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The Morning View: August 12, 2012

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, the Consumer Price Index increased 0.6% in July and has increased 1.0% on an annual basis, both more than expected.  During the month, prices for Gasoline and Transportation Services contributed to the increase, while Food at Home prices decreased.  The core rate, which excludes food and energy prices, also increased 0.6% in July and has increased 1.6% on an annual basis, up from 1.2% in the previous month. Overall, while prices did pick up a bit in July, inflationary pressures remain muted in the current environment.  The price changes reflect consumers getting out a bit more and eating at home less, but the economic re-opening process is still in flux.  As a result, the Federal Reserve is not likely to change their accommodative stance toward the economy.  In all, bond prices are slightly higher following the inflation data release and equity futures are higher heading into the market open. 

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

The Morning View: August 7, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

In this morning’s data, the economy added 1,763,000 jobs in July, more than expected.  The Leisure & Hospitality and Retail Trade industries were strong, while the Information Services and Mining & Logging industries were weak.  The Unemployment Rate fell nine tenths to 10.2%, falling more than expected, which is partially attributable to a decrease in the labor force.  Average Hourly Earnings increased 0.2% and has increased 4.8% on an annual basis, again reflecting the nature of the jobs lost during the pandemic as well as a portion of those jobs returning.  Average Weekly Hours at 34.4 in July was unchanged from the previous month.  Overall, a decent report suggesting the labor market is hanging in there and not getting worse amidst the continued choppy economic re-opening process from COVID-19.  Meanwhile, congressional leaders continue to debate the details of another round of fiscal assistance, which will impact the direction of the economy in the near-term heading into the election cycle this fall.  In all, bond yields originally ticked higher following the report, but are now little changed and equity futures are lower as we head into the market open.

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

 

Monthly Investment Commentary-August 2020

Global equities continue to march upward and dig out of the hole created in March. After falling more than 30% from the start of the year through March 23, the S&P 500 Index has rallied more than 47%. The 5.6% gain in July puts the S&P 500 back in the black for the year (up 2.4%). Smaller-cap U.S. stocks returned 2.8% during July—bringing their year-to-date tally to negative 10.6%. Emerging-market stocks led global equity returns in July with a gain of 8.9%. Developed international stocks were up 2.3%, boosted by a sharp 4% drop in the U.S. dollar index—its biggest one-month decline since September 2010.

Interest rates and credit spreads inched down modestly during the month. This helped the core bond index relative to the Treasury market and helped our flexible bond funds relative to core bond positions. The U.S. core bond market gained 0.7%, while the 7- to 10-year portion of the U.S. Treasury market returned 0.9%. Our more credit sensitive bond funds gained upward to 4% during July. Emerging market funds gained 3.7%.

The virus-induced shutdown of the economy resulted in its worst ever period, with real GDP falling 9.5% (year-to-year change) during the second quarter. For comparison, the worst quarter during the financial crisis was a decline of 3.9% during the second quarter of 2009. The path of the economic recovery will largely be dependent on the course of the pandemic. The latter only got worse and became more widespread across the country during July. But at this point, most states are hitting pause on reopening instead of going back into a full shutdown. This should soften the impact—along with additional fiscal spending support—so the second quarter will likely mark the worst from an economic standpoint. But the cone of uncertainty remains as wide as it has ever been.

The divergence between value and growth stocks has been stark and widened further in July; larger-cap U.S. growth stocks gained 7.4% compared to 3.8% for their value counterparts. The year-to-date differential between value and growth stocks is more than 30% in favor of growth. The short-term return discrepancy between the two segments is nearing levels last seen during the dot-com bubble of the late 1990s (see the chart below).

The obvious question is when and how can value win going forward given the current environment? While there are no explanations that we would identify with 100% certainty, below are scenarios which could turn the tide:

  • The last big tech bubble, which peaked in March of 2000, growth stocks just got too expensive relative to realistic growth. Speculation ran too hot. Expectations were exceedingly high. Subsequently, when red hot growth rates subsided and eventually declined post Y2K, the correction was severe.
  • Value could win if the interest rates rise. Although the Fed is pulling out all the stops to suppress interest rates by printing money and monetizing government debt (and even buying corporate debt), that is not a strategy with limitless potential.
  • Value could also win if the economy grows more rapidly than expected, i.e. expanding the growth profile of more sectors. As growth rates accelerate for cyclical and other depressed companies, investors can then “value shop” on a comparison basis.
  • Value can also win simply because of size. The popular benchmarks are dominated by bigger companies, most of which are considered growth stocks; the amount of growth needed to move the needle has become high, and the law of large numbers can make it difficult to meet expectations.
  • Value could win if investors refocus on solid balance sheets and self-funding operations. A market that turns sour tends to refocus investors’ minds on sustainable franchises instead of aggressive possibilities.
  • Value could also win as asset allocators start focusing on risk mitigation and good values.

From a psychological standpoint, investors tend to overreact in both directions. With U.S. elections coming in the Fall, this is, in our view, no time for complacency. That said, in our view value has rarely, if ever, been cheaper compared to growth. We have been able to prune and freshen portfolios at the margin over the last several months, and feel we are well positioned for whatever the markets may have in store for us.

