Capital Growth

Below is a letter we recently sent to clients about how we are responding to the recent market selloff.

The stage is being set for what we internally call the “convertible trifecta.” The markets are uncertain right now. But when markets eventually calm, the team would expect to see the combined forces of equity upside, credit upside and convert valuation gaps closing, which can be very powerful on the way back up.

Major adjustments in capital markets around the globe have changed our long-term expected return forecasts for the 100+ assets we model. Before the corona crash we forecast long-term real returns for US equities to be only 1% a year. Now new, lower valuations suggest higher returns.

U.S. stocks ended lower Friday, capping a volatile week of swings both higher and lower, as investors reckoned with the increasing evidence of the COVID-19 pandemic’s economic toll.

The phrase “a picture paints a thousand words” seems truer than ever as images of lockdowns flood our newsfeeds. From the eerie emptiness of Time Square to closed retailers, there is concrete evidence that all are doing their part to combat the outbreak.

With the economy shut down, layoffs in the millions, and no clear visibility about the economic recovery post-pandemic, companies are going to become vastly more conservative on the use of their cash. Given that source of market liquidity is now gone, the market will have a much tougher time maintaining current levels, much less going higher.

During this horrible crisis, I feel very fortunate that “social distancing” is very practical and easy for my family and me. We are blessed to live in the country on a 20-acre estate with a private lake and a backyard that is steaming with wildlife.

Most of the bond market sold off in March as the coronavirus crisis intensified. But as past crises have shown, indiscriminate selloffs can generate big opportunities.

The US Federal Reserve announced it would buy exchange-traded funds (ETFs) as part of a range of measures to help support the markets in the wake of the coronavirus. David Mann, Head of Capital Markets, Global ETFs, examines which ETFs it might actually buy, and when.

Are you a safe distance from portfolio risk? As the stock market struggles, risk reduction becomes more appealing to many.

Allocating capital as the pandemic progresses; emerging markets may be next domino to fall.

Many consumers entered the crisis with no cushion.

While the US economy continues to suffer the wrath of the coronavirus, a recovery will eventually come. Franklin Equity Group's Grant Bowers provides his latest update on the US equity market, and what he and his team have an eye on with a long-term investment view.

A head-spinning 6.6 million Americans filed new claims for unemployment benefits this week bringing the two-week total to 10 million. That’s more than the combined populations of Los Angeles and Chicago.

The new coronavirus is touching us all, one way or another. The virus is infectious but so are the preventative measures. Today I’ll continue last week’s “postcard” format and at the end give you a lightening round of things I have come across, some good and some not. I hope some of what I tell you makes you as angry as it does me.

The S&P 500 was down 1.51% today after a mixed week. The index rose on Monday, began to drop on Tuesday and Wednesday, and flip-flopped on Thursday. It is down 2.08% since last Friday and is down 22.97% YTD.

Just about every facet of life has changed due to the coronavirus pandemic. For many, this has involved adapting to working from home. We share our best practices and tips to help you maintain your productivity—and your sanity.

March was a really tough month. After a terrible February, all major stock indices were down by double digits, leading to significant declines for the quarter as a whole. All of the major indices ended the month and quarter below their 200-day moving averages, often a sign of more trouble ahead.

The coronavirus crisis will change the world in many ways. Tony DeSpirito discusses its potential impact on ESG investing and how it may hasten an important trend for active investors.

The coronavirus has forced a number of behavior changes throughout societies across the globe, including how we work, shop and interact with others. Our Head of Equities Stephen Dover discusses how COVID-19 has impacted investor decisions, too.

Even though economic activity in many countries has dramatically slowed or stopped due to the coronavirus outbreak, Franklin Templeton Emerging Markets Equity’s Andrew Ness still thinks there’s underlying long-term potential in emerging markets. He shares the specifics of what he’s on the lookout for as an investor in this highly uncertain period, which eventually will pass.

This morning's employment report for March showed a 701K decrease in total nonfarm payrolls, which was well below the Investing.com forecast of -100K.

The Institute of Supply Management (ISM) has now released the March Non-Manufacturing Purchasing Managers' Index (PMI), also known as the ISM Services PMI. The headline Composite Index is at percent 52.5, down 4.8 from 57.3 last month. Today's number came in above the Investing.com forecast of 44.0 percent. 

