LSA Connect

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

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

*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.

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.

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

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.

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.

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

Economic Update 11-16-2020

• In a light week for economic data, releases included slight increases in producer and consumer prices, slow improvements for labor, and weaker consumer sentiment.

• Global equity markets rallied strongly upon the more solidified U.S. election results from the prior week, and the announcement of promising Covid vaccine trials. Bonds fell back in keeping with higher interest rates, and foreign bonds from a stronger dollar. Commodities also rallied, with oil prices following expected improvement in petroleum demand.

Fed Note:

The Federal Reserve Open Market Committee took no action at their early November meeting, keeping policy unchanged (fed funds rate at 0.00-0.25%), with ongoing stimulative bond purchases and liquidity facilities staying in place to combat the negative economic impacts of the pandemic. There were no dissents.

Although Fed comments were a bit more bearish as of late, the formal statement was little changed in content, with economic growth and employment prospects held back by the pandemic. Descriptions of ‘continued to recover’ replaced ‘picked up,’ and overall financial conditions ‘remain accommodative,’ replaced ‘have improved in recent months.’ There were some thoughts that the Fed might add additional stimulus buying of some sort, similar to the enhancements by the Bank of England this week. However, unlike the U.K., the Fed has continued to express hesitation to even consider the concept of negative rates.

As for the primary mandates:

Fed Note:

The Federal Reserve Open Market Committee took no action at their early November meeting, keeping policy unchanged (fed funds rate at 0.00-0.25%), with ongoing stimulative bond purchases and liquidity facilities staying in place to combat the negative economic impacts of the pandemic. There were no dissents.

Although Fed comments were a bit more bearish as of late, the formal statement was little changed in content, with economic growth and employment prospects held back by the pandemic. Descriptions of ‘continued to recover’ replaced ‘picked up,’ and overall financial conditions ‘remain accommodative,’ replaced ‘have improved in recent months.’ There were some thoughts that the Fed might add additional stimulus buying of some sort, similar to the enhancements by the Bank of England this week. However, unlike the U.K., the Fed has continued to express hesitation to even consider the concept of negative rates.

As for the primary mandates:

Economic growth: Last week, 3^rd quarter U.S. GDP increased by an annualized 33%, which nearly mirrored the -31% decline of Q2. This is the ‘V-shape’ many economists have been discussing, although it doesn’t reflect the broad nuances between quickly recovering sectors (such as industrials/manufacturing) and service groups (restaurants, travel, and leisure). Expectations for Q4 remain higher than average, but far less dramatic, at 3-5% or so—largely dependent on the path of virus cases, any additional lockdowns, and stimulus that could surface in coming months to boost consumption.

Inflation: The year-over-year Consumer Price Index reading from September showed a rise of 1.4% (headline) and 1.7% (core, ex-food and energy). These relatively low inflation levels have prompted the Fed to adopt a new ‘average inflation targeting’ policy. This allows for shortfalls in inflation (like we have now, under 2%) be potentially offset by letting inflation run ‘hot’ (above 2%) for a time—assuming the long-term average of 2% will be achieved. However, this hasn’t been tried before, so its effectiveness remains to be determined. One risk is that underlying factors keeping inflation depressed, such as demographics and technological change, could keep inflation readings low for a significant time. How will this affect Fed policy if low inflation becomes persistent and doesn’t bounce back as hoped?

Employment: The labor market has improved, in lockstep with industries that have returned to active operations. Unfortunately, many lower-wage workers, largely in service industries, remain distressed with food services, travel, and leisure closed or under far reduced operation in many areas. Of course, repair in these segments is dependent on the resolution of the pandemic. In the meantime, the Fed has now created more of an asymmetric policy response to labor, noting that it will focus more on employment shortfalls than it will on pulling back on easing should the economy reach full employment. This more dovish policy also raises questions about long-term effects, as does any movement away from symmetric policy.

A national election shouldn’t have an impact on Fed policy directly, but it can obviously alter the backdrop. The lack of a ‘blue wave,’ and higher probability of retention of the Senate by Republicans, would result in more of a status quo scenario of split government. This would reduce the likelihood of more extreme policies, such as tax increases, an anti-corporate regulatory environment, or massive spending—all of which were concerns of financial markets.

Shorter-term sentiment has also been swayed heavily by stopgaps like fiscal stimulus, which Congress is expected to revisit again now that the campaign season is over. But there are no guarantees, as worst-case estimates were calling for another stimulus plan to be agreed upon as late as early 2021. The amount of stimulus is also to be determined, as a ‘blue wave’ scenario was expected to call for up to $2-3 tril., while a status quo package could struggle to exceed $1 tril. The Federal Reserve, by its own admission, has largely reached the boundaries of what it can accomplish through monetary policy, with more than a few hints from officials pointing to Congressional stimulus as the best vehicle for aid to the broader U.S. population. The risk, of course, is that smaller stimulus could result in more tempered growth in the near-term—and perhaps lesser need for the Fed to raise rates more quickly than they first anticipated (relative to the massive stimulus proposed under a ‘blue wave’ scenario, for example, which could have moved up the Fed’s timetable).

The seemingly dramatic V-shaped recovery growth seen in Q3 is likely to morph into a slower trajectory of recovery into Q4 and early 2021, although focus remains on the timing of a vaccine of some sort and its public distribution (which could end up being a full-year 2021 event). The longer a downturn lasts, the greater the risks of permanent economic damage, so a recovery of faster speed is of great interest. Financial markets appear to be pricing in a 2021-22 solution to the Covid problem, although volatility has quickly surfaced when this premise has been threated, such as a winter second wave, which has already seemed to hit Europe. As it stands, low interest rates have pulled down expected returns for cash and fixed income, forcing investors to take on credit or equity risk. While headline market multiples remain somewhat elevated, due to the success of several large-cap tech and communications companies (which account for about 40% of the index at this point), lower valuations for other segments remained tied to their more cyclical nature and less certain prospects, but also wider recovery opportunities ultimately.

Economic Update 11-02-2020

• Economic data for the week included U.S. GDP for the 3^rd quarter that rebounded in similar fashion to expectations, relative strength in areas such as personal income and durable goods, while housing data and consumer sentiment were mixed.

• Global markets suffered their worst few sessions in months last week, as rising Covid cases in both the U.S. and especially Europe cast doubt on the near-term economic recovery. Bonds were mixed, with safe havens faring well, but foreign issues negatively affected by a strong U.S. dollar. Commodities also declined modestly, with lower oil prices pulling down the rest of the group.

Economic Update 10-26-2020

• Economic data for the week included continued strength in housing data, an improvement in jobless claims, as well as continued growth in the index of leading economic indicators, albeit at a decelerated rate from the past few months.
• U.S. equity markets declined with continued uncertainty over a Congressional stimulus package; foreign stocks echoed this sentiment but were also pulled down by another wave of Covid cases. Bonds fell back along with higher interest rates, tied to the size of the pending stimulus. Commodities were mixed with oil falling back, but offset by higher agricultural prices.