Thank you for investing with us. Stay well.

Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Argent Financial with permission. Reproduction or distribution of this material is prohibited, and all rights are reserved.

The Morning View: July 22, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

In this morning’s news, the tension between the U.S. and China has escalated as the State Department ordered the Chinese consulate in Houston, TX to stop operations in order to protect American intellectual property and private information.  China vowed to retaliate if the order was not reversed. This action adds to a growing list of issues between the two nations, including Hong Kong sanctions, travel restrictions due to COVID-19, and Huawei.  Meanwhile, the U.S. dollar continues to weaken, reaching 94.9 this morning.  With levels above 102 in March of this year, the move lower has been meaningful and is about half of the large move lower seen back in 2017.  A weaker U.S. dollar can provide some support for U.S. multinational corporations as they translate earnings back to dollars.  These events highlight several cross currents that exist in the current environment, including the choppy re-opening process due to COVID-19 and news on progress toward a vaccine. Volatility will likely persist in the weeks ahead given these events and as we head into the election this fall.  In all, bond yields are slightly lower and equity futures are mixed as we head into the market open.  

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

The Morning View: July 16, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, Initial Jobless Claims were 1,300,000 for the week ending July 11th, higher than expected.  Continuing Claims were 17,338,000 as of July 4th, a bit lower than the previous week.  Meanwhile, Retail Sales for June increased 7.5%, more than estimates and still positive despite last month’s large increase.  Strength occurred in stores that sell clothing & accessories, electronics, and furniture, while food & beverage (grocery) stores were weak.  The Control Group, which excludes sales for food, autos, building materials, and gas stations, increased 5.6% in June, also more than estimates and still positive following last month’s gains.  Overall, the jobless claims figures highlight the trend of improving economic data, but those improvements have been slowing.  In addition, levels remain elevated as we grapple with increased cases, a fluctuating reopening process for the economy, and ongoing news of progress on therapeutics and vaccines.  The retail sales data shows consumers continue to spend, partly due to fiscal stimulus, some of which is set to expire at the end of July.  While an agreement on extending the stimulus is possible, leaders continue to debate the details as we move closer to the deadline.  In all, bond yields ticked lower following the report and equity futures are lower as we head into the market open.

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

 

A Brief Summary of ESG Trends and Challenges

BY: SAIYIDA GARDEZI | Portfolio Manager

Saiyida Gardezi

Investing strategies that focus on investments in companies that seek to make a positive, long-term impact on the environment, employees and communities have continued to grow in popularity. The primary appeal of ESG (environmental, social and governance) investing – along with related approaches that include SRI (socially responsible investing) and impact investing – is that investors potentially could earn favorable returns while supporting companies that are contributing to society.

To help you make informed investment decisions, here’s a brief summary of ESG investing:

What is ESG investing?

In addition to traditional financial analysis, ESG investing includes an in-depth review of non-financial factors to identify investment opportunities. Environmental factors include a company’s ecological stewardship and focus on waste and pollution, resource depletion, greenhouse gas emissions, deforestation and climate change. Social factors include how a company treats its employees, the diversity of its workforce, and its contribution to local communities. Governance factors include corporate policies and governance, executive remuneration and board diversity and structure.

What has been the trend in ESG investing?

Over the past 15 years, there has been substantial growth in ESG investments. A key reason is the change in investor demographics. More women and millennials are inheriting assets and have a greater interest in being socially responsible with their wealth. The US SIF: The Forum for Sustainable and Responsible Investment’s biennial 2018 “Trends Report” estimates that investments in ESG, SRI and related approaches increased 38 percent over the past two years to $12 trillion – or more than 25 percent of the $46.6 trillion in total assets under management in the U.S. Larry Fink, founder and CEO of Blackrock, which manages more than $6 trillion in assets, has been a vocal proponent of ESG investing. In his annual letter to CEOs over the past couple of years, he has stressed that his firm will continue to look closely at ESG criteria when allocating the company’s capital.

What are the challenges in ESG investing?

Understanding ESG has been challenging because each industry and business is different. So too are the methods and measures for applying ESG criteria. Moreover, ESG ratings are based on what a company chooses to disclose and not based on independent, third-party research, which can leave room for “greenwashing” (a play on the word whitewashing – or hyping environmental benefits). Several organizations have established standards that provide a framework for how a company can disclose ESG information, such as the Global Reporting Initiative and the Sustainability Accounting Standards Board. Disclosure is voluntary, however, and there is no organization to provide oversight or validate company claims.

There are also differences around ESG scores and how criteria are weighted. For example, one well-known technology company earns high ESG marks for its plan to be carbon negative by 2030, while another ESG index would not rank the company at all because of low gender diversity.

Cost is another challenge, as many ESG funds or exchange traded funds (ETFs) have higher management fees than their traditional counterparts, which can be a drag on performance. Additionally, most of these funds and ETFs have a limited history of three years of less.

Is ESG right for you?

