled with gains in industrial metals, while precious metals fell back last week. The price of crude oil rose tipped over $50/barrel early in the week after Saudi Arabia unexpectedly announced a production cut of 1 mil. barrels/day for Feb. and March, offsetting slightly higher production for other nations. For the week, crude gained nearly 8% to over $52, followed by gains in natural gas.

Period ending 1/8/20211 Week (%)YTD (%)
DJIA1.661.66
S&P 5001.881.88
NASDAQ2.452.45
Russell 20005.935.93
MSCI-EAFE3.163.16
MSCI-EM4.794.79
BBgBarc U.S. Aggregate-0.94-0.94
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20200.090.130.360.931.65
1/8/20210.080.140.491.131.87

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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Year End Client Letter Now Posted!

Happy New Year!

This was certainly a year we’re happy to see in the rear-view mirror. While we know we have a bit of the old year’s business still to work through we’re looking forward to a more cheerful wrap up 12 months hence.

As we write this, we are still in the middle of the pandemic albeit one with a way forward as the vaccine administration gets underway. Somewhere between now and mid-year we’ll hopefully have enough folks vaccinated to start to see measurable progress in containing the virus and a consequent loosening of the many parts of the economy that have been held hostage.

As surprising as the reach and scope of the economic pain from the pandemic has been the market reaction. A sharp selloff in the spring turned into a robust rebound in share prices as investors lifted their attention from the all too grim present and began to concentrate on the shape of the future

If there was ever a compelling set of events to use as caution against trying to time the market this year provided just that. Folks that tried to sell on the way down were confounded by the sheer velocity of the downturn and those that sold in March missed an awful lot of gains before events would lead them to feel comfortable enough to re-enter the market.

As is our tradition for this time of year, we will take a couple of pages to give you a blow-by-blow of the major asset classes in your portfolio; what they have done, what we anticipate going forward, and how we have approached each. Whether you are a long-time client or a recent addition to our extended client family, we hope you will find this helpful….

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Weekly Economic Update

Economic Update 12-29-2020

  • On the shortened holiday week, economic data included a decline in personal income and spending, mixed results in housing, and weaker consumer confidence.
  • Global equity markets were down on net last week, as agreement on Congressional stimulus remained in limbo and Covid case counts remain high, along with a newly identified strain in the U.K. Bonds fared positively in the U.S. with lower interest rates, but hampered elsewhere due to a stronger dollar. Commodity prices generally fell last week.

U.S. stocks started the week down early, with the positivity surrounding the Congressional relief package, which was tempered later in the week with additional demands from the President for larger direct payments. Additionally, reports in the U.K. of a ‘mutant’ Covid strain, which appears to be more transmissible than the original, caused a bit of trepidation. This resulted in several nations restricting travelers from the U.K., adding to other lockdowns already in place. (Later claims that the current vaccines would be effective against these one-off strains appeared to alleviate some of the concern.)

By sector, conditions were mixed with financials and technology earning returns of just under a percent for the week. On the other hand, communications, consumer stocks, and utilities all declined nearly a percent. Real estate ticked higher, on the heels of lower interest rates. Small cap stocks continued to rally, as stimulus in the works is expected to positively affect that more economically-sensitive group.

Foreign stocks performed similarly to U.S. equities, with most regions lower, and not helped due to the impact of a stronger U.S. dollar. Other than Covid case counts and expected U.S. stimulus (assumed to have global impact through the broader supply chain), the reaching of a Brexit deal between the U.K. and Europe was a positive input, although offset by the U.K. ‘mutant’ Covid issue. More negatively, at least for emerging market equities, was the continued change in tone by the Chinese government toward Jack Ma and Alibaba, which began an anti-monopoly investigation into the firm. The timing appears to have coincided with his criticism of the Chinese communist government.

U.S. bonds were helped by a small decline in interest rates across the yield curve, with treasuries and investment-grade corporates earning positive returns. Bank loans and high yield ended flattish on the week, while foreign debt was held back by a stronger dollar, pushing returns into negative territory.

