Weekly Economic Update

Economic Update 8-03-2020

  • Economic data for the week included the Federal Reserve keeping monetary policy unchanged and accommodative, GDP for the 2ndquarter came in showing historical weakness as expected, jobless claims remained elevated, while housing data showed signs of life with building activity picking up and prices steady due to tight market inventory.
  • U.S. equity markets gained, while foreign stocks experienced mixed results, as returns were largely sector-dependent. Bonds gained as interest rates ticked downward, especially outside of the U.S. as the dollar declined last week. Commodities were mixed, with energy down and metals higher.

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Fed Note

The Federal Reserve made no key policy changes in their July meeting, as expected, keeping the fed funds rate at the lower bound of 0.00-0.25%. Earlier this week, the pandemic-based emergency liquidity/lending programs were extended until at least the end of 2020, and dollar swap lines for longer.

The formal statement noted some pickup in economic activity, but noted continued concerns over the human and economic risks posed by Covid. They expect to maintain this target level until substantial repair has occurred. At the risk of stating the obvious, the Fed’s opinion is best summarized by the newly-added comment, ‘The path of the economy will depend significantly on the course of the virus.’

The official indicators remain little changed since the pandemic began:

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Weekly Economic Update

Economic Update 7-27-2020

  • Economic data for the week included stronger results for housing prices and sales activity, some of which was due to continued tight inventories. The index of leading economic indicators also showed signs of improvement. However, jobless claims rose, which disappointed relative to expectations.
  • U.S. equity markets lost ground last week, while developed foreign markets offered mixed results, and emerging markets rallied a bit. Bonds also fared well as interest rates declined further. Commodities rose on the back of energy and precious metals.

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Weekly Economic Update

Economic Update 7-20-2020

  • Economic data last week included rebounds in retail sales, industrial production, and housing. Inflation metrics also showed a small creep up on prices for certain goods. Manufacturing data was mixed, while consumer sentiment weakened slightly.
  • Equities in developed nations around the globe generally gained, with hopes for a trough in economic growth and stock earnings, in addition to positive Covid vaccine tests. U.S. treasury bonds were flattish, while corporate credit and foreign bonds rallied. Commodities were little changed for the week on net.

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Weekly Economic Update

Economic Update 7-13-2020

  • A light calendar of economic data for the week included a record increase in non-manufacturing, lower producer prices, and stronger job openings.
  • Global equity markets rose last week, as stronger economic data outweighed mixed results of pandemic infections around the world. Bonds fared well with credit spreads contracting in the U.S., and weaker dollar helping foreign bonds. Commodities were generally higher due to strength in industrial metals, while crude oil prices were little changed.

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Weekly Economic Update

Economic Update 7-6-2020

 

  • On a shortened holiday week, economic data included sharp improvement in manufacturing, as well as in the June employment situation report. Housing and consumer confidence also showed promise, as a variety of data points appear to be rebounding from extremely low levels.
  • Global equity markets gained, with stronger economic news; U.S. stocks outperformed those abroad. Bonds were mixed to higher as interest rates were little changed, but credit outperformed. Commodities rose broadly, including increases in the prices of crude oil and natural gas.

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Weekly Economic Update

Economic Update 6-29-2020

  • Economic data last week included higher than expected durable goods orders, along with mixed housing and jobless claims data. Inflation results remain tempered, as expected from low consumer demand.
  • U.S. equity markets fell sharply last week with a continued rise in Covid infections in newly re-opened states, while foreign stocks fared generally better, with more tempered declines. Bonds were mixed, with gains due to investor flows toward treasuries, and weakness in lower quality corporate credit. Commodities were mixed, with the price of crude oil falling by a few percent.

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Weekly Economic Update

Economic Update 6-22-2020

  • Economic data continued to rebound last week from the troughs of commercial activity during lockdowns. Strength was pronounced in retail sales and industrial production, as well as carryover into the index of leading economic indicators.
  • U.S. and foreign equity markets gained as economic results continued to improve along with business reopenings. Bonds were little changed, although corporates rallied from additional Fed intervention. Commodities were led by a sharp rise in crude oil prices back toward more normal levels.