How should investors think about the economy and asset values when faced with unprecedented uncertainty surrounding the effects of the coronavirus and a complete absence of guidance from analogies to the past? Read Howard Marks’s latest memo, in which he lays out the views of both the optimist and the worrier.

Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? Are we in the beginning stages of another secular bear?

Our baseline economic forecast is a U-shaped global recovery, but substantial unknowns remain.

With the Q4 GDP Third Estimate, we now have an updated look at the popular "Buffett Indicator" -- the ratio of corporate equities to GDP. The current reading is 156.0%, up from 144.9% the previous quarter.

Note: This update includes the Q4 GDP Third Estimate and the March close data.

Ed Rosenburg, American Century’s head of ETFs, sees opportunity.

Stocks dropped on Wednesday as investors focused on growing fears about the human and economic toll of COVID-19. The S&P 500 index lost 4.4% on Tuesday, and at the close of trading was down about 27% from its February peak.

U.S. companies have never had so much debt on their books as they do now.

As the world continues to grapple with the coronavirus, some areas of the market are showing signs of incremental improvement.

Matt provides a framework that he and his team use to make sense of the headlines and the price bids flashing on their monitors. His realistic, yet hopeful outlook provides a roadmap for successfully navigating this universal crisis together.

• How this environment stacks up in a 36-year value investing career
• 5 things we think are important for our investors
• What we are actually doing in our portfolios right now

Quick take: At the end of March the inflation-adjusted S&P 500 index price was 86% above its long-term trend, down from 130% the previous month.

About the only certainty in the stock market is that, over the long haul, over performance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.

Portfolios comprised of top-notch equities and bonds coming into the economic and market crises should do even better coming out of it.

We at Research Affiliates recently conducted our first virtual All Hands meeting after finding ourselves working from home in the wake of the COVID-19 crisis. As CIO, I responded to questions about our investment strategy. Katy Sherrerd, CEO, and Jeff Wilson, Head of Distribution, asked me to elaborate more broadly on my response to one of the questions submitted by email the day prior.

The world’s developing nations have yet to experience the full effects, both economic and humanitarian, of the pandemic.

Here is the latest update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly average of daily closes for the past month.

Quick take: Based on the March S&P 500 average of daily closes, the Crestmont P/E is 97% above its arithmetic mean and at the 96th percentile of this fourteen-plus-decade monthly metric.

CIO Larry Adam discusses the COVID-19 outbreak and emphasizes that investors should exercise patience, not panic.

To say that a lot has changed in the last month is a tremendous understatement. The markets are playing a weak supporting role to the worst healthcare challenge in our generation, as well as the worst economic problem since 2008.

As risk assets tumbled in late February and March, it intensified the focus on risk management: How can multi-asset strategies defend against turbulence while positioning for an eventual rebound? The answer: Be ready to adapt—and to do it quickly.

It’s been said before, but the truth appears to be this crisis is very different than others we’ve experienced. It's not an asset bubble tied to exuberance, greed, default, fraud or mismanagement of a country, currencies or anything else in our manmade economic system.

Even with all the benefits attributable to closed-end funds—intraday trading, low financing costs of leverage, ability to be fully invested, and consistent source of income—they have some idiosyncrasies that present challenges, especially during extreme volatility

From its all-time high on February 19, the S&P 500 hit a bottom of 2,237 on March 23. But it will go lower this year, according to Jeffrey Gundlach, and only then will he buy stocks.

Most ETFs focused on companies with above-average marks for environmental, social and governance practices have outperformed this year.

The March US Manufacturing Purchasing Managers' Index conducted by Markit came in at 48.5, down 2.2 from the 50.7 final February figure. Markit's Manufacturing PMI is a diffusion index: A reading above 50 indicates expansion in the sector; below 50 indicates contraction.

While times like these are challenging for investors, we believe they can also help sharpen conviction in underlying investments. We have not made any wholesale changes. With a longer-term approach to investing, we believe the fear of others will continue to present us with attractive opportunities.

Valid until the market close on April 30, 2020.

The S&P 500 closed March with a monthly loss of 12.51% after a loss of 8.41% in February. All three S&P 500 MAs are signaling "cash" and four of five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), Vanguard FTSE All-World ETF (VEU), and PowerShares DB Commodity Index (DBC) — are signaling "cash".