Commodities declined as the dollar ticker higher last week, with a gain in agricultural prices offset weaker returns from energy and metals. The price of crude oil fell by -2% on net to just over $48/barrel, while natural gas fell -6%.

Have a good week and Happy New Year. We’ve appreciated the chance to work with you in 2020, and look forward to a better (and hopefully more normal) 2021.

Period ending 12/25/20201 Week (%)YTD (%)
DJIA0.078.27
S&P 500-0.1516.71
NASDAQ0.3943.97
Russell 20001.7421.68
MSCI-EAFE-0.606.33
MSCI-EM-1.0412.61
BBgBarc U.S. Aggregate0.147.27
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20191.551.581.691.922.39
12/18/20200.080.130.390.951.70
12/25/20200.090.130.370.941.66

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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Weekly Economic Update

Economic Update 12-21-2020

  • Economic data for the week included declines in retail sales, industrial production, as well as in several regional manufacturing indexes. Jobless claims also ticked higher along with rising virus counts nationally.
  • Global equity markets rose last week, with continued easy economic policies announced and optimism over the new Covid vaccines. Bonds were down in the U.S. as rates ticked higher, while foreign bonds benefitted positively from a weaker dollar. Commodity prices rose broadly due to expectations for a global demand recovery, especially for energy and metals.

U.S. stocks fell back last week, as rising virus counts and a lack of progress in Congress about another stimulus package weighed on sentiment. In keeping with the broader market trends, energy was the sole winner last week, helped by higher oil prices and continued hopes for stronger economic demand next year. On the downside, financials and technology suffered the worst declines. Real estate also lagged, falling nearly -3%, but led by more severe declines in malls and lodging REITs. Small cap stocks also earned positive returns, again beating large caps.

Foreign stocks declined along with U.S. stocks last week, not helped by a stronger dollar. While Japan and the emerging markets only declined slightly, U.K. and European stocks fell further. Sentiment soured by the end of the week with rising virus counts, lockdowns, and as a year-end deadline for Brexit looms—with no agreement in sight. It appears at this point, absent a major breakthrough, that the U.K. and European Union could be dealing with each other through standard/default World Trade Organization rules, similar to how several other commonwealth nations (such as Australia) trade with Europe. While not the end of the world, several regional-specific issues remain unresolved, such as fishing rights around shared border areas. Emerging market results were led by commodity producers, such as Brazil and Russia, while those seen as being helped most by an upcoming vaccine, such as India, also fared well.

U.S. bonds fared well last week, with equities selling off mildly, as virus cases remain high and economic data showed signs of flattening. Treasuries fared best, although investment-grade corporates also fared positively. Foreign bonds in developed markets gained ground, with falling rates on the order of 0.10-0.20% outweighing the impact of a stronger dollar. The upcoming FOMC meeting this coming week is expected to result in little change in policy, but perhaps more veiled calls for additional fiscal stimulus.

Commodities earned positive returns across the board last week of over a percent on net, led by agriculture and energy, with industrial and precious metals earning lesser gains. The price of crude oil rose minimally to around $46.50/barrel, while Brent crude rose above $50—triggering positive sentiment around that round number again being reached. As has been the case over the last few weeks/months, positive news about the economy or vaccine distribution has been bullish for energy and industrial metals, especially, with setbacks affecting the group negatively. Precious metals remain the year-to-date leader (up 20%), but investors have rotated away from the group in recent months as risk has been embraced.

Period ending 12/18/20201 Week (%)YTD (%)
DJIA0.468.19
S&P 5001.2916.88
NASDAQ3.0743.41
Russell 20003.0919.60
MSCI-EAFE2.016.98
MSCI-EM0.8513.79
BBgBarc U.S. Aggregate-0.087.12
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20191.551.581.691.922.39
12/11/20200.080.110.370.901.63
12/18/20200.080.130.390.951.70

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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Fed Update

Fed Note:

The Federal Reserve made no policy changes at today’s meeting, as expected, keeping the fed funds rate at the zero bound of 0.00-0.25%. There were no dissents from committee members. The dollar swap lines and repurchase facility were also extended.

