Closing Brief - Bailard’s View on the Economy: Cloudy with a 95% Chance of Efficacy
Jon Manchester, CFA, CFP®, Senior Vice President and Portfolio Manager – Sustainable, Responsible and Impact Investing
December 31, 2020
Economics, the so-called “dismal science,” may have met its match in 2020. In a year otherwise marked by gloom, a thunderbolt of positivity arrived in November via the highly anticipated Phase III vaccine trials data for COVID-19. Health science—both, broadly-speaking and more specifically Pfizer and Moderna—delivered much-needed hope to a besieged global community and, in doing so, justified decades of faith in synthetic messenger RNA technology. This breakthrough science has the potential to lift the dark clouds that hung over 2020, and appears to be a clear triumph of human ingenuity.
Thanks largely to the innovative gene-based technology, scientists rolled out these vaccines in mere months when previously the fastest we’d developed a new vac- cine was four years. In fact, after BioNTech, Pfizer’s Germany-based partner, punched the genetic code for the spike protein into its computers in January 2020, their CEO reportedly designed 10 vaccine candidates himself in a single day.(1) As a result, in the not-so-distant future, the armchair epidemiologists among us could (thankfully) be out of a fake job. Perhaps we will even cut back on doomscrolling, a popular “Word of the Year” candidate referring to our propensity to binge on bad news. The overwhelming deluge of data concerning the pandemic prompted the World Health Organization to “flatten the infodemic curve” by offering steps to navigate the wave of COVID-19 information. It has been a lot to process.
Speaking of misinformation, the U.S. presidential election came and sort-of went, leaving a trail of fruitless legal challenges from the incumbent and an unusual focus on the actual Electoral College vote and certification. If nothing else, 2020 affirmed that political theater is alive and well, sadly, while the actual theatrical arts remain on life support. At least initially, equity markets appear sanguine following the early January runoff elections in Georgia that effectively handed full control of Congress to the Democrats, perhaps due to the belief that additional fiscal stimulus will follow. In reality, investors may simply be relieved that the elections are over, and another piece removed from the proverbial “wall of worry” that markets have climbed.
Amidst the rays of hope, we must also acknowledge the enormous toll on humanity that this novel coronavirus continues to impose. Records number of people in the U.S. are currently hospitalized with COVID-19, with the numbers continuing to climb. Globally, the World Bank warns that the pandemic has pushed an additional 88 million people into extreme poverty, defined as living on less than $1.90 per day. (2) It also anticipates lasting impacts on this generation of students, food in- security, and gender gaps, among other concerns.
Easy Street The economic devastation and upheaval of our social fabric only makes the domestic stock market’s stunning rally all the more disconcerting, of course. With the monetary and fiscal spigots turned up, dollars have clearly found their way into risky assets. In the closing days of the year, Bloomberg reported that U.S. companies had raised a record $435 billion via equity sales in 2020, far above the prior high-water mark of $279 billion set in 2014. (3) Some of the equity issuance came from a position of weakness (airlines, for example) but around $100 billion went to traditional Initial Public Offerings (IPOs) including the December debut for DoorDash. The largest U.S. food delivery company soared 86% on its first day of trading and initially carried a market valuation greater than Chipotle and Domino’s Pizza combined. (4) This transpired despite DoorDash having lost $149 million over the first nine months of the year in a highly favorable stay-at-home environment where orders and revenue surged.
Signs of froth are seemingly everywhere: Bitcoin, junk bonds, and blank-check companies. Shares of Tesla rocketed more than 700% higher in 2020, and the New York Stock Exchange’s FANG+ Index of 10 tech giants gained roughly 103% after jumping 40% in 2019. So much for the ongoing threat of Big Tech regulation. Indicators of euphoria are likewise flowing, including a record $722 billion of margin debt in the U.S., mean- ing investors borrowing against their portfolios. (5) Call options—which provide the right to buy shares at a set price—hit record-high trading volumes in late 2020, another potentially worrisome data point. On the scorecard, market-based gauges suggest some caution heading into the new year.