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Weekly Economic Update

Economic Update 6-15-2020

  • Economic data for the week included the conclusion of the FOMC, where no monetary policy action was taken but the overall tone remained somber. In keeping with Covid-related economic disruptions, several inflation measures saw deceleration, consumer sentiment improved, while employment conditions continue show multi-decade weakness.
  • U.S. equity markets fell around the globe with a somber assessment by the U.S. Federal Reserve, and an increase in new Covid cases in some regions. Foreign markets followed suit, albeit to a lesser degree. Treasury bonds fared well in the flight from risk, outperforming corporates. Commodities lost ground due to another pullback in energy prices.

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Fed Note

Fed Note:

Again, as expected, the FOMC kept the fed funds interest rate steady at a lower-band target of 0.00-0.25%. Without dipping into the unchartered and controversial waters of negative rates, this is as far as they can go.

The formal statement remained bleak in tone, with an outlook for growth extremely challenged due to Covid, not to mention global human suffering and loss of employment; however, some improvement at the margin as the result of government stimulus was noted. Their economic projections noted a mid-single digit expected decline of 2020 GDP, with little change expected in fed funds rate policy for the next 2-3 years. Due to the large degree of medical uncertainty, the Fed appears to be focused on providing accommodation as needed to bridge the gap between Covid economic shutdowns and an eventual recovery; although some observers have raised concerns over tipping the balance toward providing too much, keeping interest rates low for too long, and risking asset pricing bubbles or inflation at some point.

It wasn’t mentioned in the formal policy statement, but there has been increasing talk of the Fed turning to a concept called ‘yield curve control’. This sounds elaborate, but it’s essentially a more targeted version of quantitative easing, and is not a new tool. In World War II, the Fed capped short rates at 0.375% (really 3/8%—fractions were used for bond quotes back then) and long rates at 2.5%. This was done to keep borrowing costs down, maintain a positive-sloping yield curve, and set future market expectations. How would this work? The Fed would essentially engineer purchases to cap rates at a certain level. For example, if the 10-year treasury cap was set at 2.0%, if market activity caused rates to drift up toward 2.1%, the Fed would step in, buying bonds, which would drive prices up and yields down. And repeat as needed. If rates fell, however, to 1.8%, it’s debatable whether action would be taken since lower rates could be seen as preferable. This is just one example; it might work differently in practice. Other central banks, such as Japan, have been doing this for many years with mixed reviews. It may provide a way to keep yields down, though, using a more targeted level of new debt as opposed to a ‘shotgun’ approach.

The official indicators remain similar to the last meeting—a complete reversal of conditions earlier in the year:

 

Economic growth: Beginning with the first signs of strain in March, U.S./global GDP has sunk to levels not seen since the financial crisis of 2008, and by some magnitude, the 1930s Great Depression. The speed of the downturn, brought on by Covid-preemptive shutdowns, has also been unprecedented. The decline in U.S. growth in Q2 is expected to fall somewhere between -30% and -50% on an annualized basis (that wide range itself is a strange case, with usually finely-tuned measuring tools going out the window). The saving grace is the expected temporary nature of the extreme drop, with a recovery maybe not being the ‘V’ shape some hoped for, but perhaps a ‘U’. This would mean a mid-year troughing of activity, and gradual pickup in later 2020 and early 2021. This doesn’t mean there won’t be damage, with defaults and bankruptcies rising, despite the flood of government monetary and fiscal stimulus. However, the gradual reopening of regions and industries has generated some optimism that the worst is behind us. Nevertheless, full-year 2020 economic growth appears to be heading somewhere around the -5% range, which the Fed itself noted, with 2021-2022 expected to show stronger recovery trajectory. The timing and magnitude of recovery numbers remain in flux.

Inflation: One notable tendency of recessions is inflation falling off a cliff, due to a softening of aggregate demand. This has happened under Covid as well, with headline 12-month inflation rates declining from near-Fed target 2.0% down to 0.1% for headline CPI (affected by oil prices) and 1.2% for core, as of this morning. However, offsetting this weaker demand are supply chain disruptions, affecting food distribution and creating shortages in some consumer products, leading to higher prices in those areas. Some worry that the flood of stimulus not only in the U.S., but around the world, may act as a catalyst for higher monetary-based inflation. This is far longer debate, to be hashed out in years to come.