The formal statement was little changed, in terms of wording. The purchase of treasuries ($80 bil./mo.) and agency mortgages ($40 bil./mo.) will also continue until they make ‘substantial progress’ on their employment and inflation goals. There was initial speculation about the Fed potentially lengthening the average maturity of their treasury portfolio, in order to target the part of the yield curve most sensitive to consumer borrowing (and perhaps indirectly to keep U.S. borrowing rates contained), but this was not part of the official plan this month.

In the released summary of economic projections, GDP expectations were raised a bit for 2020, as well as for the next two years. The median unemployment rate was lowered, while expectations for inflation were raised a bit—all closer to trend pre-Covid. The ‘dot plot’ of fed funds rate expectations shows zero until at least 2022, with a few breakout opinions by 2023.

This is how the key Fed inputs are finishing the unusual 2020 year:

Economic growth: In keeping with the recovery starting in Q3 (annualized +33%, following the -31% drop in Q2), Q4 growth is expected to be in the ~5% range (although the Atlanta Fed’s estimate remains above 10%). However, more robust earlier estimates have fallen after the recent wave of Covid infections and restrictions in several populous states. Following these waves, now that emergency vaccine use has been approved, the trajectory of expected 2021 growth is almost completely reliant on vaccine distribution and acceptance. The eventual recovery of the economy is not really in dispute—the matter of debate remains the timeframe and near-term impact of lockdowns causing further delay. The current consensus for 2020 is negative low-single-digit growth, perhaps slightly better than -5%, followed by mid-single-digit expansion in 2021, and a gradual resumption back toward 2-3% trend growth in the years following. Regardless of the vaccine rollout details, it may take a few years to fully get back to a pre-Covid ‘normal’ (the definition of which also remains in flux). A recovery that moves faster than this could pressure the Fed to normalize rates higher more quickly; ongoing sluggishness could be enough rationale for pegging rates at zero for years.

Inflation: Last week, November CPI was reported as 1.2% for headline and 1.7% for core, on a trailing 12-month basis. Despite the improvement in economic growth, inflation has lagged behind. The Fed’s policy is targeted to this, and with little thus far to point to re-accelerating inflation, this indicator would push for rates staying accommodative for some time. They’ve indicated as much through their average inflation targeting policy, which is dovish in nature. Fears of future inflation brought on by the Fed and Congressional fiscal spending remain ‘out there,’ although it’s assumed a divided House/Senate may help keep spending in better check. The long-term debate about inflation is split between these fears of a spike due to the long period of easy monetary policy and unprecedented spending, offset by demographic and technological forces pointing to a continued secular period of tempered price growth.

Employment: Job numbers have followed an expected path, with a sharp drawdown in the spring, and recovery over the summer and fall. Recent reports have seen a flattening trend, coinciding with the above-mentioned restrictions and unwinding of one-off impacts such as census workers. Reacceleration in key services sectors such as tourism, hotels, air travel, as well as retail and education, will be key to the timing of how quickly unemployment declines back to prior pre-Covid lows. Unfortunately, due to the structure of the labor force, this may take longer to normalize than will the economy overall.

Investment markets have embraced the news of several effective Covid vaccines, with November’s equity performance ranking among the best single months over the past few decades, along with gains for commodities, and tighter spreads for corporate debt. Have they moved too far, too fast? That is always a question during times of positive or negative change. It is always about expectations. Just as markets can react to the worst consensus fears, they can also run in advance to the highest hopes. The reality often falls somewhere in the middle, as fundamentals catch up to sentiment (and valuations). With the Fed keeping rates low for an extended period, this input can result in somewhat higher warranted valuations—until rates rise again, that is, somewhere down the road.

