The 2020 Presidential Election and Markets – 5 Things Investors Need to Know

ContentMigration on October 2, 2020

by Rob Williams, Director of Research

We expect the continued economic recovery to be a driver of market returns overall and putting the uncertainty of elections behind us will be positive for risk assets such as equities. In the meantime, as we enter the height of election season, investors should consider how the following factors will affect markets.

1) Expect a tight race and continued volatility. Biden maintains a lead over Trump in the voting polls, but the lead has shrunk as the economic recovery gained momentum and markets moved higher.


Source: Bloomberg

Trump’s polling gap is highly dependent on Covid-19 cases. Recent market volatility and an uptick in new cases is likely to keep Trump trailing into the election, but close enough to keep results highly uncertain.

Source: Bloomberg

2) Historical data is a mixed bag. Historical election and market return data tells us that immediate post-election market returns have not favored either party; both parties have had strong positive and negative return regimes over both short and longer periods. While the incumbent president has typically had the advantage, 13 vs. 10 wins, this is not so during recessions, where the incumbent has lost 4 out of 5 times.


Source: Bloomberg

3) Contested results will cause market volatility. A contested election/delayed results is something investors should be considering and would likely result in at least a temporary risk-off scenario. The 2000 election is the nearest example we have of a delayed result, when the Supreme Court ultimately halted recounts and declared a winner. The result of the uncertainty was lower interest rates and weaker equities, with performance favoring international, value-oriented equities and longer-duration fixed income.

Source: Bloomberg

4) Trade policy will be impactful and doesn’t depend on either party controlling Congress. The handling of trade policy will be one of the key differences between candidates and doesn’t require a shift in Congress to be implemented. Harsh rhetoric and tariffs during the China/U.S. trade war weighed on international returns, especially China and emerging market Asia. Status quo results may continue to favor the U.S., while a Biden victory could bolster relative international returns.

Source: Bloomberg

5) Both parties will focus on pro-growth policies, and the Fed will be the more important driver of interest rates. The following table provides color on how markets would respond depending on the winning candidate.

Source: Bloomberg

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Making Sense of Fed Policy During COVID-19

ContentMigration on March 26, 2020

The Fed’s response to the economy and market breakdown engendered by the COVID-19 crisis has been unprecedented — not only in scale, but how quickly new policy tools have been used to address rapidly tightening financial conditions. The following is a short post intended to demystify the “alphabet soup” of Fed tools and what each tool is trying to fix, and provide a list of additional policies we can reasonably expect in the near-term.

A global health crisis ultimately requires a scientific solution, but earlier this month within the span of days, the health crisis morphed into economic stress (with the uncontained spread of COVID-19 in Italy), and eventually threatened to become a full-blown financial crisis (after the OPEC oil shock on March 7). Ultimately, the intensity of the Fed’s policy tools was targeted at containing and preventing market stresses from turning into a financial crisis while the world dealt with COVID-19.

Notable policy tools the Fed has employed thus far include:

Interest Rates Cut to Zero

The Fed has cut rates to zero, first on March 3 by 50 basis points, and by a further 100 basis points on Sunday, March 14. As market stresses intensified effects on short-term fixed income both in the U.S. and overseas, which was caused by interest rate differentials, the FOMC had to cut rates to zero two days before its scheduled March meeting, underscoring the urgency of the situation.

Unlimited Quantitative Easing (QE)

The Fed started a $700 billion QE program on March 14, and nine days later, it expanded the size of QE to be open-ended. To put this into perspective, after the global financial crisis (GFC), the span of QE1 to QE3 took 5 years. It took only nine days for the Fed to expand QE to be open-ended. Put another way, the Fed will buy more assets this week than it bought post-GFC during the years 2010 to 2012.