It depends on client preferences and values. Given the current challenges, building an optimal ESG-only portfolio could prove elusive as evaluation criteria remain unclear and reporting standards evolve. Nonetheless, as fiduciaries, we need to stay current on developments in ESG investing to understand and communicate its benefits, drawbacks and risks. Researching companies with a layer of ESG could mitigate certain risks and meet specific client needs, but only if some of the aforementioned challenges are addressed.

 

Fixed Income Commentary-July 2020

2nd Quarter 2020 Fixed Income Review

Following a wild ride in the first quarter, fixed income markets had positive performance in the 2nd quarter of 2020, mainly due to the Federal Reserve’s announcement of numerous programs to support liquidity in many sectors. Additionally, world central banks, including the U.S. Federal Reserve, signaled more accommodative policies, with the latter cutting the overnight rate twice in March from 1.50% to a range of 0% to 0.25%.

Below are some 2nd quarter and YTD 2020 Bloomberg Barclays fixed income index returns:

The chart on the following page shows the changes in the UST yield curve from the end of Q2 2019 (gold line) and the end of 2Q 2020 (green line). The bar graph at the bottom shows the changes in yields for select maturities. As a result of the global pandemic, general economic uncertainty, and central bank purchases, U.S. Treasury yields are at or near all-time lows.The 10-year U.S. Treasury (UST) Note, a bell-weather measure used in the fixed income markets, ended Q2 2020 with a yield of 0.66%. An all-time low yield of 0.54% was hit on March 9, 2020. In addition, the UST yield curve “steepened” during the quarter as short-term yields fell more than longer-term yields- globally bond yields fell in general. The 2-10-year UST yield spread differential, an often-cited measure of the slope of the yield curve, ended 2Q 2020 at 51 basis points. By comparison, that same yield spread has averaged almost 70 basis points for the past five years.

In their most recent meeting in June, the FOMC left interest rates unchanged and signaled that they would likely keep interest rates on hold through 2022 amid “considerable risks” to the economic outlook. According to most reports there is unanimity at the Federal Reserve to do whatever it takes to support the recovery.

At their June meeting, the FOMC updated projections for GDP, inflation, and unemployment for 2020. The Fed’s median estimate for GDP is -6.5% versus a 2.00% estimate in December 2019 and core inflation is seen at 1.00% versus 1.90%. The unemployment rate is expected to be 9.3% versus the 3.50% rate expected last December.

Like U.S. Treasuries, most foreign sovereign bond yields moved lower in Q2 2020, although globally, negative yielding debt decreased to around $13 trillion from over $17 trillion a year ago- a positive for investors.

The U.S. fixed income markets have yet to witness the negative yield phenomenon seen in both European markets as well as Japan. It is important to note that most domestic pundits, as well as members of the Federal Reserve, do not expect negative interest rates in the U.S. At present, the use of negative interest rates is an extraordinary monetary tool being implemented by some central banks with untested results and unknown long-term repercussions. Present expectations are for the U.S. central bank to continue selectively purchasing in the open market (Quantitative Easing or “QE”) to support lower rates in targeted sectors of fixed income. This previously considered “unconventional tool” was successfully implemented during the financial crisis and has already shown to be effective supporting asset prices and lowering rates in recent months. “Yield curve control,” a condition where a central bank explicitly targets the yield on Treasury securities to keep them from rising, is another much discussed policy currently being used in Australia.

Below, in blue, are 10-year bond yields from several foreign countries (sorted from low to high). Note the wide difference between the yield of the bellwether German Bund (the German ten-year note) at   -0.46% compared to the U.S. ten-year note at 0.66% currently. This marked disparity in yields is indicative of divergent central bank monetary policies as well as differing economic outlooks domestically and abroad.

While always seeking opportunities during periods of market dislocation, we continue to recommend that our core fixed income portfolios maintain high credit quality and shorter, more defensive, durations. We continue to feel any potential upside in longer dated bonds is outweighed by paltry cash flows with interest rates at current levels.

Where appropriate, we continue to believe a core fixed-income strategy utilizing high quality individual bonds evenly “laddered” over several years, and replacing bonds as they mature with longer maturities, provides a good offset for riskier assets or strategies in a balanced portfolio. Described as a “volatility dampening” characteristic, even in an environment of extremely low rates and heightened correlations, this type of structure also provides dependable cash flows and a source of liquidity which may be accessed as more lucrative opportunities become available in other sectors. As always, potential individual bond purchases are pre-screened by our fixed income team for sustainable financial strength, conservative debt coverage ratios, and other favorable characteristics.

These are very unusual times in the financial markets. An unprecedented amount of central bank intervention with historically low (and even negative) interest rates at a time when sovereign deficits balloon to historic levels globally, is a challenging environment to work within. We continue to recommend a broad diversification of fixed income strategies, both conservative and more opportunistic, as a means of preserving capital, creating cash flow, and pursuing positive risk-adjusted returns. We hope you will contact your portfolio manager, or any member of our fixed income team, with questions or comments, and we will be happy to discuss our thoughts further.

For more information about this investment commentary, please contact one of the following:

Sam Boldrick, Director of Fixed Income, Argent Trust
Hutch Bryan, Senior Portfolio Manager, Argent Trust
Oren Welborn, Portfolio Manager, Argent Trust

Not Investment Advice or an Offer
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.