Bond yields remain low across the board, from a historical perspective, on a nominal and after-inflation real basis. While there are some opinions that a faster recovery and changed Fed language could result in higher long-term rates and a steeper yield curve, the Fed has been careful about messaging during this sensitive period. It’s hard to see this changing in the near-term.

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Weekly Economic Update

Economic Update 12-14-2020

  • In a lighter week for economic data, releases included minor increases in producer and consumer prices, and higher-than-expected jobless claims as an uptick in Covid cases continues to weigh on the jobs market. Consumer sentiment improved with the Covid vaccine news, along with inflation expectations falling a bit.
  • Global stocks declined last week, as higher Covid case counts, lack of economic stimulus from the U.S. Congress, and upcoming deadline for Brexit weighed on investor sentiment. Bonds, on the other hand, fared well as interest rates retreated downward. Commodities gained across the board in keeping with a renewed trend of optimism for higher eventual post-pandemic demand in energy and metals.

U.S. stocks fell back last week, as rising virus counts and a lack of progress in Congress about another stimulus package weighed on sentiment. In keeping with the broader market trends, energy was the sole winner last week, helped by higher oil prices and continued hopes for stronger economic demand next year. On the downside, financials and technology suffered the worst declines. Real estate also lagged, falling nearly -3%, but led by more severe declines in malls and lodging REITs. Small cap stocks also earned positive returns, again beating large caps.

Foreign stocks declined along with U.S. stocks last week, not helped by a stronger dollar. While Japan and the emerging markets only declined slightly, U.K. and European stocks fell further. Sentiment soured by the end of the week with rising virus counts, lockdowns, and as a year-end deadline for Brexit looms—with no agreement in sight. It appears at this point, absent a major breakthrough, that the U.K. and European Union could be dealing with each other through standard/default World Trade Organization rules, similar to how several other commonwealth nations (such as Australia) trade with Europe. While not the end of the world, several regional-specific issues remain unresolved, such as fishing rights around shared border areas. Emerging market results were led by commodity producers, such as Brazil and Russia, while those seen as being helped most by an upcoming vaccine, such as India, also fared well.

U.S. bonds fared well last week, with equities selling off mildly, as virus cases remain high and economic data showed signs of flattening. Treasuries fared best, although investment-grade corporates also fared positively. Foreign bonds in developed markets gained ground, with falling rates on the order of 0.10-0.20% outweighing the impact of a stronger dollar. The upcoming FOMC meeting this coming week is expected to result in little change in policy, but perhaps more veiled calls for additional fiscal stimulus.

Commodities earned positive returns across the board last week of over a percent on net, led by agriculture and energy, with industrial and precious metals earning lesser gains. The price of crude oil rose minimally to around $46.50/barrel, while Brent crude rose above $50—triggering positive sentiment around that round number again being reached. As has been the case over the last few weeks/months, positive news about the economy or vaccine distribution has been bullish for energy and industrial metals, especially, with setbacks affecting the group negatively. Precious metals remain the year-to-date leader (up 20%), but investors have rotated away from the group in recent months as risk has been embraced.

Period ending 12/11/20201 Week (%)YTD (%)
DJIA-0.547.70
S&P 500-0.9515.39
NASDAQ-0.6939.14
Russell 20001.0316.02
MSCI-EAFE-0.514.87
MSCI-EM0.5312.83
BBgBarc U.S. Aggregate0.357.21
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20191.551.581.691.922.39
12/4/20200.090.160.420.971.73
12/11/20200.080.110.370.901.63

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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December 2020 Revision Announcement

As 2020 winds down, the election nearing completion and a vaccine for COVID-19 around the corner, LSA will be implementing revisions to the following portfolios: Private Client L100k, Socially Responsible, American Funds, Fidelity, Vanguard and all of the VA models.  These changes will be implemented for the NTF solutions as well.  The IPC is working on the revision rationale, as well as the revision video, and will be posting all the updates to the LSA Beta site this week.  Below you will find the targeted release schedule for each of the model series.