Commercial Paper Funding Facility (CPFF)

In order to support the commercial paper market, which is a short-term funding vehicle for the corporate sector that seized up last week, the Fed announced a $100 billion purchase program backed by $10 billion of funds to cover loan losses from the U.S. Treasury’s Exchange Stabilization Fund (ESF) (typically used to intervene in foreign exchange markets).

Money Market Mutual Fund Liquidity Facility (MMLF)

On March 18, the Fed created the MMLF to lend money to banks so that they can purchase assets from money market mutual funds, supporting functioning of the money markets. Again, this program is $100 billion in size, backed by $10 billion from the U.S. Treasury’s ESF.

Corporate Credit Facility (PMCCF, SMCCF)

On March 23, the Fed created two vehicles to purchase corporate bonds in both the primary and secondary markets. Notably, the Fed announced the purchase of corporate bond ETFs. This program to buy IG corporates was truly a new tool (not used during the GFC), which has calmed credit markets in the near term. The total size of this program is $300 billion, backed by $30 billion from the ESF.

Term Asset-Backed Loan Facility (TALF)

Also on March 23, the Fed established the TALF to buy asset-backed securities that are backed by auto, student, or small business loans. The capacity of this vehicle is included in the $300 billion to buy corporates and ETFs.

Our takeaways and expectation for future policy:

The Fed and U.S. Treasury are in coordination, and thus, monetary and fiscal policy are one.

The Fed is in the fiscal arena now. By creating vehicles to effectively support the debt markets and make loans to businesses backed by the U.S. Treasury, the Fed is now squarely conducting fiscal policy, and we believe this trend will continue with future policy moves.

The Fed will roll out a Main Street Business Lending Program.

The Fed announced a “Main Street Business Lending Program,” the specifications of which are currently unknown, but we believe it will be of similar structure to the ESF-backed facilities mentioned previously.

These facilities and programs are going to get larger, much larger.

In the CPFF, MMLF, SMCCF, etc., the lending capacity of these vehicles are backed by capital from the U.S. Treasury. For every dollar from the U.S. Treasury, there may be 10 dollars of lending capacity. Of the announced programs, there is roughly $500 billion of lending/market support capacity backed by $50 billion of capital from the ESF. The “Phase 3” stimulus bill upsizes the ESF by $450 billion. Put a 10x multiplier on that and $4.5 trillion is the size of market support and lending capacity that would be available to the Fed. To put this into perspective, the Fed’s balance sheet is currently at $4.6 trillion after over a decade of monetary accommodation since the GFC! A $2 trillion fiscal stimulus program could have the effect of a $6 trillion stimulus program, which is over 30% of U.S. GDP! That would dwarf any stimulus deployed during the GFC by multiples.

The Fed and Treasury are truly doing “whatever it takes.”

We are optimistic that market functioning and liquidity will slowly return. The Fed and Treasury have shown a sense of urgency to support the economy during the COVID-19 pandemic and hopefully, when the virus starts to taper off, we believe we could see a material rebound in financial assets.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Black Swans of the Same Feather – Sage Commentary on Recent Market Volatility

ContentMigration on March 10, 2020

The market moves in recent weeks have been nothing short of unprecedented. We seem to be experiencing multiple rare and unpredictable events simultaneously. The following is a recap of key events and our observations thus far.

A recap of last week through Monday, March 9:

  • COVID-19 concerns have grown given its spread to an increasing number of countries. The disease has now reached more than half of the countries in the world, including the U.S. This has been a major concern, and markets have priced in a hit to economic growth both from private sector demand and more uniquely, supply-side shock, as supply-chain disruptions in Asia and now the U.S. will result in a further hit to global growth. In its most recent report, the OECD revised its 2020 global growth rate assumption down to 2.4% from an already low 3% given concerns around COVID-19. The rate could fall as low as 1.5%, according to the OECD’s outlook.
  • A strong policy stimulus response was expected, and the Fed made the first move, with an emergency 50 bps rate cut on March 3. However, given that the current situation largely involves an unpredictable viral outbreak that is truly an external shock, lowering the cost of money did not have the same effect as in prior slowdowns since the 2008 crisis. In the coming weeks, the world’s major central banks and governments are expected to inject additional monetary and fiscal stimulus into the economy to combat any potential slowdown. The ECB is expected to ease policy further, either by cutting rates and/or making asset purchases on March 12, and the Fed is expected to follow suit with further rate cuts on March 18. On the fiscal side, affected countries could provide fiscal stimulus to their respective private sectors through the form of tax cuts or direct relief to affected industries – similar to what China has done over the past month for its domestic business sector.
  • In addition to the COVID-19 shock, tensions between Russia and Saudi Arabia have escalated into an all-out oil price war. In response to a breakdown in OPEC/Russia talks last week, on Saturday, Saudi Arabia announced massive discounts to its official oil selling prices and indicated that it was increasing production above the typical 10 million barrels per day. The fear of an oil price war resulted in a 25% selloff in crude oil during yesterday’s trading session – the second worst day for WTI crude on record. The selloff sent shockwaves through global markets, as any commodity-linked asset class or sector priced in an additional hit to growth on top of slowing activity from COVID-19.
  • These events occurred in the context of a market with extremely thin liquidity. Wider bid-ask spreads across all asset classes have amplified market volatility with several extreme +3% up and down days. Currently, the VIX index is trading at 55, the highest at any time since the 2007/2008 crisis.

Observations:

  • The collapse of Treasury yields – Treasury yields have collapsed to all-time lows as investors continue to flock to safe havens. U.S. Treasury markets are not just pricing in further Fed action, they are pricing in a total “Japanification” of the U.S. economy with long-duration yields trading well below 1% at the start of this week.
  • Widening credit spreads – Credit spreads have widened past 4Q 2018 to near 2016 levels, with the speed of the move catching investors off guard. U.S. credit markets, which before March had been resilient against virus fears, have repriced to reflect a significant economic slowdown over the balance of 2020. Currently, the U.S. high yield sector offers an all-in yield at near 8%, which could prove to be an interesting opportunity if market volatility begins to settle down as a result of positive Covid-19 breakthroughs, government policy actions, and increased investor confidence.
  • Equity performance vs. bonds – The recent relative return of global equities versus bonds has no precedent outside of the financial crisis, since right after the collapse of Lehman Brothers and AIG. The chart below shows the 1-month relative return of the MSCI ACWI vs. the Bloomberg Global Aggregate Index, which stands at -21%.

The Market is Pricing in a Recession – The Question is: How Deep?

At Sage, we’ve maintained a relatively low level of risk across most of our strategies and remain opportunistic. A full-scale risk-off positioning often provides an opportunity in dislocated areas of the market, but we believe it’s too early to “buy the dip” here. Markets are in “no-man’s land” in some respect, driven by a tremendous amount of uncertainty and fear.

The scenario in which COVID-19 disruption devolves into a global recession is now reflected in market pricing. The question now is how deep is it expected to be? Policymakers will respond in the coming days and weeks with monetary and fiscal stimulus, but the nature of those policies will have to somehow address the threat to the economy that is now fourfold: COVID-19 demand/supply chain shock, an oil price war, credit stress, and a lack of trading liquidity. We await that response, along with any new details, and will continue to keep you updated as this unprecedented situation develops.

Going Forward: Heightened Market Surveillance & Identifying Value Across Asset Classes

  • The Sage investment team is deeply experienced and has worked together through multiple cycles, including several periods of economic and market stress. During uncertain times, the structure and experience of our team has proven to be an advantage for our clients.
  • We approach this environment with patience and diligence. Within our fixed income portfolios, our duration positioning has become more defensive in anticipation of more normalized levels of interest rates. Furthermore, a normalization of market risk has the potential to steepen the yield curve in concert with further rate cuts from the Fed. Within credit, we have maintained a relatively conservative posture, which has helped to mitigate downside risk during this correction. We continue to be selective in our credit exposure, avoiding issuers that we deem to be vulnerable to near-term downgrade pressures. In early February, we lowered equity sensitivities within our multi-asset class strategies, which allows us to be opportunistic in the case that conditions improve and/or attractive valuations present themselves.
  • For more information about specific Sage strategies, please reach out to your client service team at 512-327-5530.

