Rates decline modestly despite inflation concerns; demand outpaces supply as economy reopening continues, spreads tighter across most market segments in May and sector returns mostly positive, but mixed YTD.
Light supply and positive demand support prices, infrastructure negotiations continue, state/local aid distributions begin to enhance recovery and lower quality municipals continue their trend of outperformance.
Baird Advisors provides timely insights about the current interest rate environment for the baby boom generation.
Municipal curve flattens as demand overwhelms even rising levels of supply, municipal investors digest tax and infrastructure plan implications and longer maturities and lower-quality outperformed in April.
Rates decline and curve flattens as Fed maintains extremely accommodative policies, spreads tighter across most market segments in April and sector returns positive for April, but mixed YTD.
The coronavirus vaccine rollout began worldwide. The U.S. rollout has been particularly successful and while most other major economies are still far behind, vaccine programs are a global positive because they have given line of sight to the economic reopening and recovery. Because of this, expectations for a more powerful global recovery have materialized and financial markets responded in force. In one of the most severe equity market rotations in years, shares of technology and other growth stocks were battered, while shares of beaten down sectors and value stocks rose significantly. In this environment, Chautauqua’s portfolios appreciated in value, but we underperformed relative to our benchmarks.
While Robinhood trading and short squeezes commanded headlines early in the quarter, more significant events impacting markets and economic data included substantial progress on the vaccine front, a turn lower in Covid-19 cases, and the passage of a very large fiscal stimulus bill. Improving economic fundamentals lifted growth expectations as well as long-term interest rates, spurring debate about future inflation. The cumulative effect on equity markets was generally positive, with most broader stock indices rising through the year’s first three months.
Consistent with past economic and market cycles, low quality/high beta stocks led out of the bear market of 2020. While we had hoped at the end of last year that the baton had been handed off to quality value leadership, we were early, and the beta trade outperformance accelerated to what appears to have been a blow off top by mid-March. In total, the 12 months witnessed the quintile of the highest beta stocks up 255% versus a 29% gain for the quintile of the lowest beta stocks in the Russell 2000 Value! A near 10-fold better return and something we have not witnessed since the 2009 rally post the Great Financial Crisis.
Rates rise quickly as fiscal stimulus and vaccine rollout lead to higher growth and inflation expectations.
Municipal curve steepens on growth/inflation concerns, ARPA, AJP, AFP and taxes and solid March returns provide mixed returns for the quarter.
The Advantages of Higher Interest Rates for Fixed Income Investors
Municipals yield rise on inflation concerns, winter storm Uri cripples Texas at great economic impact and rising rates produce negative february returns.
Longer yields rise as curve steepens, COVID-19 cases plateau, House passes pandemic relief package.
Curve steepens modestly, Biden sworn in as U.S. President, vaccination efforts continue, spreads mixed across market segments in January and sector returns mixed though indices generally negative.
Strong rally in lower-rated municipals, Democrats take control in Washington DC, vaccinations and reopening become visible, positive January returns driven by lower-rated and longer-dated securities and total returns of selected Bloomberg Barclays municipal indices and subsectors.
Historically, deep value/low quality stocks have led out of bear markets. Their outsized returns have tended to be strong and swift, but they are quickly exhausted and yield to the broader market as the recovery plays out. As we reflect upon performance for the calendar year, we are frustrated to have trailed the benchmark, yet we must acknowledge that the portfolio performed consistent with our discipline. Our focus on high quality businesses rewarded us as expected during the first quarter of 2020, providing strong downside protection as markets plummeted, and outperforming our respective benchmarks by as much as 800 basis points.
The storyline remained the same for much of 2020’s final three months – difficult trends in COVID-19 cases and deaths, a heated political environment, and an accommodative fiscal and monetary backdrop. However, very strong efficacy data delivered by the Pfizer and Moderna vaccines stole the show in early November and drove equity markets higher into year end.
The Covid-19 challenges of 2020 were unexpected and unprecedented, but so was the speed and magnitude of the monetary and fiscal responses.
Stimulus measures throughout the year have helped valuation multiples grow richer, despite a collapse in corporate earnings and economic fundamentals. This dynamic underlines the biggest source of market returns this past year: the expansion of valuation multiples. Chautauqua's International and Global Growth strategies were able to again outperform in the fourth quarter, aided by changes in the portfolios, including taking profits from some high valuation “winners” and redeploying to lower valuation holdings.
Year in Review
Global pandemic shock followed by massive coordinated fiscal and monetary response, Fed's response and Congress' CARES Act eased the pain; politics and geopolitical uncertainty were high in 2020, fixed income flow rebounded and the full market cycle for spreads in one year.
