Officially, a “recession” is defined as two consecutive quarters of negative Gross Domestic Product (GDP). GDP attempts to measure consumer spending, business investment, government spending, and net exports. Usually, we think of strong GDP as passing through to strong stock market conditions, but GDP and the equity market don’t always move in the same direction. In a few weeks, we will get official numbers on a massive quarter-over-quarter GDP drop; however, the U.S. stock market is looking past the current situation in anticipation of higher economic output in the second half of the year and beyond.

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Not all segments of the market are created equal. The Russell 3000 Index, which represents most of the investible equity market in the United States, is down over 10% since mid-February; however, dissecting this larger index into smaller segments illustrates a much wider range of returns. As we navigate market allocation for our clients, the index returns in these catty-corner style boxes demonstrate the importance of evaluating style tilts within our portfolios.

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I love the “crystal ball” predictions at the start of every year. Please hear me, I’m a risk analyst and thus a skeptic by training, so I expect very few of these predictions to be correct. What I love about them, is that they bring up top topics of concern and of opportunity. These forecasts provide such a fertile starting spot to dig into the work by which we have been entrusted: managing the long-term balance between risk and return.

I’d like to share the types of conversations that these fortune tellers have sparked here at ThirtyNorth:

• Can we expect market volatility in this election year? Our perspective here at ThirtyNorth is long-term, so short-term volatility in a period running up to an election is unlikely to change our investment strategy; however, elections create a period of uncertainty that deserves attention as we attempt to hold steady on our long-term objectives. In an incumbent election year, these volatility predictions remind us to keep our focus on policy shifts that may have long-term economic impact.
• What are the risks and rewards within the growing BBB debt space? Although bonds with BBB ratings from Standard & Poor’s are viewed as investment grade, they have been assigned the lowest credit quality of this grade. Many are wondering if a large portion of BBB debt is at greater risk of default than implied by their ranking. As noted in a recent Barron’s article, some expect up to 20% of BBB, which equates to about $660 billion in debt, to be downgraded from investment to non-investment grade during 2020.¹ This is not a new conversation at ThirtyNorth, as we have been working to minimize BBB debt in our investment grade fund selection for a while now. As these cards are still being read, we are examining who wins and loses with (and without) a large downgrade scenario.
• Are Environmental, Social, and Governance (ESG) themed funds as advertised? With the expectation of large demand for ESG products, the marketplace is beginning to see a flood of products claiming to make investment decisions that promote ESG themes. As a firm with a mission to bring together money and meaning, we are excited for the opportunities to invest in products that are actively engaging companies on issues that our clients value; however, we are finding that fund ESG claims aren’t always reflected in their decision making. We are analyzing investment options, looking to engage with fund companies, and working on curating a list of funds that we find live out their stated mission.

You’ll hear more from us on these topics and others over the next few months, but as always, we would love to hear from you about the issues that make you feel encouraged or worried about your investments. Fortune tellers are always welcome here.

Sarah Bomhoff

¹Jasinski, Nicholas. “A ‘Ponzi Market’ Is Developing in Corporate Bonds. Here’s What That Means.” Barron’s, Dow Jones & Company, Inc., 22 January 2020, https://www.barrons.com/amp/articles/bonds-corporate-high-yield-investment-ponzi-easing-central-banks-yield-squeeze-treasuries-51579641764

Disclosures:

• All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. It should not be regarded as a complete analysis of the subjects discussed.
• Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Tax information is general in nature and should not be viewed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. There are no guarantees that an investor’s portfolio will match or outperform any particular benchmark. Index returns do not represent the performance of ThirtyNorth Investments, LLC, or its advisory clients.
• ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.