* Source on all charts is Bloomberg.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

All Hands on Deck – An Update on COVID-19, Its Effect on Markets, and Our Game Plan

ContentMigration on February 28, 2020

It’s been a long week for the markets. After a respite at the beginning of February, fears around the coronavirus (COVID-19) have devolved into a full-blown panic, resulting in the fastest equity selloff ever. Looking across markets reveals the extent of the turmoil:

A few observations from the last eight trading days:

  • U.S. risk assets are leading the down move. The S&P 500 fell into a corrective -10% drawdown in the shortest time period ever. In addition, investment grade corporate credit spreads, which were largely immune to the initial COVID-19 shock in January, widened by 23 basis points to 1.20% over Treasuries. High yield corporate spreads have widened by 112 bps to nearly 5% over Treasuries.
  • Conversely, Chinese equities have outperformed handily during the recent drawdown. Whether it reflects improving conditions in China, or an under-owned region outperforming in a “sell-everything” market, de-risking remains to be seen.
  • Treasury rates continue to make new all-time lows. As of this writing, the U.S. 10Y yield is hovering near 1.15% which is well through the low in yield established during the Brexit Referendum in 2016.

It’s all hands on deck for us at Sage. While we don’t know yet what medium to long-term effects the COVID-19 will have on markets, we do see some areas that could present an opportunity given the extreme fear in the market. Here’s our perspective on various asset classes and the game plan for investing in this environment.

Fixed Income: Interest Rates to Remain Low:

Treasury yields have retreated to make a new all-time low, reflecting COVID-19’s potential impact on the global economy. In January, market consensus treated the effects of the virus as having no more than a 1Q effect on GDP. As the virus continues to spread to more countries, the market has shifted to discounting a much deeper hit to the global economy.

The markets are expecting the Fed to act in response to the virus shock – the Fed Funds market is now anticipating nearly four rate cuts this year (Chart 1) after pricing in just one on February 20th. The Fed’s projection of its rate path, which hasn’t been updated since December, now looks far different than market pricing. Market participants will certainly pay close attention to future Fed communications.

Given the uncertainty in the market, continued flows into high quality fixed income, and potential policy easing, we expect yields to remain low, or even move lower from here. We are maintaining a longer duration across our fixed income strategies.

Credit spreads have widened in kind with the equity selloff, albeit its move isn’t as extreme when compared to recent history. The corporate bond markets are still adjusting to the risk to global growth from historically low spread levels (Chart 2). Conversely, at ultra-low Treasuries yields, corporate credit and other spread sectors now present an interesting yield advantage versus low Treasury yields. To that end, we are carrying a relatively low level of corporate credit risk across most strategies, leaving room to add to credit in the case that the narrative on COVID-19 changes for the better and/or take advantage of dislocations that occur during a panic sell-off.

Equities/Multi-Asset Strategies:

Ahead of the most recent selloff, we lowered equity exposure within the Multi-Asset Income strategies, and reduced beta in our equity allocations. Equity price action during the end of February reflected the public fear around the spread of the COVID-19. The S&P 500 rallied to an all-time high on February 20 then subsequently fell into a corrective 10% drawdown one week later – the fastest descent into a correction, ever. The magnitude of the down move was exacerbated by selling pressure from systematic strategies and retail investors. Two widely followed technical indicators – Relative Strength Index (Chart 3) and Put/Call Ratio (Chart 4) – are at extreme bearish levels which tells us that selling pressure should subside in the near term.