Stock prices continued their remarkable ascent from the March pandemic low, shaking off a rise in new COVID-19 cases and a heated political environment to finish the third quarter near all-time highs. Stronger economic data and broader participation across the market were at work. Heading into the third quarter, more cyclical areas of the market such as producer durables, materials, consumer discretionary, and energy had generated the worst absolute returns through the first half of the year. However, in the third quarter these sectors delivered some of the best performance and joined healthcare and technology in reporting positive returns. The change was driven by an improvement in economic fundamentals reflected in further employment gains, a rebound in manufacturing activity, and strong housing data, underpinned by an accommodative monetary stance and prospects for more fiscal help.
As we pass the six-month mark since the U.S. COVID-19 lockdowns, we reflect upon recent and potential long-term changes in consumer spending trends. The market ricochet off the March lows disproportionately rewarded the stocks of those businesses that have benefited the most from the economy reopening. The S&P 600 Small Cap Hotel Restaurant and Leisure Index, to illustrate, has more than doubled in the past six months to within 10% of its all-time high.
Markets grinded higher in the third quarter. Strength was broad-based amongst sectors and geographic regions. In this environment, growth stocks outperformed substantially relative to value stocks. Chautauqua's International and Global Growth strategies were able to again outperform in the third quarter, aided by the significant repositioning we had done in portfolios amidst the sell-off in March.
Baird Advisors takes an all-weather approach designed to control risk while adding incremental value through yield curve positioning, sector allocation, security selection and competitive execution.
Baird Funds Senior Portfolio Managers Duane McAllister, CFA, and Lyle Fitterer, CFA, provide insight into how staying with municipals can provide resiliency through uncertainty.
Baird Advisors Managing Director and Chief Investment Officer Mary Ellen Stanek, CFA, and Dan Clifton, partner and head of policy research at Strategas, discuss potential implications of the upcoming election and its impact to the financial markets.
Much has changed since the major market averages recorded fresh highs in February of this year…much that is, except the level of those averages. The epic plunge and ricochet of the market puts the S&P 500 within 8% of its all-time high and the Nasdaq Composite 2% above where the sell-off began. During that time, however, the economy has entered the steepest recession since the Great Depression. Corporate earnings estimates have been revised lower by 26% for 2020 and 14% for 2021. As a result, valuations as measured by price-to-earnings ratio have risen to levels not seen even during the Financial Crisis of 2008. At current levels, the market appears priced for perfection, despite the country’s progress controlling the COVID-19 outbreak deteriorating at an exponential pace.
As stay-at-home restrictions eased across the country during the second quarter and consumers and businesses started to resume normal activities, equity prices quickly began discounting a recovery. Company updates in many cases revealed weekly improvement, driven by some combination of pent-up demand and extra spending power from significant fiscal stimulus. The result was a remarkable “V” in the first half of the year as the sharp and painful decline of the first quarter gave way to a sizable ascent in the second. We are certainly encouraged by signs of fundamental improvement but also know that recoveries do not unfold in a straight line, and the build in new virus cases as the quarter closed is a case in point. Investors should expect bouts of volatility as companies work through a challenging time.
Markets rallied vigorously in the second quarter. The increase in risk sentiment was considerable. Positive stock performance was broad-based, with all sectors and regions benefitting. In this environment, after providing downside protection in a volatile and declining market in the first quarter, Chautauqua's International and Global Growth strategies were again able to outperform in the second quarter.
In our latest whitepaper our investment team provides insights into why it’s important to maintain a high-quality bias in the municipal market until the outlook is more certain.
Much will be written about the first quarter of 2020, which was unprecedented in most every way. The evolution of the Coronavirus from a distant headline to a local health and economic crisis and its impact on markets, governments, and central banks will not soon be forgotten. As a result, we open differently than our typical quarterly format in these challenging times.
At the time of this writing, most of the nation is locked down with shelter-at-home orders as we approach in the coming weeks what we hope to be the peak of the COVID-19 outbreak in the United States. The global pandemic has virtually shut down much of the global economy, making financial analysis for many investments near impossible in the short run.
This was an extraordinarily challenging quarter for all market participants. Chautauqua's International and Global Growth strategies also generated negative absolute returns but outperformed their benchmarks in the first quarter of 2020, to provide some downside protection, in the face of significant absolute loss. In this letter, we discuss the nature of our performance and provide our investment outlook.
Read more about the current opportunities in Taxable Municipal Bonds in Baird Advisor's latest whitepaper.