Investment Commentary-July 2020

Second Quarter 2020

BY: FRANK HOSSE
Director of Investments – Argent Trust Company  |  615.385.2720

Benchmark Returns ChartEquity investors have been on quite a roller-coaster ride this year. After hitting an all-time high on February 19, the S&P 500 Index plunged a gut-wrenching 34% over the next month, marking the quickest bear market in U.S. history. Smaller company stocks did even worse during that period, losing more than 40%.

Investors who remained strapped in as we did—keeping our arms and legs inside the car at all times, of course—then experienced an equally surprising and gravity-defying upturn. From the March 23 low, the market soared nearly 40%, notching its best return ever over any 50-day period. Talk about whiplash.

For the full second quarter, larger-cap U.S. stocks gained 21% and smaller-cap stocks climbed 25%. Despite the medical, economic, and social turmoil all around, the U.S. market is down just 3% year to date and is only 8% below its all-time high on February 19. (As a reminder, after a 34% drop it takes a 52% gain to get back to breakeven.)

However, there is a major bifurcation beneath the surface. The Russell 1000 Growth Index is up 10% on the year, but its Value sibling is down 16%. That’s a stunning 26-percentage-point difference in only six months. Viewed from another angle, the tech-heavy Nasdaq Index is up 13%, while the Dow Jones Industrial Average languishes, down 8%. One more perspective: The S&P 500 technology sector is up 12% on the year, while the financials, industrials, and energy sectors are down 24%, 14%, and 35%, respectively. So for many companies, things are not nearly as sanguine as they may appear looking only at the market overall.

Looking overseas, developed international stocks rose 15% and emerging markets (EM) stocks gained 18% in the second quarter. For the year, they are down 11% and 10%, respectively. As in the United States, growth stocks are crushing value stocks overseas as well. The U.S. dollar depreciated slightly during the quarter, providing a modest tailwind to foreign market returns for dollar-based investors.

Moving on to the fixed-income markets, core bonds gained almost 3% for the quarter, as Treasury yields dropped slightly (falling bond yields imply rising bond prices) and investment-grade corporate bond spreads narrowed, rallying along with the equity markets. Core national municipal bonds were up 2.7%.

Riskier credit-sensitive sectors within the fixed-income universe posted very strong gains, making up ground from their first quarter losses. High-yield bonds gained 10%, while emerging market debt topped 12% for the quarter.

Second Quarter Portfolio Performance & Key Performance Drivers

The incredible rebound in risk-asset markets—stocks, corporate bonds, and other credit markets—in the second quarter provided a strong tailwind for our portfolios.

As a reminder, in mid-March, as the S&P 500 plunged 25%, we rebalanced and added an increment (around 4%) back to U.S. stocks in our balanced portfolios. Further, as high yield corporate yields topped 10%, we increased positions funded from lower-risk assets in several allocation strategies.

We don’t rule out the possibility U.S. stocks will revisit their March lows (2,237 on the S&P 500) and we are ready to act again when a compelling opportunity arises.

In the meantime, we like how our portfolios are positioned, balancing a variety of shorter-term risks against attractive medium- to longer-term return opportunities, across a range of macroeconomic scenarios and potential market outcomes.

As highlighted above, global equities performed strongly for the quarter. While the U.S. market was the best performer, foreign markets gained some momentum, outperforming the S&P 500 from late May to quarter-end. Looking ahead, we expect superior returns from our balance in international and EM stocks.

Our portfolios’ fixed-income exposure is well-diversified. It includes core investment-grade bond funds (providing recessionary/bear-market ballast to the portfolio) and flexible, actively managed credit- and income-oriented funds, including a tactical position in floating-rate loans. All these non-core fixed-income sectors meaningfully outperformed the core bond index, enhancing our portfolios’ absolute and relative performance for the quarter.

It’s Been a Wild First Half … Where Do We Go From Here?

COVID-19 is the Most Important Near-Term Variable

As always, we see a range of potential economic and financial market outcomes looking ahead over the next six to 12 months and beyond. What is unique about the current environment is how dependent the outcomes are on the course of COVID-19. Significant uncertainty remains as to the virus’s progression, even as economies around the globe start to reopen and relax social distancing standards. The timing, availability and effectiveness of treatments and vaccines are also highly uncertain but crucial variables for the economic outlook.

In our view, the key risk to the economy and financial markets is the potential for a widespread second wave of COVID-19 infections, hospitalizations, and deaths that force another large-scale economic shutdown. In that event, stocks could re-test their March lows. We are prepared for that dire scenario with our portfolio holdings in core bonds. But absent a severe second wave (or some other major exogenous shock), and even assuming there are smaller localized outbreaks, we think an uneven but steadfast economic recovery is the most likely scenario looking out over the next six to 12 months at least.

Monetary and Fiscal Policy Are Also Key

While we view the progression of COVID-19 as the most important driver of the near-term economic and market outlook, monetary and fiscal policy are second-most in importance. And, in the policy sphere, the Fed is key.