Posted Tuesday, December 8th, Private Client L100k, American Funds, Fidelity, and Vanguard – targeted trade date – Tuesday, December 15th.

Posted Wednesday, December 9th, JNL, JNL EA, Sammons – targeted trade date – Wednesday, December 16th.

*As a reminder, the Revision Explanation Presentation/Video will be posted in the “Portfolio News,” section on each of the platform home pages.

*Tax Efficient models will not be updated until the first quarter of 2021.

*LSA will be removing the NTF ETF models at the end of December.  With the major custodial platforms moving to a full NTF ETF platform there is no reason to continue to support the NTF ETF solutions we will only be providing the open model series.

Investment Rationale:

The markets have held up pretty well over this last quarter even after the latest modest pullback, perhaps the uncertainties caused by the virus and its related economic toll combined with the uncertainty of the elections. It’s important for us to remember that the presidency, as powerful a position as it is, has very little to do with the economy as a whole. Congress can push the needle with their fiscal policies certainly, but even then, it’s often more to do with what they don’t do that makes the difference. Now that the elections are almost at an end, and with the COVID-19 vaccines in production, there looks to be some closure to the uncertainty. With this, coupled with a congress that is looking to pass another round of stimulus, the LSA IPC is looking to address a little 2021 posturing in some of the models that were not impacted by the June updates.

Valuations today appear neither extremely cheap, nor outrageously expensive, and price in an optimistic economic and earnings recovery next year, which of course is possible. It’s important to not become complacent, and reassess that one’s current positioning is appropriate no matter the weeks and months ahead. This is important for potential volatility on the downside, if conditions don’t improve as quickly as markets hope or have already priced in. As importantly, it could also help avoid missing critical upside, since news on the medical and economic front could potentially be received very positively by global financial markets.  This is why the LSA IPC is making some updates to the models at this time.  These changes are looking to address safety and downside while taking advantage of some growth opportunities. 

Here are the core themes: 

  1. LSA is looking to continue increasing our Large Cap exposures with a stronger continued bias toward the growth side. Technology has been incredibly resilient through the recent pandemic and has provided an opportunity for growth within models.  LSA is looking to increase the focus on this opportunity and to take advantage of some of the price dislocation that continues to be attractive.
  2. As mentioned above, it is important to address upside opportunities, but with all of the uncertainty of our markets and the global economy, it is also important to continue to address the downside as well. The LSA IPC is looking to pair our increase in equities and growth with a treasury position.  Treasuries have served as a tremendous hedge to equities over time, which is why we are looking to pair the equity exposures appropriately with a treasury to help as the potential for volatility remains high for the next year or so. 
  3. At this time the LSA IPC continues reassessing our underweights to internationals and small caps as valuations continue to look a little more attractive. In previous model updates, LSA has been overweight large caps and in the international space has leaned more towards a global play.  As the health of the global economy continues to improve, we would expect to see these overweights start to neutralize.  Not all of these thoughts will be expressed in this round of updates, but will be at the top of list for potential updates in 2021. 

As the markets continue to look for clarity from COVID-19 and recent unrest in US social issues, LSA continues to believe that volatility is still of concern over the next 12 months.  Once again, much of the recent crisis has been masked by Congress and the Federal Reserve which has helped spur a tremendous recovery in 2020.  It is important that we continue to be diligent as these artificial tailwinds could quickly become headwinds as we watch an ever-growing deficit and an unemployment rate that is going to be difficult to continue to decrease at a pace like what we saw in the second and third quarter.  These market environments allow for the ability to reevaluate risk and cooler heads to identify opportunities in the markets which is the core goal of the recent model updates.

