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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.

The Morning View: June 16, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, Retail Sales for May increased 17.7%, much higher than expected and rebounding from last month’s record decrease.  Strength occurred in stores that sell clothing & accessories, sporting goods, and furniture, while food & beverage (grocery) stores showed only a small increase in the month, given spending levels during the pandemic.  The Control Group, which excludes sales for food, autos, building materials, and gas stations, increased 11.0% in May, also much higher than expected.  Overall, a strong report highlighting the economic re-opening process and consumers beginning to spend in areas that experienced weakness during the shutdown.  Increasing consumer spending will be key in the months ahead as the higher COVID-19 case levels are balanced with the different phases of re-opening of the economy throughout the country.  In all, following the release of the Retail Sales figures, both bond yields and equity futures are higher this morning 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: June 11, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, Initial Jobless Claims were 1,542,000 for the week ending June 6th, slightly less than expected.  Continuing Claims, which are for people who are covered by unemployment insurance and currently receiving benefits, were 20,929,000 for the week ending May 30th, remaining above the 20M mark.  Overall, even though initial claims are trending lower, there is still a long way to go for the job market to get back to pre-COVID-19 levels.  Meanwhile, in the announcement following yesterday’s meeting the Federal Reserve reiterated caution as the economy will likely take time to recover and they expect interest rates to not increase through 2022.  In all, bond yields are lower and equity futures are sharply lower this morning as markets contemplate the road to recovery with moves higher in recent weeks.

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: June 5, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, the economy gained 2,509,000 in May, enormously better than the 7.5 million job losses expected. Leisure & Hospitality and Construction saw marked improvement, while Health Care and Retail Trade were also higher. The Unemployment Rate fell to 13.3%, from 14.7% the previous month, reflecting the job increases. Average Hourly Earnings fell by 1.0% in May, following last month’s large increase, but has grown 6.7% on an annual basis, again reflecting the jobs lost in the low earning industries during the pandemic. Average Weekly Hours Worked moved higher to 34.7, from 34.2 in the previous month, partly due to those currently employed stepping up to handle more workload. Overall, a very strong and unexpected increase in jobs during the month and an indication the fiscal and monetary stimulus could be helping. While it is a survey of just a portion of the population, it is typically taken early in the month and gives encouragement to the notion of an improving economy. Even so, with an elevated unemployment rate, a smooth re-opening process will be key to ensuring the momentum continues in the months ahead. As we head into the market open, bond yields are higher following the report and equity futures are mixed, with the S&P and Dow higher, while technology names in the Nasdaq are slightly lower given their recent gains.

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. 

Video: Argent’s 30th Anniversary – Looking Back & Looking Forward

Argent – 30th Anniversary – Looking Back & Looking Forward from Argent Financial on Vimeo.

The Morning View: May 28, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

In this morning’s data, there were 2,123,000 initial jobless claims filed in the week ending May 23rd, about as expected.  There have been over 40 million claims filed in recent weeks due to the COVID-19 pandemic.  Even though many parts of the U.S. are starting to re-open, the number of people that will be re-hired remains in question.  With social distancing measures still in place, such as limitations on capacity at restaurants and other locations, it is likely the labor market will take some time to recover as we work through the phased opening.  Meanwhile, the second reading on GDP in the first quarter 2020 moved slightly lower to -5.0% and the core PCE also moved slightly lower to 1.6%.  Inflation pressures remain low in the current environment but will need to be monitored closely in the future by the Federal Reserve given the amounts of fiscal and monetary stimulus enacted during the pandemic.  In all, bond yields ticked higher 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.

Heritage’s Response to the COVID-19 Pandemic

The Heritage employee family is taking the recommended steps to help stem the spread of COVID-19 while focused on caring for our families and our clients.

We continue to function efficiently and effectively. Your Heritage client service professional remains available to serve you, even while many work remotely. Updates from our investment management professionals and other Heritage news will be updated.

The calm, rational responses by our fellow citizens give us additional assurance as we all persevere.

Please continue to be sensible and safe.

(Originally posted March 22, 2020)

The Morning View: May 19, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, Housing Starts were 891 thousand in April, falling 30.2% from the previous month slightly worse than expected.  In addition, Building Permits were 1.074 million in April, falling 20.8% from the previous month, but a bit better than expected.  Overall, these data points reflect the difficulties in the housing market from the COVID-19 pandemic.  New homes, without current residents, are easier for people to tour and see in person, as compared to existing homes where people prefer not to have non-family members entering the house.  Additionally, a high unemployment rate makes it more difficult for people to find funds and collateral to buy homes.  Low interest rates coupled with a smooth re-opening process, should ease these affects. While housing remains a small part of GDP, the jobs and activities surrounding the housing market feed into other parts of the economy.  In all, bond yields are higher this morning 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.

CARES Act Clarification on IRA Distributions Announced

On March 27, President Trump signed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. The 880-page Act included multiple provisions that will impact Argent Financial Group clients, but at the time of its signing did not address “undoing” 2020 individual retirement account (IRA) distributions already taken.

On April 9, 2020, IRS guidance (IRS Notice 2020-23) was released allowing IRA distributions taken between Feb. 1, 2020, and May 15, 2020, to be rolled back into the IRA if the rollover was completed by July 15, 2020, but with the following caveats:

  • Distributions taken in January 2020 are not eligible for this extension.
  • IRA distributions can only be rolled back into an IRA once every 365 days. If funds have been distributed and rolled them back into an IRA within the 365 days preceding the date of the most recent distribution, then the most recent distribution will not be eligible for a rollover.
  • Inherited IRA distributions cannot be rolled back into the IRA.
  • Any taxes withheld from distributions made in 2020 and subsequently rolled back into the IRA will not be returned, but will instead be applied against the 2020 tax return.

It is important to know that this new guidance is subject to change. It is possible the IRS will further relax or waive the rules on returning 2020 IRA distributions. We will update this article if the IRS changes its guidance. Meanwhile, please contact your Argent relationship manager if you have any questions about the new guidance or want to learn how the CARES Act could impact your financial assets.

The Morning View: May 8, 2020

BY: MARSHALL BARTLETT
Senior Vice President / Portfolio Manager

Announced this morning, the economy lost 20,500,000 jobs in April, a bit better than the 22 million losses expected, but it is still the largest drop in the post WWII period.  All major industry sectors showed losses, while Leisure and Hospitality was especially weak.  The Unemployment Rate jumped to 14.7%, from 4.4% in the previous month.  Average Hourly Earnings increased 4.7% in April and has grown 7.9% on an annual basis, both notably higher than expected and likely reflecting the nature and amount of the jobs lost.  Interestingly, Average Weekly Hours Worked was flat at 34.2, much higher than the 33.5 expected. Overall, an historic number of job losses in April, taking away nearly all of the jobs created during the most recent expansion.  As the re-opening process slowly proceeds across the country, it is unclear exactly how many of these jobs will return as individuals cope with how to return to normal.  It will take time and progress on various treatments and a vaccine for COVID-19 should help some as we work through the months ahead.  In all, bond yields ticked higher following the report 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.