We have recently been reminded how important it is to incorporate defensive strategies into our clients’ portfolios to help weather the storm of turbulent markets. After an extended bull market of over 10 years, we see again that significant market corrections can be triggered by various factors ─ and we often don’t see them coming. For this reason, we must attempt to always be prepared. Certain asset classes, by their nature, will react more sharply during highly volatile times, while others can provide a way to stay in the markets with a more defensive stance.

Please join Direxion for this informative webcast to learn about various strategies that strive to offer stability to your portfolio. Session topics will include:

• Finding the asset classes that tend to offer more stability during volatile markets
• Exploring how a high-quality equity strategy may be prudent to help dampen volatility
• Applying sensible hedging strategies to offset anticipated equity losses

Additionally, we will hear from Astoria Portfolio Advisors’ John Davi regarding their economic outlook and market perspective for these historic times.

In a typical recession, the global economy tends to have large imbalances that take a long time to unwind, such as a housing bubble or overinvestment by businesses. This time the global economy is experiencing a shock, rather than the natural end result of a slow build-up of excesses.

Following these guidelines can help equity investors navigate the uncertainty created by the COVID-19 pandemic when selecting stocks and positioning portfolios.

Hope is not stupid. My colleague, Paul Eitelman, did a nice job yesterday preparing our clients for the likely horrible news that will most likely greet us for the month of April each and every morning. Today, I would like to take a moment to talk about reasons for hope.

The pace of government and private sector response will likely be slower than we may like, but we have the collective knowledge to address the pandemic, including support to individuals and businesses.

With today's release of the January S&P/Case-Shiller Home Price Index, we learned that seasonally adjusted home prices for the benchmark 20-city index were up 0.31% month over month which is cut to -0.04% with inflation adjustment.

The year after I graduated from college, the movie Animal House debuted in 1981. With everything falling apart for the Delta fraternity, including grades and double-triple probation, all looked lost. At the point when others would give up, senior fraternity member, John Blutarsky, gave a spirited call to arms by reminding everyone that the U.S. didn’t give up when our Naval operations at Pearl Harbor were bombed on December 7, 1941.

Predicting the stock market at a time like this is hard. To do so well, we would have to predict the direct effects on the economy of the COVID-19 pandemic, as well as all the real and psychological effects of the pandemic of financial anxiety. The two are different, but inseparable.

Much will depend on how fast businesses bring back jobs.

Since the end of 1927, the index that ultimately became the S&P 500 has experienced 14 separate bear runs.

The $2.2 trillion stimulus is the biggest ever, but Congress will likely be forced to do even more.

The headline number of 120.0 was a decrease from the final reading of 132.6 for February. Today's number was above the Investing.com consensus of 110.0.

To help support investment-grade corporate bond market liquidity, the Federal Reserve introduced two facilities March 23: the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF).

The latest Chicago Purchasing Manager's Index, or the Chicago Business Barometer, fell to 47.8 in March from 49.0 in February, which is in contraction territory. Values above 50.0 indicate expanding manufacturing activity.

The consequences of policymakers returning to the same tools employed in the financial crisis.

Uncertainty continues to dominate global securities markets and heightened volatility is the result. Feifei Li, partner and head of equities, asks Rob Arnott, the founder and chairman of Research Affiliates, about the implications of increased volatility on investment strategies and where investors can find the best opportunities.

Since the market downturn began, TD Ameritrade has seen new-account openings for its automated investing platform jump 150%.

Here is an advance preview of the monthly moving averages we track after the close of the last business day of the month.

The US economy will likely struggle temporarily, but the combination of aggressive monetary policy and substantial fiscal stimulus should deter the worst case scenarios from occurring. These efforts will serve as a ‘bridge’ to a place not too far in the future (hopefully June) where the virus is contained, a therapeutic response is developed and the economy returns to normality.

Rebalancing is a case where inaction creates risk to policy in volatile times. One of the most critical rebalancing points of the past decade is ahead of us. So now what?

I do feel strongly that we are living through a generation-defining moment that too many are only now starting to grasp.

Not everyone sees the bottom as necessarily reached.

Today the National Association of Realtors released the February data for their Pending Home Sales Index. According to the National Association of Realtors®, "Pending home sales rose in February, climbing for the second consecutive month."

With the most dramatic part of the storm hopefully over, the question is whether the market has bottomed. When is the recovery? Before we get into how to visualize market recovery, let’s offer some perspective on the recovery of the emotional trauma.

The coronavirus will accelerate the changes to the wealth management industry predicted by McKinsey & Co.