Going Forward: Heightened Market Surveillance & Identifying Value Across Asset Classes

So what now? While we think equity and credit selling pressure should subside in the near-term, uncertainty around the effect of the COVID-19 will remain, along with corresponding market volatility. However, a market environment driven by fear, speculation, and uncertainty could present opportunities to identify mispriced securities, sectors, or asset classes as more information comes to light. We approach this environment with patience and diligence. Within our fixed income portfolios, we remain slightly long duration and carry a relatively low level of credit risk. Within our multi-asset class strategies, we’ve recently lowered equity sensitivities, which allows us to be opportunistic in the case that conditions improve and/or attractive valuations present themselves.

We are closely monitoring the COVID-19 situation and will continue to update you on any changes in market conditions or our perspective.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Watch for These 6 ESG Trends in 2020

ContentMigration on January 30, 2020

by the Sage ESG Team

1. A greater adoption of ESG.

Growth in ESG funds continues to climb. According to Morningstar, net flows to sustainable funds in the U.S. were $20.6 billion in 2019, almost four times the amount of net flows from 2018 of $5.5 billion. There are now 300 ESG open-ended funds and ETFs, up 27% YOY from 236 funds in 2018.

Source: MorningStar Direct, Data as of 12/31/2019

2. Greater results.

Gone are the days of sacrificing performance to invest in the causes and themes we care about. More people are investing in ESG portfolios because the performance of ESG strategies are competitive with conventional investment products and align to individuals’ values. We call it a double-bottom line. This month, Barron’s reported that in 2019 big-cap equity mutual funds that received a Morningstar sustainability rating of “above average” or “high” outperformed comparable funds with lower sustainability ratings.

Source: Barron’s Morningstar

We are seeing similar results. In 2019, Sage fixed income and equity ESG strategies also outperformed their respective market benchmarks.

3. An increase in products.

We are seeing new ESG products emerge across the asset allocation spectrum, from 401(k) plans to real estate and alternatives portfolios. Specialty funds on ESG themes have also risen in popularity, such as strategies with increased focus on diversity, with gender emphasis, and a breakout of climate change issues, including fossil-fuel-free funds.

Source: RBC Global Asset Management

At Sage, we expect an increase in the number and types of our product offerings in 2020. Last year, Sage ESG portfolios made their way into cash management and 401(k) plans, providing ESG investment opportunities to plans where there is growing demand but few ESG options.

4. Increased competition.

As more ESG products make their debut, we expect 2020 will be a year of separation in the quality of performance and ESG integration process. There will be heightened scrutiny from SEC, as ESG consideration is increasingly viewed as part of an investor’s fiduciary duty to clients, and institutional consultants will become clearer on their ESG investment requirements. It will be important for each asset manager and each ETF provider to have clear processes in place for how they choose ESG investments. Investors will want to know 1) What is the framework? 2) What is the source of the data? 3) How does it reflect the culture of the firm? 4) what is the client reporting process? 5) how has the strategy performed? Third-party validation from data providers, such as MSCI and Sustainalytics, will matter; the industry will need a referee to say what is truly ESG.

Sage ESG has portfolios that are audited by Sustainalytics semi-annually, because we believe it’s important to our clients to have third-party verification. We also conduct annual stewardship surveys to engage with ETF providers and determine which have practices and policies in place to select the best ESG companies to include in an ETF.

5. Internal ESG policies will matter.

When it comes to choosing an ESG investment manager, internal policies and the “ESG-ness” of the firm will be just as important as its ESG investment holdings. Increasingly, public companies and ESG investment managers are producing annual sustainability reports to measure how their product, services, and people adhere to ESG standards.

In 2018, 86% of the companies in the S&P500 Index published sustainability or corporate responsibility reports.

Source: Governance & Accountability Institute, Inc. 2018 Research – www.ga-institute.com

Additionally, it will be increasingly important for ESG investment managers to affiliate with and support ESG research and reporting organizations, such as MSCI, Sustainalytics, and the Sustainability Accounting Standards Board (SASB), and to seek and hold key certifications, such as the B Corporation designation.