After the Federal Open Market Committee (FOMC) meeting in June, Fed chair Jerome Powell made it very clear the Fed intends to keep monetary policy extremely accommodative for the foreseeable future. Powell said, “We are strongly committed to use our tools to do whatever we can, and for as long as it takes, to provide some relief and stability, to ensure the recovery will be as strong as possible and to limit lasting damage to the economy. … We are not thinking about raising rates. We are not even thinking about thinking about raising rates.”

To this end, 15 of 17 FOMC participants expect the federal funds policy rate to remain near-zero at least through the end of 2022. See the dot-plot chart above. Moreover, the Fed restarted large-scale quantitative easing (QE), committing to purchase $120 billion per month of Treasury and agency mortgage-backed securities.

The Fed is leading the way for other global central banks to enact their own extremely loose monetary policies. According to Ned Davis Research, 97% of all central banks are now in an easing cycle (cutting rates), and 87% of central banks have their current target interest rate at a record low level.

Chart - Fiscal Stimulus as a percentage of GDP, Great Recession versus COVID-19On the QE front, global central bank balance sheets, in aggregate, have increased to a record 38% of global GDP. The Fed’s balance sheet stands at a record 33% of U.S. GDP and climbing. Similarly, for the European Central Bank at 44% of GDP and the Bank of Japan’s balance sheet at a whopping 118% of Japan’s GDP.

On the fiscal policy side, global fiscal stimulus and support programs have also been unprecedented, much larger than during the financial crisis of 2008–09 for most countries. Another trillion-ish dollar fiscal stimulus package in the U.S. seems likely later this summer as both the White House and Democrats (if not yet congressional Republicans) favor additional government spending to support households and business get through the medical crisis.

This monetary and fiscal support helped prevent a depressionary spiral from taking hold as the pandemic crisis peaked in March/April. It now looks like the U.S. and global economies may have bottomed in April and are on the upswing, albeit from severe recessionary levels. Recent U.S. economic data have been much better than expected—most notably the surprisingly strong May payrolls (2.5 million jobs added) and retail sales reports.

Given All This Stimulus, Is Inflation a Risk? Not Now, Maybe Later

Chart - Surging Money Supply Has Been Offset by Falling Money VelocityWe are seeing a lot of discussion in the financial press about the risk of inflation in the United States given the massive stimulus from the Fed along with the multi-trillion-dollar debt-financed fiscal support programs.

We do not see inflation as a near-term risk given the strong disinflationary impact of the pandemic. But we can envision a scenario where the current reflationary policies set the stage for an inflationary environment a few years down the road.

We do not view inflation as a near-term risk because there is too much slack in the economy due to the hit from COVID-19, absent a major supply-side shock that more than offsets the demand shock. It will take a while—likely a few years at least—for the economy to get back to operating at full capacity and full employment. Until then, the slack should restrain consumer price inflation and wage inflation. It is also worth remembering that even when the U.S. economy was at full employment in the months before COVID-19, core inflation was still below the Fed’s 2% target. Now, with the economy running below its potential, inflation is a lesser risk.

As we saw in the aftermath of the 2008 financial crisis, the Fed’s liquidity largesse showed up in price appreciation for financial assets, rather than in price inflation in the real economy. We see this as likely to replay again. It already has to a meaningful extent given the huge rebounds in equity and credit market since late March.

However, there is a strong risk these policies will translate into inflation if they remain extremely loose after the economy reaches full capacity and full employment. The Fed is signaling it won’t act preemptively to curb inflation in this cycle. The Fed is also apparently content to effectively monetize the debt created by government deficit spending. If the Fed continues these policies beyond the COVID-19 crisis, it runs the risk of falling behind the inflation curve. This could lead to an inflationary surprise and a sharp repricing of assets.

We will be watching closely for evidence of inflation as this cycle unfolds. In the meantime, should we get an inflation surprise, our portfolio positions in short-term fixed-income, flexible fixed-income funds, and EM stocks should all perform relatively well. Core bonds will be the big loser in an inflationary environment.

Other Risks

Besides a resurgence in the pandemic, there are several other macro risks to be aware of. We’ll name the four at the top of our list:

  1. An escalation in U.S.-China geopolitical tensions and/or a re-ignition of their trade war
  2. The November elections and policy-related uncertainty (for example, a repeal of the Trump corporate tax cuts if the incumbent party loses)
  3. Increasing social and political unrest
  4. The potential for corporate earnings to disappoint the consensus later this year
Financial Markets

Given this economic backdrop, we see both risks and opportunities for financial assets. In addition to the list cited above, the primary market risk we see is overvaluation, which implies poor forward-looking returns for both core bonds and U.S. stocks.

Core Bonds

No matter how you slice it, the future returns from core bonds will be very low, and probably negative when adjusted for inflation, due to the very low starting yields. This is why our fixed-income allocation in our balanced portfolios is significantly invested outside of core bonds, in flexible and higher yielding bond funds. These investments have expected returns several percentage points higher than core bonds, in our view. They have more short-term risk, but they are much less risky than stocks.