The effervescence across various markets can be linked to the aforementioned easy money policies. Goldman Sachs maintains a U.S. Financial Conditions Index dating back to 1990, which derives the bulk of its composite score from the 10-Year U.S. Treasury Yield and a corporate bond spread. Reflected in the chart below, that Index reached a new all-time low recently—below its 1998/1999 levels—suggesting that financial conditions are more supportive than at any time in past 30 years. This may help to foster economic growth in 2021, while also running the risk of creating financial market bubbles. Goldman economists are forecasting U.S. Gross Domestic Product (GDP) growth of 5.9%, versus the 3.9% consensus estimate. Their Chief Economist, Jan Hatzius, expects a 2021 “vaccine boost” and a “significant amount of accumulated ex- cess savings” to provide tailwinds. (6)
Relief Spending With 10.7 million officially unemployed in the U.S. as of December, and the employment-to-population ratio of 57.4%, nearly four points lower than in February, it doesn’t quite follow that there would be “significant ex- cess savings” to tap into. However, the Personal Saving Rate calculated by the Bureau of Economic Analysis spiked to 33% in April. While it has normalized some- what since, the saving rate ended November at roughly 13%, still elevated compared to the 7% to 8% rate seen in recent years. Unfortunately, as you might guess, the savings have accrued predominantly to higher-income households. The pandemic has weighed most heavily, at least financially speaking, on those with the least capacity to absorb the blow. From an inequality and societal perspective, this remains problematic.
The cold calculus of economic growth, however, points to a much healthier U.S. economy in 2021. This is helped by the estimated 3.5% GDP decline in 2020, naturally, as well as the $900 billion COVID-19 relief bill that will boost disposable income in the first quarter. This fiscal aid is sorely needed with the pandemic still raging and disposable income down in three of the last four months. Personal Consumption Expenditures (PCE) fell in November for the first time since April, strengthening the case for more stimulus.
Other economic markers in the U.S. are largely point- ing north. The S&P CoreLogic Case-Shiller 20-City Home Price Index advanced 8% year-over-year in October, its biggest gain since 2014. West Texas Crude Oil drifted higher during the fourth quarter but, priced at approximately $48 per barrel, it doesn’t pose inflationary concerns at this point. The Institute for Supply Management (ISM) indices for Manufacturing and Services remain in growth territory. With low interest rates and tame inflation, plus substantial fiscal and monetary support, the economy appears primed to rebound. This tidy story diminishes, though, if the vaccines’ rollout falters in any meaningful way.
Not-So-Graceful Brexit It only took four-and-a-half years and three Prime Ministers! Brexit is finally a reality, albeit a somewhat incomplete one given that Britain’s services sector— which accounts for roughly 80% of the economy—was largely omitted from the 1,246-page deal. (7) Nonetheless, once important details such as which species of fish can be caught were ironed out, Britain and the European Union (EU) have a trade agreement.
Rather unkindly, a Bloomberg Opinion piece referred to it as the “most regressive trade settlement seen be- tween modern democratic nations.”(8) On the plus side, the agreement does allow for goods to trade without tariffs or quotas, assuming the United Kingdom (UK) maintains current standards on the environment, labor, and other areas. Moving those goods, however, will involve a considerable amount of red tape. Citizens on both sides won’t have freedom of movement either, and the fate of migrants appears muddled at this point.
Equity investors have yet to fully embrace the UK sovereignty story. The FTSE 100 Index declined 14% (price-change only) in 2020, making it one of the worst-performing major markets in the world. Skepticism abounds regarding Britain’s ability to pull off this conscious uncoupling, although to be fair the FTSE 100 Index’s relatively low weight in technology companies and higher allocation to “old economy” industries played a significant role. For the British pound, it was a split decision in 2020, approximately 3% appreciation versus the U.S. dollar but a 6% decline versus the euro.
History will determine whether Brexit should be viewed as “Cameron’s Folly” (former Prime Minister David Cameron) or the dawn of a bright new future. In all likelihood, it will fall somewhere in between, with the UK forced to adapt to its imperfect new reality, just as all of us did in an absolute Zoom bomb of a year.
Sources:
1 “How Pfizer Delivered a Covid Vaccine in Record Time: Crazy Deadlines, a Pushy CEO,” wsj.com, 12/11/20
2 “2020 Year in Review: The impact of COVID-19 in 12 charts,” blogs.worldbank.org, 12/14/20 3 “IPO Euphoria Drives Record $435 Billion in U.S. Stock Sales,” Bloomberg.com, 12/21/20 4 “DoorDash Soars in First Day of Trading,” nytimes.com, 12/9/20 5 “Investors Double Down on Stocks, Pushing Margin Debt to Record,” wsj.com, 12/27/20 6 “Goldman Sachs is even more bullish on the power of a COVID-19 vaccine,” yahoo.com, 12/7/20
7 “Brexit Deal Done, Britain Now Scrambles to See How It Will Work,” nytimes.com, 12/25/20 8 “Now We Know How Boris Johnson’s Movie Ends,” Bloomberg.com, 12/24/20
The Year No One Saw Coming: A Look at Accelerated Trends and New Changes for Domestic Equities
Thomas J. Mudge III, CFA, Director of Domestic Equity Research
December 31, 2020
2020 was definitely not the year so nice that they named it twice. In addition to the far-reaching impacts of the COVID-19 pandemic, the U.S. experienced a Presidential impeachment, urban riots, the most active and seventh-costliest Atlantic hurricane season on record, massive wildfires across the western states, and perhaps the worst-ever state-sponsored cyberattack in its history.