Employment: Prior to Covid, the reversal from decades-low sub-4% unemployment early in the year, to a Great Depression-like spike, would have never been believed. The nature of job loss is important, in that many of these are expected to be temporary layoffs as officials completely closed down certain portions of the economy preemptively, with hopes of a gradual reopen as soon as possible. This explains the massive jobless claims numbers, while other small businesses have been kept afloat with government assistance, as a ‘bridge’ to the other side back to normalcy. (There are also some measurement issues affecting how government statistics classify ‘furlough’ versus ‘layoff,’ etc.) The timeline of this return to normal remains fluid, controlled by the virus’ path, but re-opening is gradually widening nationally. This is good news from at least an economic front, as the longer a shutdown lasts, the more difficult it can be to sustain traction in business sustainability and worker skills. As it stands, it’s estimated that the unemployment rate may still be as high as 10% by the end of this year, and stay the mid- to higher-single digits in 2021.

 

The investment world has experienced a roller-coaster of its own, with the steepest/fastest decline in decades (stocks down near -35%), followed by one of the fastest recoveries (near +45%). Not that we need another one, but this serves as a reminder that financial markets look ahead to hopes and dreams for the future, but aren’t always an accurate mirror of the present. This is again the case, with analysts essentially ‘throwing away’ 2020, and looking to 2021-22 for a resumption of growth estimates. The future path remains very dependent on Covid, the retreat/persistence of which may drive economic growth, employment, company earnings, credit health, and additional government actions (the latter of which drive the critical interest rate inputs).

 

 

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Weekly Economic Update

Economic Update 6-08-2020

  • Economic data released last week continued to show broad shutdown-based weakness over the past several months, in manufacturing, services, construction, and employment. However, some signs of improvement are being seen on the margin, which have been taken positively by financial markets.
  • U.S. equity markets gained with signs of economic recovery and a strong jobs report later in the week; foreign markets moved higher to an even greater degree. Bonds lagged with interest rates ticking higher on this same strength. Commodities rose with another strong recovery in crude oil, as producing nations discussed further supply cuts and demand is up.

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June 2020 Revision Announcement

LSA June 2020 Revision Announcement

As the economy begins to reopen from COVID-19 concerns, LSA has implemented revisions to the following portfolios: Private Client, PC Tax Eff, PC Traditional, PC Blended, ETF, ETF Tactical, PC Income Strat, PC Income Focused. These changes have been implemented for the NTF solutions as well. IPC has posted the COVID-19 Part IV presentation and video to help support the rationale around the recent changes. The LSA IPC will be addressing all other models in the coming weeks.

Posted Tuesday, June 2nd, Private Client, PC Traditional, PC Blended, ETF – Targeted trade date – Tuesday June 9th.

Posted Thursday, June 4th, ETF Tactical, PC Tax Eff, PC Income Focused, PC Income Strat – Targeted trade date – Thursday, June 11th.

*The Mutual Fund and ETF revisions will impact the NTF models as well.

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

Investment Rationale:

In past cycles, equity bear markets and subsequent recoveries have unfolded over months, not weeks. This more recent volatility event was different on that front. Compared to how trading was conducted decades ago, the current flood of news through electronic sources, institutional algorithmic trading systems, and fast (and now largely free) retail trading has generated higher volumes. By adding low-cost market, factor, and thematic exchange-traded funds to the mix, the ease in implementing exposures may also be exacerbating the day-to-day volatility markets experience. This created a few hiccups in bond markets, where underlying bond holdings are far less liquid, causing the fewer offered exchange-traded products to act as a ‘safety value’ for price discovery and liquidity. This function has also added to volatility, and no doubt was a factor in the Fed’s decision to provide liquidity and buying power to these markets—a validation of their widespread usage and growing importance to financial market health.

In terms of pricing today, many market strategists are in agreement that where we go from here remains heavily dependent on the medical landscape. This makes the situation more fluid and more of a wildcard than we’ve been used to. In normal downturns, even if economic forecasts aren’t perfect, some modeling can be done to provide a rough framework for recovery. In this case, the depth and length of the downturn is likely very much dependent on the spread/waning of the virus and the global economies to get back to business as usual.

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