Stocks

Chart: Equity Risk Premium Using Forward Earnings Yield and Forecasted 10-Year Treasury YieldAfter rallying 40% from their March low, U.S. stocks again appear overvalued in absolute terms. However, many investors consider stock valuations relative to bonds or cash, typically referred to as the equity risk premium. On this measure stocks still look attractive. Our investment process focuses more on absolute valuation as it’s been a better predictor of full-cycle returns. But we recognize and respect the fact that many investors use relative valuation measures, and relative measures can indeed drive returns in the short to intermediate term.

For us to overweight stocks from our current approximate neutral weighting, we need to see attractive absolute expected returns, which are not on offer today. At the same time, attractive relative valuations and a plausible bull-case scenario keep us from unwinding the U.S. stock positions we added during this year’s bear market. There are sensible arguments that U.S. stocks should be priced higher today than they have been in the past, especially in light of extremely low interest rates that are expected to be in place for a long time.

Now within equities, there are compelling opportunities in foreign stocks, especially in emerging markets. First of all, overseas stocks are more reasonably priced. For example, EM stocks’ cyclically adjusted P/E ratio is near its lowest point in 35 years of data. Second, foreign economies and their markets are generally more sensitive to global growth, so as the world recovers from the pandemic, foreign stock prices should outperform U.S. stocks. Finally, in a sustainable recovery, we would expect the U.S. dollar to decline, as it is generally a safe-haven currency that depreciates in the face of strong global growth. A falling dollar would further enhance foreign stock returns for U.S.-dollar-based investors (as foreign earnings are translated into more dollars).

Closing Thoughts

So where does this leave us? We believe our portfolios are prepared for a resurgence in the coronavirus as economies start to reopen and also potentially due to seasonal factors later in the year. Of course, there are other uncertainties looming in the near distance that could disrupt financial markets as well, such as the November election and U.S.-China geopolitical frictions.

But we also hold a cautiously optimistic view that even with an inevitable uptick in COVID-19 cases in coming months, the overall social policy response won’t need to be as draconian, and therefore the economic impact won’t be as bad as during this first wave.

If the latter public health scenario plays out against a backdrop of extremely loose fiscal and monetary policy, there is a good chance we’ll get a sustainable, albeit uneven, global economic recovery. It’s unlikely to be a sharp V-shaped recovery, but something more gradual, with fits and starts along the way and some sectors and industries doing much better than others. If so, corporate earnings are likely to rebound as well. Measured against very low interest rates—and with fears of severe recession (or worse) off the table thanks to the policy response—this would support the view that equities and fixed-income credit sectors are relatively attractive compared to core bonds. Our meaningful portfolio exposures to non-core, flexible, and actively managed bond funds should do quite well in this event.

Furthermore, within the equity universe, a global economic recovery, likely accompanied by a declining dollar, should also be a tailwind for international and EM stock markets relative to the U.S. stock markets, for the reasons discussed earlier. Our globally diversified equity exposure should benefit from this, and our overweight to EM stocks should further boost portfolio returns.

In our actively managed equity portfolios, we would not be surprised to see value/cyclical stocks take the leadership reigns from growth stocks, potentially marking a new cycle of relative performance in favor of value. Our portfolios would benefit from this change in leadership as well.

In sum, we see several ways for our portfolios to “win” looking out over the next five to 10 years. But we should also steel ourselves for a potential double-dip back down to the late-March market lows, most likely caused by disappointing developments on the virus/medical front. As always, it is so important to be invested in the right portfolio aligned with your risk tolerance and financial goals. This should enable you to keep a healthy long-term perspective and to remain disciplined and “stay the course” through the inevitable downdrafts when fear in the markets is palpable.

Not Investment Advice or an Offer
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money
investing.

Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Argent Financial with permission. Reproduction or distribution of this material is prohibited, and all rights are reserved.

Why Donor-Advised Funds Can Be a Wise Option for Charitable Investor

BY: MINDY HIRT  |  Senior VP & Wealth Advisor, Nashville

The stress and uncertainty of living through a pandemic affect everyone differently. For some investors, it might be stirring up an urge to donate to charity in the hope of making a small difference in the world.

There are many ways to make a charitable donation — the most straightforward, of course, is to simply write a check to the cause of your choice. On the other end of the spectrum, some wealthy investors opt to set up charitable family foundations, which offer tax benefits and structural flexibility, but can be administratively complex and expensive.

But there are other options for charitably inclined investors, including donor-advised funds (DAFs), which combine some of the tax benefits of a foundation with a lower financial barrier for entry.

Investors can open a donor-advised fund through a sponsoring organization like a local community foundation. Donors can fund their DAF with cash or other assets, then decide when they’re distributed and to which charities.

A donor-advised fund can be opened with an initial donation of $5,000. In contrast to a family foundation, which must distribute 5 percent of its funds each year, DAF distributions can take place on the donor’s preferred timeline; donated assets might sit unused in the fund for years, but the donor receives a tax write-off for the assets right away.

The donor relinquishes control over any assets put into a DAF (so they can’t be returned), and the sponsoring organization becomes the donor of record, which makes DAFs an especially good option for donors who prefer to stay anonymous. The specific investments within the fund, the level of risk and general investment strategy are all determined by the donor. Some sponsoring organizations also allow active involvement from an advisor such as Argent. 