On the positive side of the 2020 ledger, several successful COVID-19 vaccines were created in a matter of months, and historic Middle East peace accords were also reached. While not unique to 2020, trends in world poverty, child mortality, chronic hunger, and exposure to a broad range of environmental toxins continued to decline, and global literacy rates continued to rise.
Perhaps surprisingly, stock markets around the world produced positive returns in 2020. The S&P 500 Index, after plunging early in the pandemic, rose to new all-time highs within a few months and finished the year up 18.4%.
Comparing Pandemics Notably, the U.S. stock market behaved similarly when the last great pandemic, the Spanish flu, swept the globe in 1918. At least so far, the COVID-19 pandemic has proved less deadly than what humanity experienced over 100 years ago, which killed at least 50 million worldwide and—according to the Centers for Disease Control and Prevention—caused an estimated 675,000 American deaths out of a much smaller population of 103 million at the time. Yet through it all, the stock market (as measured by the Dow Jones Industrial Average, or DJIA) rose 10.5% in 1918, and another 30.4% in 1919.
While the end of World War I certainly contributed to the market’s rise, the stock market’s behavior through this pandemic, and other subsequent less-lethal epidemics, suggests that investors perhaps view these events as different from other causes of economic slowdowns. That is, the crisis is perhaps akin to a natural disaster, like a hurricane, where business is temporarily suspended as opposed to an overarching change in business outlook (e.g., the Great Depression or the Global Financial Crisis). Regardless of the precise motivation, in a year with a shortage of good news, the stock market’s success was a welcome positive note.
New and/or Accelerated Trends As the year progressed, investor thinking evolved in sometimes predictable and other times surprising ways. Tech giants—known as the FAANG stocks, or Facebook, Amazon, Apple, Netflix, and Alphabet (formerly Google)—already made up a significant portion of the S&P 500 Index’s overall market cap due to their rapid growth in recent years. Yet in 2020, they became the poster children for the phrase “the rich getting richer.” The pandemic forced people to stay at home thereby increasing demand for home delivery (Amazon) and virtual entertainment (Netflix, Facebook, Alphabet, Amazon, and Apple), and also boosting the need for internet/cloud computing access for work (Alphabet, Facebook, Apple, and Amazon). At the start of 2020, the five FAANG stocks made up 13.0% of the total value of the S&P 500 Index. By year-end, that share had increased to 17.3%.
As the U.S. has shifted toward a predominantly service economy in recent decades, the viability of working from home increased, and technology evolved alongside. The pandemic required almost everyone who could do their job remotely to do so, essentially leveling the playing field from a career advancement standpoint, at least in the short term.
The trend toward automation certainly accelerated due to the pandemic, especially in industries that would otherwise require close human contact for long periods. It was also a record year for initial public offerings (IPOs). On the flip side, the popularity of just-in-time inventory management and low-cost foreign outsourcing both faced significant setbacks in 2020. These systems are exceptionally vulnerable to the shipping restrictions and delays that became commonplace during the pandemic.
An Unusual Double Relief Rally While painful for personal, professional, and financial reasons among many, there can be light at the end of the proverbial tunnel. When market bottoms occur, investors anticipate a coming recovery, and stocks that were previously seen as potentially unable to survive the downturn will often rally strongly if they make it through. These “relief rally” stocks are given a new lease on life and have historically outperformed as a result. When the stock market bottomed on March 23, 2020, relief rally stocks behaved as usual, but this year there was an added twist. On November 9, when Pfizer announced the completion of successful COVID-19 vaccine trials, there was a second relief rally as the uncertainty regarding the future of the pandemic greatly decreased. In retrospect, this second rally seems obvious, but it was very different than what happens in a typical recovery and caught many investors off guard.
Government Stimulus with the Specter of Inflation Governments’ fiscal and monetary responses to the economic consequences of mandated lockdowns resulted in massive borrowing and stimulus spending, as well as accommodative monetary and interest rate policies. The world seems to be experimenting with Modern Monetary Theory, which is the controversial notion that governments can, to a point, pay their bills by essentially printing money and avoiding the (potentially disastrous) inflationary consequences.