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Weeky Economic Update

Economic Update 12-07-2020

  • Economic data for the week included slightly weaker ISM manufacturing and services, although the underlying metrics continued to show expansion. The employment situation report for November showed a significant slowing of job growth compared to the recovery over the past six months, due to rising Covid cases.
  • U.S. equity markets led the globe last week, again reaching new highs, while foreign stocks earned positive results as well. Bonds declined in the U.S. as positive sentiment and stimulus hopes led to higher long-term interest rates, while a falling dollar helped foreign bonds. Commodities were mixed with less volatility than seen in recent weeks, as crude oil again climbed higher.

U.S. stocks again reached all-time highs, with sentiment driven by U.K. Covid vaccine approvals, and plans being outlined for vaccine distribution in late 2020 and into the first half of 2021, assuming U.S. FDA approvals are forthcoming. By Friday, the market appeared to react well to the disappointing nonfarm payroll report, not due to the weakness per se, but the rising hopes for additional Congressional stimulus by the end of the year. This was signaled by both parties, although the total likely amount has now fallen below $1 trillion.

Weekly sector results were led by a sharp increase in the shares of energy companies, followed by health care, in the expectation of global demand recovery with a Covid vaccine. Declines for utilities stocks brought up the rear.

November was the best single stock performance month in decades, with the S&P up 11%. Interestingly, the S&P 500 stock index performance has broadened in recent weeks, from only a handful of mega-cap growth stocks in the lead, to over 90% of the index members trading above their 200-day moving average (a common momentum benchmark). This type of strength has tended to be a positive sign, at least as opposed to more narrow leadership.

Foreign stocks earned positive returns, but lagged those in the U.S., despite the boost from the weaker dollar. The U.K. fared best, with a return of several percent, followed by middling results in Europe and emerging markets, while Japan lost a bit of ground. Returns remained cyclical abroad, with strength in commodity-producing countries such as Brazil and Mexico, along with South Korea. Chinese stocks were mixed last week, in keeping with strengthening U.S. restrictions on Chinese investments related to their military, as well as legislation passed by the U.S. House  U.S. calling for enhanced regulatory and accounting scrutiny for Chinese firms in order to retain their U.S. listing status.

U.S. bonds experienced weakness last week generally, as the same optimism for fiscal stimulus and vaccine distribution that has boosted equities, has also pushed interest rates higher on the long end of the yield curve. While both treasuries and investment-grade corporates experienced declines, high yield bonds and floating rate bank loans earned positive returns along with risky assets. A decline in the U.S. dollar of -1% helped push the return of foreign sovereign debt into positive territory, especially for emerging market local currency bonds.

The Treasury department has asked the Federal Reserve to end its credit facilities at year end, and return unused funds. While this wasn’t taken negatively, it does remove a bit of flexibility. The facilities weren’t heavily used, although the ‘forward guidance’ that a backstop was available if needed appeared far more powerful than the injection of funds physically.

Commodities were mixed for the week, with weaker prices in agriculture offset by gains for energy and metals. The price of crude oil ticked slightly higher to just over $46/barrel, with a moderate OPEC member agreement on early 2021 production designed to balance production with still-low demand. This offset a nearly -10% drop in natural gas, due to benign late fall weather conditions and high supplies on hand.

Period ending 12/4/20201 Week (%)YTD (%)
DJIA1.168.28
S&P 5001.7216.50
NASDAQ2.1440.10
Russell 20002.0414.84
MSCI-EAFE1.025.41
MSCI-EM1.6512.23
BBgBarc U.S. Aggregate-0.426.84
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20191.551.581.691.922.39
11/27/20200.090.160.370.841.57
12/4/20200.090.160.420.971.73

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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Weekly Economic Update

Economic Update 11-30-2020

  • In a shortened holiday week, economic data included stronger housing prices but a decline in sales, mixed personal income/spending results, and lower consumer sentiment as Covid cases again pick up.
  • U.S. and foreign equity markets both experienced gains last week, as positive sentiment continued. Bonds were mixed, with U.S. corporates and foreign debt also gaining. Commodities were mixed, with cyclically-sensitive energy and industrial metals seeing gains, offset by declines in precious metals.
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Weekly Economic Update

Economic Update 11-23-2020

  • Economic data for the week included increases in retail sales, industrial production, and several housing metrics; a pair of regional manufacturing indexes decelerated but remained solidly in expansion.
  • World equity markets moved in different directions last week, with U.S. stocks declining and foreign stocks rising. Bonds fared well, as interest rates globally declined. Commodities also gained along with higher crude oil and industrial metals prices.