Due to the historically long bull market that ended earlier this year, some investors may have highly appreciated assets that account for a large amount of their portfolio and would incur a sizable tax liability if sold. If those investors are charitably inclined, donor-advised funds can be a great strategy. Instead of selling the assets and paying taxes on them, a donor can place them into a donor-advised fund. By doing so, the donor receives a tax deduction, their chosen charities receive 100 percent of the benefit and there are no capital gains taxes to pay.

As a result of COVID-19, market values are down from their highs and many are facing financial uncertainty. Some new DAF candidates might not feel they can afford to irrevocably give away larger sums of money at this time — even if the needs in the community have increased. However, those who have already funded a DAF have a wonderful opportunity to respond to charities’ current needs.

There’s no doubt that many people out there need help right now — especially here in Nashville, where COVID-19 came directly on the heels of a devastating tornado in early March. So, if you’ve already established and funded a DAF, you don’t have to be hesitant about distributing more from the fund than you might in a normal year. Having it already set up allows you to respond quickly and generously when necessary — both now and in the future.

If you would like to discuss how a DAF fits with your overall wealth management plan, please contact me at (615) 385-2718 or get in touch with your local Argent representative.

The Morning View: July 2, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, the economy added 4,800,000 jobs in June, more than expected.  The Leisure & Hospitality sector saw the largest increase, while the Mining and Logging and Utilities industries were weak.  The Unemployment Rate fell to 11.1%, from 13.3% the previous month.  However, a misclassification error notes that the unemployment rate may be 1% point higher than reported.  Average Hourly Earnings fell by 1.2% in June more negative than expected, but it has increased 5.0% on an annual basis.  Both figures highlight the initial loss of jobs in low paying industries and those jobs starting to return.  Average Weekly Hours Worked moved two tenths lower to 34.5, as the fluctuating re-opening process continues throughout the country.  Overall, a strong report that continues the labor market rebound from the extremely low levels achieved during the pandemic.  While the increase is welcomed, with several states deciding to slow or re-adjust their opening process it may cause some additional volatility in the labor market in the months ahead.  In all, both bond yields and equity futures are higher heading into the market open.  We wish everyone a safe and happy 4th of July holiday!

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

 

 

 

 

 

 

 

 

 

 

Investment Outlook-July 2020

Unprecedented

BY: JIM McELROY, CFA  

Jim McElroy

It may be somewhat of an exaggeration to say that the last three months have been unprecedented, but we’re going to stick with that modifier. It’s true that here have been “plagues” in our lifetime that have dramatically altered social behaviors (polio before the Salk vaccine, comes to mind). We remember that Paul Volker and the Federal Reserve brought the U.S. economy to its knees in the late ‘70s and early ‘80s by allowing interest rates to rise to unimaginable levels — 90 day T-Bills yielding 21% — in a successful effort to put an end to runaway inflation. And we’ve experienced periods of equal or greater social unrest: the 1960s civil-rights and anti-war movements, for example.

The combination of all three catastrophes — the COVID-19 pandemic, a government-imposed shutdown of the economy and marches and riots in major U.S. cities — all in the span of a little over three months surely qualifies as unprecedented. These are strange days with strange market responses.

During the first quarter of 2020, the S&P 500 entered a bear market, declining by as much as 34% from an all-time high on February 19 to its low on March 23. Since then, the index has gained 38.6% and, at least technically, has embarked on a new bull market. Year to date, the S&P 500 is down 4%, and is only 8.4% from its all-time high. This is with an unemployment rate near 14%, a first quarter GDP of -5% and an anticipated second quarter GDP of -30%. Not surprisingly, the NBER has declared that the U.S. has been in a recession since February.

A new bull market in stocks in the face of a recession is a common occurrence: it’s a testament to the optimism of investors who can “look across the valley” and envision better economic times and higher market prices in the future. What is unusual about this bull market is the brevity of the bear market which preceded it: at twenty-three trading days, it was one of the shortest on record, comparable to the October crash of 1987.

The rapid establishment of a new bull market suggests that investors see a “V” shaped path — a sharp decline followed by an almost vertical recovery — as the most likely economic scenario for the balance of 2020. Market pundits are fond of employing visual aids to describe future economic directions and paths: in addition to the letter “V”, some of the other symbols they have tortured include the letters “U”, “L”, “M” and “W”, the Nike Swoosh and the square root symbol. Lately, as market volatility has increased and direction has become more dubious, we hear more references to “U”s and Swooshes and, on particularly bad days, to “L”s.

Our own opinion leans more towards the “U” and the Swoosh — a sharp decline followed by a more gradual recovery — but as we’ve said before, much depends on the path of COVID-19 and its effect on the economy. Corporate earnings reports for the second quarter will begin coming in during the second week in July and they’re expected to be dismal. We’ll be paying particular attention to how the market responds to disappointing numbers: positive price moves on bad earnings usually bodes well for the future. However, we don’t expect much clarity about earnings expectations for the third or fourth quarter: 40% of S&P 500 companies have already foregone such guidance and that percentage is likely to grow.

