LSA Connect

As the new administration begins to take over and we continue to reopen from COVID-19 concerns, as vaccines find their way into more arms,  LSA has implemented revisions to the following portfolios: DFA, DFA Blended, Private Client Blended , ETF and, ETF Tactical.  These changes have been implemented for the NTF solutions as well for the PC Blended models.  The LSA IPC has posted our 2021 Outlook presentation and video to help support the rational around the recent changes.  These are the only models being updated at this time.  

Posted Monday, February 15^th, DFA and DFA Blended – targeted trade date – Friday, February 19^th. 

Posted Tuesday, February 16^th, Private Client Blended – targeted trade date – Monday February 22^nd. 

Posted Wednesday, February 17^th, ETF and ETF Tactical– targeted trade date – Tuesday,  February 23^rd. 

*The PC Blended 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: 

Economic Update 2-16-2021

• Economic data for the week included inflation that continued to rise slightly (due to commodity prices largely), but still tempered levels on a trailing year basis. Labor metrics improved a bit, but remain challenged relative to pre-Covid levels.

• Global stock markets experienced a positive week, with foreign outperforming U.S. equity markets. Domestic bonds fell back as interest rates ticked higher, while foreign bonds benefited from a weaker dollar. Commodities rose across the board, with strong demand and supply concerns, particularly for crude oil.

Economic Update 2-8-2021

• Economic data for the week included slightly weaker results for manufacturing, but a stronger report for services. The employment situation report for January was disappointing, but other labor reports featured a few bright spots.

• Global equity markets bounced back sharply last week, with U.S. outperforming foreign by a bit. However, higher-quality bonds fell back in keeping with rising interest rates. Commodity prices rose due to spikes in the prices for crude oil and natural gas.

Economic Update 2-1-2021

• Economic data for the week included no action by the Federal Reserve, a 4^th quarter GDP report that came in largely in line with expectations, continued strength in the housing market, and jobless claims that came in a bit better.

• Global equity markets experienced their worst week in a few months, with ongoing fears of economic slowing due to continued virus cases, in addition to some unique trading in certain U.S. stocks that raised volumes. Bonds were little changed despite that weakness in risk assets. Commodities were slightly higher due to tighter agricultural inventories.

The Federal Reserve made no policy changes at today’s meeting, as expected. The fed funds rate was kept at the zero bound of 0.00-0.25%.

The formal statement was little changed, noting that the pace of recovery is moderating, with ‘weakness concentrated in the sectors most adversely affected by the pandemic.’ There were no dissents. They did note that the overnight repo facility will be closed down by February, as it appears it’s no longer needed (it had low volume as of late). There was no change to the language about staying accommodative. Much of the speculation before the meeting was centered on trying to gauge the Fed’s timetable for asset purchases (on adding to the purchases and/or when they’ll end), but there was no clarity on this. Also, there have been calls for the Fed and U.S. Treasury to ‘lock in’ low financing rates by extending the average maturities of the portfolio and move issuance to new debt to longer maturities, including perhaps issuing a 50-year bond, as other nations have, but no announcement as of yet.

This is how the key Fed inputs look in early 2021:

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.

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.

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.

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

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….

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.

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

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.