Sage is a member or supporter of all the sustainable organizations that we believe are making the strongest advances in ESG research and reporting. These include Principles for Responsible Investing (PRI), Climate Action 100, The Forum for Sustainable and Responsible Investment (US SIF), Task Force on Climate-Related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and The Green Bond Principles. We also produce and update annually our Sage Responsible Investment Policy in order to provide investors with transparency about how we incorporate ESG factors into our investment process.

6. Clearer reporting.

An emphasis on clear, concise, and consistent reporting will be higher than ever. An increase in the number and types of products will cause confusion in two dimensions: 1) What third-party sources should I pay attention to, and 2) Who is (actually) doing ESG and how do they do it?

At Sage, we are pragmatic in our ESG investing. Our client reporting includes consistent communication about measurable outcomes. For us, financial materiality and the “G” in ESG will be the focus. Governance will be followed by an emphasis on social and environmental factors, because we believe change starts within the company. This year we will introduce more broadly our Sage ESG Leaf Score, enabling investors to quickly assess ESG performance across companies and industries.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

5 Key Themes That Will Drive Markets in 2020

ContentMigration on January 16, 2020

Sage’s base case going into 2020 is a market environment characterized by stabilizing growth, low inflation, and continued monetary and fiscal policy support. The following are five themes that will impact market performance in 2020.

To listen to Sage’s 2020 market outlook podcast and how we are positioned for the first half, click here.

1. The U.S. Consumer

The domestic household sector remains the engine of U.S. economic growth. Household debt service capabilities are the healthiest they’ve been in over 30 years, and the labor force continues to expand, with the unemployment rate continuing to fall to cycle lows.

Source: Sage, Bloomberg

2. The Trade War

2019 was a year of de-escalating trade tensions, culminating in a “phase one” trade deal between the U.S. and China. Easing of trade tensions was a contributing factor in the late-year rally. If the status quo holds, trade issues should remain in the background. A quiet period of trade rhetoric would dampen volatility and lift economic sentiment.

Source: Sage, Bloomberg, Reuters

3. Central Bank Accommodation

After years of balance sheet contraction due to tighter monetary policy, global central bank balance sheets expanded in 2019, as global central banks enacted easy money policies in the face of slowing economic growth. Central banks are not expected to change policy course in 2020, which should continue to provide support to financial assets.

Source: Council on Foreign Relations

4. Corporate Earnings

A recovery in economic activity coupled with low inflation will be required for strong corporate earnings growth. Although corporate profit margins are at a 30-year high, inflation could raise costs and negatively affect corporate profitability.

Source: Sage, Bloomberg

5. The Presidential Election

Over the past 90 years, equities and fixed income have typically fared well during presidential election years, with 19 of 23 election years resulting in positive equity returns and 21 of 23 years resulting in positive returns for U.S. Treasuries.

Source: Sage, Damodaran Online (NYU)

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Notes from the Desk: 3 Reasons Now is the Time to Sell High-Yield

ContentMigration on September 25, 2019

by Ryan O’Malley, Fixed Income Portfolio Strategist

In recent weeks, Sage has become more cautious on lower-quality corporate bonds. Our caution is based on the following signals.

1. Abnormal Performance – High-yield bonds have performed well on an absolute-return basis this year, returning nearly 12% in 2019. Years of double-digit returns for high yield are rare and are typically followed by much weaker returns the following calendar year.

2. Relative Value – High-yield bonds have dramatically outperformed investment grade corporate debt this year, and particularly in the past few months. The spread premium paid by high-yield bonds compared to investment grade bonds has narrowed to its lowest level in 2019 and is near historic lows.

3. Signs of stress in the weakest parts of the market – Despite strong overall performance in the high-yield bond market, there are signs of stress. One such signal is the increase in the number of bonds trading at “distressed” levels. “Distressed” bonds are defined as those issuers who’s spread to the relevant U.S. Treasury exceeds 1,000 basis points, or 10%. The number of bonds trading at “distressed” levels has increased by 63% in the past 12 months.

