Daily Archives: April 28, 2020

The Markets This Week

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by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most global equity markets moved modestly lower last week as updated manufacturing data came in at record low levels and an additional 4.4 million Americans filed for unemployment insurance. In the past five weeks, over 26 million people have filed for unemployment benefits, which represents about 16% of the U.S. labor force. Furthermore, the supply and demand imbalances that the global shutdown has created in the economy have been enormous, particularly in some commodity markets. Global stay-at-home orders have evaporated the demand for oil, and storage facilities are nearing full capacity. On Monday afternoon, oil prices turned negative for the first time in history as traders were forced to pay counterparties to take barrels off their hands as storage costs skyrocketed. Prices stabilized a bit as the week progressed, but many investors have understandably been asking how such price fluctuations could be possible. The intricacies of the oil markets are quite complex, but the core of the issue is the imbalance between supply and demand, combined with only limited storage capacity in the supply chain. As oil has continued to be pulled from the ground despite limited demand for the final product, storage facilities have approached full capacity. Oil contracts between buyers and sellers settle with physical delivery of the product, and buyers must pay for the storage. But with storage facilities at full capacity, these costs have skyrocketed.

Despite the eye-catching economic data and significant dislocations in commodities prices, equity markets have recovered strongly from their March lows as a result of rising optimism surrounding the reopening of global economies. However, any such reopening must be implemented carefully and in multiple stages. We expect this to be a long process, with additional bouts of market volatility along the way. The resumption of “normalized” economic activity will not occur at the “flip of a switch,” as it will also require a recovery of confidence within society, which will take time. Thus, the ultimate economic recovery will likely not be fully achievable without a solution from the medical community (via vaccine or effective therapeutic). Most credible sources seem to suggest that such a solution is more likely to arrive in 2021 than in 2020, setting the stage for a potentially longer event than some optimists seem to anticipate. However, we continue to remind investors that while its effects may be with us for another year or more, the COVID-19 pandemic will be transitory in nature. As long-term investors, it is important to remain focused on the temporary nature of these challenges and remember that the long-term earnings power of markets will remain intact. 

The Numbers & “Heat Map”

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THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Interest Rates: Federal Reserve, Mortgage Bankers Association

MARKET HEAT MAP
The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.

US ECONOMY

CONSUMER HEALTH

VERY NEGATIVE

The consumer has been the bedrock of the US economy through much of the current expansion. However, we have further reduced our grade to VERY NEGATIVE as a result of the unprecedented social distancing and quarantining efforts currently being employed to fight the spread of COVID-19.

CORPORATE EARNINGS

VERY NEGATIVE

 Coming into the year, analysts were expecting mid to single digit earnings growth, but the spread of COVID-19 is likely to have a substantial impact on near-term earnings forecasts. However, earnings could bounce back quickly once the pandemic has run its course.

EMPLOYMENT

VERY NEGATIVE

We expect continued job losses due to the suppression of economic activity necessary to combat the spread of COVID-19.

INFLATION

POSITIVE

Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. The deflationary environment created by COVID-19 should provide additional room for robust stimulus from both fiscal and monetary policy initiatives.

FISCAL POLICY

VERY POSITIVE

The CARES Act provides approximately $2.2 trillion of support for businesses and families that are impacted by the economic fallout of the COVID-19 pandemic. This is by far the largest fiscal stimulus package ever passed, and we anticipate the possibility of additional support once we emerge on the other side of the “curve”.

MONETARY POLICY

VERY POSITIVE

In response to the threat of COVID-19, the Federal Reserve has implemented two emergency rate cuts and has moved its target interest rate back to zero. Additionally, it has announced its intention to conduct further asset purchases to support markets. We believe that the Fed is doing all it can to support the economy and markets.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

VERY NEGATIVE

With COVID-19 being declared a global pandemic, our geopolitical risks rating is VERY NEGATIVE. However, we think it is important for investors to disentangle the public health concerns over the near-term from the expectations for markets over the long-term. The pandemic remains a near-term issue at this time.

ECONOMIC RISKS

VERY NEGATIVE

The economic impacts of the COVID-19 pandemic are likely to be substantial. However, we believe that the eventual economic recovery (which will be aided by historically large economic stimulus) will occur more swiftly than from previous economic shocks.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

Did You Know…?

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Your client experience is our number one focus. Did you know, in addition to traditional phone conversations, our team is equipped with the technology, training and internal support to provide multi-party phone and video conferencing, online document collaboration, and digital forms/signatures? Let us know your needs and preferences so we can continue to enhance your experience while we are remote and moving forward.

VNFA NEWS

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Welcome Mo Spolan to #TeamVNFA!
We welcome Maurice “Mo” Spolan to the new position of Investment Research Analyst. Mo is a CFA Level III Candidate with a degree in Finance from the University of Colorado at Boulder, Leeds School of Business.

Mo will work out of VNFA’s Bethlehem headquarters as part of the investment department. He will contribute to the VNFA Investment Committee research initiatives regarding portfolio construction, individual equity analysis and the development of new strategies/offerings.

“Mo has been able to hit the ground running as a productive addition to our team despite the unusual circumstances of his start,” said Connor Darrell, Assistant Vice President and Head of Investments. “Mo’s first week in the office was a unique one, and it ended with our management team closing our physical offices and sending the entire staff home to work remotely.  Long-term, we expect that our clients will greatly benefit from the depth Mo’s hiring adds to our investment research process.”

In addition to his recent experience in asset management and investment banking, Mo was also contributor for Seeking Alpha, a crowd-sourced investment research platform. Outside of work, Mo enjoys reading a broad range of nonfiction, watching professional sports, and lifting weights.