Insight & Commentaries

For years, stock investors have fixated on “style,” which means investing in “growth” or “value.” “Value” in this context is usually defined as buying stocks with low price-to-book or low price-to-earnings ratios. Some are now rethinking the very foundations of this framework as the return to value indexes continues to shrink (Chart A, below). Others are leaving behind simplistic notions of “style” investing and looking for all sorts of new factors to find performance. In our view, adding a multitude of new factors to the mix is also the wrong approach. The right perspective simply relates price to a few…

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In October, Muni yields crept higher, rising by 6-9 bps across the curve, echoing the move higher in US Treasury yields. Muni Mutual funds recovered from a single week of outflows and took in over $5 billion for the month. After the election results were announced, how-ever, both Muni and U.S. Treasury yields fell dramatically as expected gridlock in the split legislature diminished the prospects of a massive stimulus package and higher inflation. The main story in Munis was record monthly supply in October as issuers rushed to market prior to the election.

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As we start the fourth quarter, the major U.S. stock market averages hover around a 0% return for the year. That unexciting performance masks extraordinary volatility — a 35% February-March decline and a 50% March-August bounce back. Other assets demonstrated similar volatility (graph, next page). Through September 30, Long-term U.S. Treasury bonds returned over 20%, and Bloomberg Barclays Aggregate U.S. Bond Index returned 6.5%. Short-term T-Bills returned about 0.7%, and gold is up 24%. Volatility again ruled the roost in 2020, and diversified portfolios generally did better than all stock portfolios. As we head into the final quarter of 2020,…

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The Case for Quality

A significant shift in financial markets occurred roughly twenty years ago. It was June 2000, and Federal Reserve Chairman Alan Greenspan had just raised the short-term interest rate to 6.5%. Within months, a falling stock market would lead the economy into a short and shallow recession.  Unbeknownst to anyone at that time, the central bank would soon begin cutting rates further than they ever had before. In so doing, they would usher in a new era of easy credit. In this commentary, we make a case for investing in quality, especially during this ultra-easy credit era. Why do we call…

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The stock market is up over 40% from the March 23 bottom. This spectacular 50-day rise bookends the 33% market drop from mid-February to the March bottom. Overall, the S&P 500 moved by more than 70% in a little over three months, leaving many investors bewildered. But recent market action implies that most traders are expecting conditions to improve from here. Stimulus measures, reopening the economy, and hopes for a virus vaccine or treatment are all part of the recovery scenario. In this week’s commentary, we look at what is driving the case for both bears and bulls. We also…

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A strong case can be made for dividend growth investing. The Case for Rising Dividends explores the rationale and evidence behind the dividend growth philosophy.

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The 2020 coronavirus outbreak is taking a toll and investing in times of uncertainty can be challenging. Large moves in stock and bond prices have again become the rule rather than the exception. We would like to share a series of exhibits and perspective pieces that you might find helpful in navigating today’s turbulent markets.

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A Good Decade

Investment returns are the reward sought by all investors, not small returns or unpredictable returns, but large and guaranteed ones. Unfortunately, those sorts of returns are imaginary. This is not to say that estimation, a more respectable form of imagination, is not in widespread practice. All investors imagine some sort of plausible future of some kind, with some sort of expected reward. These imaginings are behind every dollar invested in the world today. “By the end of the next decade, quite a way off, there will be a pandemic, and stock investors will achieve record wealth.” These words, if uttered…

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Shifting Ground

The news of a Biden/Harris election win and heightened prospects for a COVID-19 vaccine are being digested by markets today. As for the former, news agencies declared Democrat Joe Biden president-elect and control of the Senate is to come down to two run-off races in Georgia. For the latter, hopes of a COVID-19 vaccine linked to an announcement of progress toward a vaccine sent global stock indices soaring this morning. The ground beneath this year’s two most dominant themes — politics and pandemic — is moving. The political shift is assumed to be toward the “middle” with an expectation of…

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Today, The Wall Street Journal ran a front-page, above-the-fold article titled “Dividend Darlings Trail Stock Market Despite Pumped-Up Yields.” The authors point to underperformance by dividend payers within the S&P 500 Dividend Aristocrats index, an equally weighted index consisting of all S&P 500 companies that have increased dividends every year for the past 25 consecutive years. The article highlights some iconic dividend payers with large yields suffering large share price drops this year. So says The Wall Street Journal: “Exxon Mobil Corp., whose dividend yield is sitting at a near-record of more than 10%, has declined 51% in 2020… AT&T…

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Emerging Opportunity?

Roughly 160 of the world’s nearly 200 countries are considered emerging markets (EM), and approximately 6 billion people, or 85% of the world’s population, live in emerging economies (map, below). Thus, there are plenty of reasons not to ignore emerging markets in a portfolio. But there are special considerations unique to emerging markets. These include currency movements, different political and legal systems, greater exposure to commodity prices in some cases, and periodic debt troubles. However, none of this is new, and many emerging markets are evolving from immature, rapid growth toward more mature, slower growth. Even though growth may be…

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The Municipal curve steepened in September, with yields on the short end essentially flat and 10+ year yields higher by 5-6 basis points (bps). Inflows into Muni Mutual Funds continued, with an additional $6 billion added this month. With rates so low, the market appears to be reaching for yield and focusing on lower-rated credits, resulting in spreads continuing to fall. We expect new issuance to pick up prior to the election and the market’s focus to remain on these lower-rated issuers, presenting a good opportunity to invest in the higher-grade sectors and credits that we prefer.

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Buying the Big Five?

Imagine an investment strategy wherein you might seek out the most successful and valuable companies. We will refer to this as the “big five” portfolio. Further, imagine that this “big five” portfolio bought the five most valuable companies in the Standard & Poor’s 500 index at each year’s end starting in 2000. Imagine further that this process was repeated each year ever since. How might this strategy of buying big and valuable stocks have done? The strategy produced positive returns, but the journey would have been painful and frustrating (chart A, below). Investing in the “big five” at the start…

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What Next?

Even though stocks should rise over time, we think the pace of the market rally is set to slow because extraordinary government supports for the economy are set to fade, and valuations have run ahead of fundamentals. Changing Tack It is hard to bet against stocks for the long-term. Since the 1920s, stocks have produced a positive return every 20 years based on S&P 500 annual returns. Stocks tend to beat bonds and cash over time, supporting the idea that markets tend to reward risk. But this fact obscures the reality that stock investing also involves periodic drops. Not everyone…

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Municipal yields drifted higher in August after falling in July, with the curve steepening in concert with U.S. Treasuries. Muni Mutual Fund inflows have continued for 15 consecutive weeks, taking in another $11 billion in August. The curve remains steep, especially in the six- to 10-year area, where we’re finding opportunities to pick up additional yield while not adding significant additional duration risk. Credit spreads remain elevated but have narrowed from their peak, signifying a “reach” for yield.

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Time for Tactical?

Years ago, it was easy to make money. Those who were around during the 1970s may even remember earning near 20%. A three-month CD in December 1980 earned over 18%, according to data from the Federal Reserve. Such rates are near 0.18% today — far below the core inflation rate (+1.3% year-over-year). At that rate, a $100 investment would grow to only $101.80 over ten years. Evaporating Interest Rates And don’t think buying longer-term bonds is the answer, either. Ten-year U.S. Treasury bonds now yield 0.7% compared to over 3% just two years ago. A $100 investment in a zero-coupon…

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