U.S. stocks were mixed to lower last week, as early excitement over more good Covid vaccine news was offset by sharply rising cases across the country, dampening consumer and business activity (a high profile example was the physical shutdown of New York City schools—a close reminder for Wall Street traders). By sector, returns were mixed, with energy leading the pack, up several percent, with oil prices rebounding; this was followed by materials and industrials, which continued to represent the cyclical group. Lagging with negative returns were traditional defensives utilities, health care, and real estate. 

As was the case the prior week with Pfizer, positive news of Moderna’s mRNA-based Covid vaccine showed a high efficacy rate (95%) pushed stocks higher to begin the week. Additionally, it appears to be easier to store and transport (in standard refrigerator temperatures) than the Pfizer vaccine (needing far colder conditions, which create complications). The U.S. government has already pre-purchased 100 million doses, in part of an effort of world governments to ‘lock up’ access to vaccines, typically during the development process. Along with this announcement, Pfizer also adjusted their vaccine effectiveness rate upward from 90% to 95%, and applied for FDA emergency use authorization. As expected, the most positively affected stocks were those in the travel and entertainment groups.

Tesla will be added to the S&P 500 stock index, as committee members were hesitant to do for an extended period due to the company’s lack of profitability. Now that some profits have come through, S&P appears more willing to take the next step. It’s important to remember that even ‘passive’ indexes have at least one ‘active’ component—and sometimes several. Inclusion in the S&P series of indexes requires committee approval, after companies have met baseline metrics for profitability and liquidity, making this an ‘active’ decision. This is in contrast to indexes such as the Russell series, where inclusion is dependent on size alone, although original ‘style’ criteria were decided by committee members at some point.

Foreign stocks earned positive returns, bucking the weekly result in the United States—Japan and the emerging market groups led all others. Unsurprisingly, more commodity-oriented nations Brazil and Mexico led the way as hopes for 2021 improvement grew. Conditions in developed markets, such as Europe, appeared driven to a greater degree by vaccine hopes than current lockdowns—perhaps due to these occurring prior to those in the U.S. However, sentiment has been held back by the fact that a Eurozone fiscal aid package is being held up by vetoes by Poland and Hungary. In Asia, optimism followed the signing of the Regional Comprehensive Economic Partnership (RCEP) tariff-reduction trade pact, by 15 countries, from China to Australia.

U.S. bonds earned positive returns as rates ticked lower across the yield curve. Investment-grade corporates outperformed treasuries a bit, as spreads also narrowed during the week. A weaker U.S. dollar helped boost the returns for both developed and emerging market sovereign debt, earnings gains of up to a percent for the week.

Commodities broadly gained on the week in most major groups, led by increases of several percent each in industrial metals and energy, while precious metals declined slightly. Cyclical economic recovery hopes continue to remain high with the arrival of a vaccine. The price of crude oil rose by 5% to around $42.50/barrel, while natural gas declined by over -10%. OPEC and others have delayed a planned production increase in early 2021, which would have added to already high supplies.

Period ending 11/20/20201 Week (%)YTD (%)
DJIA-0.654.69
S&P 500-0.7311.95
NASDAQ0.2533.21
Russell 20002.388.28
MSCI-EAFE1.872.06
MSCI-EM1.768.49
BBgBarc U.S. Aggregate0.597.31
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20191.551.581.691.922.39
11/13/20200.090.170.410.891.65
11/20/20200.070.160.380.831.53

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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