Insight & Commentaries

This week closes out a most volatile quarter. Stocks are on track to rise by the most during the quarter (+19% as of this writing) since 2009 despite a sharp contraction in the economy. The powerful rally leaves many wondering about valuations amid a pandemic and recession. Even though price is important, we should avoid relying too heavily on standard valuation metrics such as price-to-earnings multiples because this economy is far too volatile to assess business prospects accurately and because stock values are determined mostly by long-run, rather than short-run, earnings power. Price is Important Overpaying for stocks can take…

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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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Last Monday, the National Bureau of Economic Research declared the longest economic expansion in U.S. history over. After beginning in June 2009, the expansion lasted for 128 months through February. Born in the depths of a severe financial crisis that started at home, many worried the U.S. would suffer a long decline. In the ten and one-half years that followed, the U.S. economy and markets outpaced most others, leaving domestic stocks with premium valuations. Even though U.S. stocks appear relatively expensive, we should remain tactically overweight domestic assets for now because dollar-denominated assets can convey significant benefits during times of…

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Municipals rallied significantly in May, with AAA yields moving lower or remaining unchanged in every trading day of the month. The opportunity to invest in munis that we pointed out in last month’s report was also recognized by the broader market, causing munis to return to more “fair value” levels compared to other fixed income assets. As over $3 billion in cash returned to muni funds, short-term yields fell to historic lows and the overall market posted one of its best monthly performance numbers in over 10 years. We expect muni yields to remain at these depressed levels in the…

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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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Tactical asset allocation in CONQUEST portfolios is discussed in this quarterly series. In this quarterly installment, we discuss how CONQUEST is adapting to rapid changes brought about by the outbreak of Covid-19. An encouraging start to the year gave way to the unsettling reality of a global pandemic last month. In very short order, financial markets responded to extraordinary societal changes. Since February 19, global stock markets shed a record $25 trillion (30%) in a matter of days after Covid-19 became a pandemic. Bond markets and commodities also exhibited volatility and complicated movements. Not since 1987 have markets adjusted with…

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Half Full

Reopening the economy has stirred some optimism amid a wash of depressing forecasts. The Federal Reserve Banks of Atlanta and St. Louis have a model that estimates the U.S. economy may contract at a 42-48% annualized rate in Q2. For a more optimistic read, the Federal Reserve Bank of New York “Nowcast” estimates a 31% pace of decline in Q2. Thirty-six million lost jobs and record drops in both industrial output (-11% April) and retail sales (-16% April) are driving the slump. The second quarter is going to be a bad one, but recently markets seem to be looking beyond…

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MuniWatch

After experiencing unprecedented stress in March due to the effects of the coronavirus, the municipal bond market has returned to more of a sense of normalcy as the new issue market begins to open and trade activity stabilizes. This report looks at forces shaping recent changes in the municipal bond market.

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Dividend Cuts

Some companies are cutting dividends as the economy weakens. A recent Barron’s article lists about sixty firms that eliminated, suspended, or cut dividends since February. We decided to look at the fundamental characteristics of the companies cutting dividends. To do this, we created an equally-weighted portfolio comprised of the stocks in the Barron’s article and asked several questions. What was the dividend yield at the end of last year, before coronavirus hit? What was the financial profile of the dividend cutting firms based on profitability, leverage, and dividend policy? Finally, what happened to the stock prices of those firms which…

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Hints of Progress

A small glimmer of hope is concealed in recent data trends. Here are a few examples: The number of Covid-19 U.S. cases fell for the fourth week in a row (chart A, below), and deaths decreased for the first time last week (chart B, below). Unemployment insurance claims also fell for the fourth consecutive week (chart C, below). Domestic air traffic posted small gains last week (chart D, below) as did transit hubs (chart E, below). Credit spreads changed little for the third week in a row (chart F, below), and analysts trimmed less than $1 from S&P 500 earnings…

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Signs of Stability

Before we can hope to see a turn for the better, we must first see signs of stabilizing. For the most part, this is what we see in the most recent data. We try to discern the path to recovery in the week-to-week data: virus trends, by looking at cases and deaths across the United States; economic trends, by looking at mobility and reports of real economic activity; and market trends, by looking at the response of key financial indicators. This week’s analysis showed us that the economic hole is deep, but the rate of falloff is slowing. Slowing Spread…

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MuniWatch

The municipal bond market experienced unprecedented turbulence over the past month as coronavirus fears swept all markets. Wild swings in yields became the expectation rather than the norm, with multiple days of 50+ basis point moves. Investors pulled over $25 billion from municipal mutual funds in the past three weeks after recording over 60 consecutive weeks of inflows, according to Lipper. Liquidity providers retreated from the market just as these funds were forced raise cash. Our defensive strategy of keeping duration short and credit quality high has provided protection in this period of market stress.

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Tracking Recovery

Stocks rallied last week on talk of reopening the economy and the S&P 500 is about half way back to February highs. The lockdown is helping to slow cases of coronavirus, but the economy is taking a beating as a result. Judging by recent data, the U.S. economy is likely contracting at an annualized pace in the range of -15% to -22% (chart, below). Over 10 million Americans filed for unemployment insurance in the past month. Estimates of potential job losses range from 23 million (Goldman Sachs) to 47 million (St. Louis Federal Reserve). The speed of the present downturn…

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