Many market participants are rightly skeptical that inflation will remain at bay given these government policies and, as a result, both gold and cryptocurrencies had very strong years in 2020. Gold rose 25.1% and Bitcoin rocketed 307.8% for the year.
Looking Ahead There were of course other changes and surprises in 2020, far too many to mention here. Some may have lasting impacts, while others may just be of passing interest. The world has changed enormously since the last global pandemic 102 years ago, and it is too early to tell exactly how the aftermath of this one will shake out.
No one predicted the events of 2020, and very few even correctly guessed how the year would unfold once the impact of the COVID-19 pandemic was apparent. Given that backdrop, let us all hope for a better year ahead in 2021.
Country Indices Flash Report – December 2020
An uninspiring deal between the UK and the European Union was reached before the year-end deadline. Huge issues concerning financial services remain on the table, but fishing is resolved.
5G: The Investing Opportunity is in the Supply Chain White Paper
A pillar of Bailard’s Tech & Science team’s investment approach is researching opportunities in emerging technology products and services that demonstrate broad potential and durable business cycles. The rollout of the next generation cellular network technology, “5G,” is one such investment theme we believe is now catalyzing and has several years of investable opportunities ahead.
Bailard Wins Third Place in Pensions & Investments Best Places to Work in Money Management Award for Firms with 50-99 Employees
2020 marks the third year Bailard has been recognized as a best place to work by Pensions & Investments
FOSTER CITY, Calif. – Dec. 15, 2020 – Bailard, a values-driven asset and wealth manager in the Bay Area, has been included in the 2020 Best Places to Work in Money Management awards announced by Pensions & Investments, where Bailard has placed third for firms with 50-99 employees. This is the publication’s ninth-annual survey and recognition program dedicated to identifying and recognizing the best employers in the money management industry.
This is Bailard’s third consecutive year making this list and rounds out a year of several best workplace recognitions for the firm gained over the course of the year. Bailard’s excellent culture has been built over the firm’s 51-year history and is a result of the firm’s ongoing commitment to its values, including accountability, compassion, and excellence.
“In this very unusual year, we learned again that employers that consider the overall wellbeing of their employees are regarded well. The best employers in 2020 are those that have stepped up with policies and practices to support and protect employees’ physical and emotional health, while continuing to keep the focus on clients’ needs,” said P&I Editor Amy B. Resnick. “Our surveys found that the employers on the list were likely to work hard to sustain their corporate cultures, even during times of pandemic lockdowns and continuing to work from home in many cases.”
Bailard worked to closely support its employees and maintain its award-winning culture throughout the COVID-19 pandemic by adapting to a fully-remote environment while maintaining Bailard traditions, like weekly firm-wide trivia games, their weekly 9:05 all company meeting, and their annual Oasis all company celebration in honor of the firm’s founding – now shifted to a virtual setting. Bailard also appointed a vice president of human resources, Kyle Berkeley, in 2020 to help the firm through its next chapter of growth and continue to make employee wellbeing and education a top priority of the firm.
“In a year where it feels so much has changed, this recognition is a reminder of many of the crucial things that have remained the same, mainly our incredible team and our values,” said Peter Hill, the CEO of Bailard. “We have always been proud to be a company that puts our culture first, and in a year like 2020, this has been more important than ever.”
Pensions & Investments partnered with Best Companies Group, a research firm specializing in identifying great places to work, to conduct a two-part survey process of employers and their employees to determine the 2020 winners. The first part consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. This part of the process was worth approximately 25% of the total evaluation. The second part consisted of an employee survey to measure the employee experience. This part of the process was worth approximately 75% of the total evaluation. The combined scores determined the top companies.
For a complete list of the 2020 Pensions & Investments’ Best Places to Work in Money Management winners and write-ups, go to www.pionline.com/BPTW2020.
About Bailard
With 50 years of experience, Bailard proudly serves as a trusted partner focused on achieving long-term results aligned with client goals. An independent firm since its founding in 1969, Bailard stands committed to its values and, most importantly, its clients. With $4.2 billion AUM as of September 30, 2020, Bailard’s high-touch client service and proven track record are grounded in the firm’s core values of accountability, compassion, courage, excellence, fairness, and independence.