Sage Positioning

As a result of this changing view, Sage has elected to trim high-yield exposure where we had individual bond positions – taking profits on some longstanding trades, including debt issued by Hilton Worldwide, T-Mobile, Ardagh Group, Cheniere Energy Partners, and Western Digital. Sage has also tactically shifted away from “crossover” credits, or credits that hold investment grade ratings from one agency and high yield from the other.

Investment grade spreads often follow trends in the high-yield markets, so Sage has also shifted its investment grade exposure away from riskier credits and towards higher-quality ones.

*Source on all charts is Bloomberg.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

September Equities Outlook in 5 Charts

ContentMigration on September 16, 2019

1. Global growth continues to slow, and the escalation in the trade war, weakness in U.S. data, and politics have increased the probability of a global recession in the next 12 months. The silver lining, at least in the short-term, is that coordinated central bank easing will continue to provide some support to risk assets.

2. We see tactical upside given that sentiment has become very bearish and we are heading into a better seasonal period.

3. Absolute valuations in global equities are not stretched and, relative to bonds, have gotten more attractive with a drop in rates.

4. The U.S. continues to have better growth momentum and earnings momentum versus international markets. Developed markets face less policy flexibility and heightened political challenges, while EM markets face trade headwinds and a persistently strong U.S. dollar.

5. In terms of U.S. sector exposure, we favor an overweight to tech, staples, and REITS.

*The source on all charts are Sage and Bloomberg.

To view our September Fixed Income Outlook in 5 Charts, click here.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

September Fixed Income Outlook in 5 Charts

ContentMigration on September 12, 2019

1. The New York Fed has placed a roughly 40% probability that there will be a recession in the next 12 months.

2. Higher economic risk and lower rate expectations has been positive for high-quality core fixed income, but it is not a good combination for lower-quality spread sectors. Valuations in high yield and other riskier spread sectors are at historically tight levels, offering little cushion in a spread-widening scenario.

3. Correlations to equities among higher-risk fixed income are also at historically high levels, suggesting a greater vulnerability to any risk-off environment.

4. Core fixed income still offers investor diversification benefits vs. equities with negative correlations to equity returns. Using 4Q18 as a recent example – investors reaching for yield too aggressively will be hurt in an equity draw-down scenario.

5. An outlook that includes Fed rate cuts and higher economic risk suggests higher allocations to fixed income. Core fixed income looks the most attractive when weighing risk-adjusted returns with diversification benefits.

*The source on all charts is Bloomberg.

To view our September Equities Outlook in 5 Charts, click here.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Debatable, Yet Undeniable —Taking Responsibility for Climate Change

ContentMigration on August 5, 2019

by Bob Smith, President & CIO of Sage Advisory

My recent visit to the Arctic was both breathtaking and disturbing. It is a naturalist’s wonderland, offering many opportunities to appreciate and observe the eco diversity of the region. It is also a place where one can see firsthand the growing adverse impact of climate change and mankind upon its inhabitants.

Although it has long been debated as to what extent humans are contributing to climate change and our ability to adapt, what is undeniable is the fact that the earth is getting warmer. The current warming cycle is occurring twice as fast in the Arctic than anywhere else on earth, and it is causing significant changes in the extent, duration, and conditions of sea ice. The loss of sea ice around the Svalbard, an archipelago in the Norwegian Sea, is predicted by scientists to be particularly profound in the coming decades.

These changes affect all life forms in the Arctic but none more so than the iconic polar bear. An apex predator and the largest species of bear on our planet, the polar bear is very much a marine mammal in that it depends upon sea ice as the platform upon which to hunt and breed. This makes the polar bear the one species in the Arctic that is the most vulnerable to climate change because their land, and the crucial natural bounty it provides, is literally melting beneath their paws.