The response in the fixed income markets to the recession has also leaned towards a more optimistic outcome than the severity of the recent jobs and GDP data would suggest. Interest rates usually decline during recessions and they certainly did so during the first quarter when the recession began. During the second quarter, U.S. Treasury rates held relatively steady at low levels: currently 3 mo. .152%, 10 yr. .654% and 30 yr. 1.411%. The yield curve in the second quarter remained positively sloped (long term bonds yielding more than short term bills/notes, usually a condition that encourages banks to lend and the economy to grow).

It’s interesting to note that the last time there was an inversion in the yield curve (short term bills/notes yielding more than long term bonds, a predictor of recessions) was in February, the month in which the recession began. The credit spread — the excess yield of investment grade corporate bonds over the allegedly risk free yield of U.S. Treasuries — has declined a full percentage point from its recent high of almost 4% at the end of the first quarter, indicating that investors have less concern about corporate bond defaults than they did in March. This shrinkage in spread over Treasuries can be observed in tax exempt municipal bonds, emerging market debt as well as in other less than perfectly rated obligations. It’s not that these spreads aren’t elevated — they definitely are — but that they are significantly off their highs, more than one would expect so soon after the official declaration of a recession. While it’s true that interest rates across the  yield curve are at record low levels (as one would expect during a recession), the positive slope of that curve and the overall shrinkage of credit spreads are further hints of an early conclusion to economic hardship.

In support of this optimism, the Federal Reserve has indicated, in the clearest language possible, its full backing for minimal interest rates, both long and short, and maximum liquidity for trading markets. This is in addition to the multi-trillion-dollar stimulus packages that Congress and the president have made available to furloughed and dismissed employees. These measures have been effective in softening the blow that a 14% unemployment rate normally would have had on consumer spending — about 60% of GDP — and in keeping hopes alive. In this environment, some have suggested that there could well be downstream costs associated with this government largesse. Of course, when your house is on fire, you don’t worry about the water bill.

Nevertheless, since February of this year, the government has been borrowing and spending a staggering amount of deficit dollars. And since February, the Fed has increased its balance sheet from about $4 trillion to $6.5 trillion — a 62.5% increase — mostly by buying U.S. Treasuries, Mortgage Backs and Agency securities. In other words, a good bit of the government’s largesse has come from creating money. And creating money to support ever larger deficits has, on occasion, led to periods of hyper-inflation. We do not believe this is likely to occur in an environment of 14% unemployment and -30% GDP, but it is a risk that deserves watching. If the economy were to snap back too quickly and/or the Fed were to keep its foot on the gas too long, there could be serious repercussions. But that seems unlikely at this time.

The investment outlook for the balance of 2020 and beyond is all the more cloudy because of the highly unusual way in which we have arrived at this midpoint of the year. There are few precedents to a government shutdown of major portions of the economy: the closest analogy that comes to mind may be the rationing of consumer goods during wartime. Both events have an uncertain duration and both require sacrifices. But wartime economies are full employment economies; they’re more about redirecting the components of GDP than about shutting them down. Once a war is over, assuming we’ve won, the challenge is to redirect capital to a peacetime footing.

With a shutdown and high unemployment, the challenge is to recreate capital and that can take some time. The longer the current shutdown lasts, the fewer the number of businesses that will survive, the worse the unemployment rate becomes and the longer the recovery will take. The recent relaxation of restrictions on indoor dining, air travel, movie theaters, bars, etc. have improved the unemployment numbers somewhat (14.7% to 13.3%), but the spikes in infections have forced retrenchments. It may very well be that the economy cannot regain its prior growth rate until well after the virus has run its course, either by way of herd immunity or an effective vaccine.

So far, the markets appear to be defying pessimism and looking to a future beyond the valley, however cloudy and cryptically configured its geometry. Sometimes it’s best not to fight the tape.

About the author: Over an investment management career covering nearly forty years, Jim McElroy has served as portfolio manager, partner, mutual fund manager, Chief Investment Officer, President, consultant and writer of commentary for several financial institutions and private firms. In addition to a Ph.D. and an MBA, he is the proud holder of a Chartered Financial Analyst designation.


Not Investment Advice or an Offer
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.

The Morning View: June 26, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, Personal Spending increased 8.2% in May, a bit less than expected but still a rebound from a strong decrease in April.  Conversely, Personal Income fell by -4.2% in May, slightly better than expected and follows a double-digit increase in April.  In addition, the PCE core deflator, a measure of inflation, grew 1.0% on an annual basis.  While still below Fed targets it is a one tenth increase from the previous month, giving a slight respite to those fearing a deflationary environment. Overall, both spending and income remain volatile as the economy works through a choppy re-opening process.  Consumers appear eager to return to spending habits even with a fall in income. The massive fiscal stimulus efforts already in place, such as the additional unemployment benefits, help explain this dynamic and underscore the importance of getting the balance correct between re-opening and further stimulus in the weeks ahead.  In all, bond yields are little changed to lower this morning and equity futures are lower as we had into the market open. 

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.