About Pensions & Investments
Pensions & Investments, owned by Crain Communications Inc., is the 48-year-old global news source of money management. P&I is written for executives at defined benefit and defined contribution retirement plans, endowments, foundations, and sovereign wealth funds, as well as those at investment management and other investment-related firms. Pensions & Investments provides timely and incisive coverage of events affecting the money management and retirement businesses. Visit us at www.pionline.com
About 2020 Pensions & Investments Best Places to Work in Money Management
This award does not evaluate the quality of services provided to clients and is not indicative of Bailard’s future performance. There was no cost for Bailard to enter. This year, a total of 94 firms were placed on the Pensions & Investments Best Places to Work in Money Management list. 23 managers were recognized in Bailard’s category of 50 to 99 employees. There was no fee for Bailard to enter.
To have been eligible for consideration, companies must meet the following criteria: be a for-profit or not-for-profit business or public agency; have a facility in the United States; have a minimum of 20 full and/or part-time employees working in the United States; must be in business a minimum of one year; and have at least $100 million of discretionary AUM.
* All investments involve a risk of loss. There is no guarantee any strategy will achieve its objectives. Bailard will not offer advice in any jurisdiction where it is prohibited from doing so.
Bitcoin, Blockchain & DLT... Oh My!
Understanding the terminology and technology behind cryptocurrency
Eric Greco, Portfolio Associate
December 31, 2020
The surge in cryptocurrency prices witnessed in the second half of 2020 is not just a flashback to 2017 Bitcoin mania. While a number of cryptocurrencies have seen prices rise past their all-time highs achieved in late-2017, what truly distinguishes this run-up from 2017 is the level of institutional investor participation. Major financial institutions such as JPMorgan, Goldman Sachs, Grayscale, and Guggenheim have either announced large-scale purchases of Bitcoin or come out with more amenable commentary towards cryptocurrencies.
DLT: The Machinery Behind it All While readers might be familiar with the term blockchain, and its association with Bitcoin and other major cryptocurrencies, it represents just one type of distributed ledger technology. Let’s take a moment to dive into the lesser-known, but fundamentally important, distributed ledger technology behind cryptocurrency. Also known as “DLT,” distributed ledger technology is a decentralized database spread across various network participants (computers referred to as “nodes”) who authenticate and validate transactions. This decentralization eliminates the role of a central authority that manages and maintains the value of that currency.
Blockchain Is a Type of DLT Where blockchain builds on the concept of distributed ledger technology is its use of additional cryptography. It utilizes a proof-of-work consensus algorithm to verify transactions. Select network participants, called miners, compete with one another to solve complex mathematical equations in order to add new transaction data, via a “digital block,” to the public ledger. In order to solve the equation, the miner must enter the correct hash, a mathematical function that references the transaction data contained within the new block. It takes exceptional computational power and whoever solves the equation first adds the new block to the end of the existing blockchain. Miners are incentivized to solve the equation by a Bitcoin reward received for adding a new block to the blockchain.
In addition to transaction data, each block contains the hash of the previous block, assuring the integrity of the transactions. Any modifications to the transactions in a block will cause the hash in the next block to be invalidated, and it will also affect the subsequent blocks in the blockchain (1), alerting network participants of the malicious behavior. At its core blockchain advances solutions, offering enhanced security and speed, and more efficient infrastructure, thereby reducing costs.
Cryptocurrency Is Stored in a Blockchain The most well-known application of blockchain is cryptocurrency. By creating and storing financial transactions with the encryption techniques described above, network participants play an active role in the generation of units of currency and verification of the transfer of funds. Further, by operating through a decentralized protocol, the currency supply of these cryptocurrencies is not determined by a central bank.
By utilizing DLT, cryptocurrencies function in a way that is, frankly, foreign to our fiat-based systems (that is, currencies based on faith in the issuing government). The four categorical differences from the traditional system include:
An Immature Market DLT is key to the appeal of cryptocurrencies such as Bitcoin and Ether, the native currency of Ethereum.
Cryptocurrencies remain a very nascent asset class. And, not surprisingly, given their exploding popularity and value, governments aren’t ignoring the space. Even as major institutional investors exhibit increased openness to crypto assets such as Bitcoin—and as we gain more clarity around how governments plan to potentially regulate them—any imposed changes have the potential to shock the system and lead to continued volatility in the short term.
Importantly, blockchain is not singularly useful for Bitcoin and other cryptocurrencies; its applications go well beyond that. The potential use cases are numerous and extend from banking and finance to voting, healthcare, and automotive uses just to name a few. In the words of blockchain’s creator, Satoshi Nakamoto, it is “… an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”(3) At this point, the applications for secure, efficient, and cost-effective exchanges are only limited by our imagination.
Sources: 1 https://blog.ndcconferences.com/understanding-blockchain/ 2 https://www.businessinsider.com/distributed-ledger-technology-blockchain
3 https://bitcoin.org/bitcoin.pdf