Unlike humans, the polar bear – and importantly, the food chain it tops – are unlikely to adapt. The U.S. Geological Survey projects that two-thirds of polar bears currently in existence will disappear by 2050 as a result of the melting sea ice.

Source: PolarBearHabitat

Melting ice has an obvious external effect on the hunting patterns of polar bears. But polar bears are facing trouble from the inside as well. Unfortunately, due to their high-fat diet of seals and walrus they have become one of the most contaminated beings on Earth. This is because seals and walrus ingest fish and mollusks, which live on micro-organisms baring persistent organic pollutants (POPs). These man-made toxic substances are recognized carcinogens that never degrade and come from distant industrial factories via air and ocean currents.

While I believe everyone is responsible for climate change– from governments to oil and gas producers, to anyone who is dependent on fossil fuels to live their daily lives – there is a responsibility at the corporate level to curb behavior that exacerbates such negative externalities as climate change.

Just as the polar bear is at the height of its food chain, so are two of companies responsible for the creation and widespread use the pollutants contributing to the polar bear’s demise. 3M (MMM), with $33 billion in annual sales, is ranked No. 216 on Forbes’ 2019 list of the world’s largest public companies, and DuPont (DD) is ranked No. 81, with $86 billion in annual sales.

Minnesota-based 3M originally sold two pervasive and now-controversial compounds, PFOA (perfluorooctanoic acid) and PFOS (perfluorooctane sulfonate). PFOA was an integral manufacturing component for nonstick coating product Teflon that was manufactured by Delaware-based DuPont, and PFOS was a key component of the fabric protectant Scotchgard.

Scientists have found more than 200 halogenated harmful contaminants in polar bear blood samples. These contaminants adversely affect the polar bears’ immune systems, hormones, bone density, growth development, and reproductive organs, and they can lead to brain damage.

PFOS production in the United States ceased in 2002, and PFOA were phased out in 2015, the same year DuPont spun off a new company called Chemours (CC) with several of its chemical businesses.  However, PFOA are still widely used internationally and many imported goods, such as textiles and plastics, contain them.  The detrimental effects of these substances released into the environment are long lasting and have led to many lawsuits.

Last year, Minnesota won a $850 million settlement against 3M on the basis that 3M knew about the chemical dangers of these substances and continued to pollute natural resources. And this year, in Michigan, 200 families are suing 3M for contaminating the water. Chemours has sued DuPont, which had been facing 3,500 lawsuits in Ohio over exposure to PFOA, for underestimating the extent of its liabilities.

As a sustainable investment manager, it is my responsibility to enable investors to vote with their dollars and invest in the issues they care about. People can curb climate change and mitigate environmental pollution by voting with their money and investing in companies that have policies in place to limit such negative activities.

One key component of our sustainable investment analysis is whether a company engages in operations that either alienate community members or violate their human rights. So, it is interesting to note that while 3M might score well on some ESG factors, we consider it high risk when factoring in its intentionality.

PFOS and PFOA were replaced by 3M and other companies in the United States with different types of PFAS (per- and polyfluoroalkyl substances) that are said to breakdown faster and be safer overall; however, their relative safety is still being debated. We want to know to what extent did 3M know it was polluting the environment and how long has it continued to do so? These are areas of risk for the company that will affect its long-term financial performance, not only from a legal expense perspective, but from an investor and consumer sentiment perspective. We believe the growing interest in sustainable investing will increase the attention on these issues and as a result, create better corporate citizens that better serve their environment.

When we look at the polar bear, we are reminded that we have a responsibility to ourselves and to our children to do what we can to mitigate the effects of climate change and mankind on the environment. The polar bear’s role as the apex predator in the Arctic puts it at great risk to continue to accumulate toxic levels of man-made pollutants. They are the high Arctic region’s canary in the coal mine, and their growing attrition should be a wake-up call for us all.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.