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Meeder Fixed Income Strategies
By Amisha Kaus, Portfolio Manager • August 2020

MARKET OVERVIEW AND OUTLOOK 

The Federal Reserve’s latest policy meeting last week reaffirmed the FOMC member’s extensive support for a federal funds rate near-zero and it also extended seven of its nine emergency lending vehicles’ deadlines from September 30th to the end of 2020. This deadline extension marks the Federal Reserve’s continued assistance for market stability, thereby supporting the ongoing spread compression across all major fixed-income asset classes.

 

U.S. Treasuries:
LOWER AND FLATTER
The U.S. Treasury yield curve shifted lower and got flatter in July, as yields across all maturities continued to fall in July. The Fed’s preferred inflation gauge, Core PCE, came in at just 0.9%, much lower than their perceived rate-increase threshold of 2%. This further helped longer-maturity Treasury yields decline more than the shorter-maturity yields.

 

U.S. INVESTMENT-GRADE CORPORATE BONDS:
SPREAD NORMALIZATION AND LOWER ISSUANCE
Investment-grade credit spreads continued to decline in July and U.S. corporate bonds presented one of the best opportunities as investors continued their search for yield in high quality asset classes. However, average yield on investment-grade corporate bonds fell below 2% in July, for the first time ever. U.S. corporations pared back their borrowing spree in July, as the issuance dropped to $76 billion, after a record corporate bond issuance of $200 billion in each month from March through June this year.

Outlook
Investment-grade corporate bonds will continue to benefit from further spread normalization as their demand remains strong, but issuance is expected to remain low for the remainder of 2020.

 

HIGH-YIELD CORPORATE BONDS:
YIELD ADVANTAGE AND BACK TO POSITIVE
According to ICE Data Services, as much as 20% of global bond yields are below 0% today and nearly 85% are yielding below 2%. High-yield bonds have attracted yield-starved investors to the asset class with a yield near 5.5%, even as default rates have increased.

July marked the sector’s best monthly return since 2011. High-yield bonds have seen an impressive 23% gain in the months following the Federal Reserve’s March 20th actions to support lending in the markets, wiping a loss of 19.1% in the COVID-19 pandemic related market volatility period. July’s strong performance has helped high-yield bonds turn positive for the year.

Outlook
High-yield default rates are expected to increase in the following months as distressed companies continue to feel effects of the ongoing COVID-19 pandemic. Narrow sector spreads leave less room for appreciation. Higher credit quality companies in the asset class could fare better.

 

 

U.S. DOLLAR AND EMERGING MARKET DEBT:
THE DOLLAR’S DECLINE
The U.S. dollar dropped to its 2-year low in July due to low economic growth expectations and extremely loose U.S. monetary policy. Debt issued by emerging market countries and corporations benefitted from a weaker dollar as their servicing costs were reduced. 

Outlook
Emerging market debt could continue to strengthen from an increase in capital flows, if the U.S. dollar stays weaker, as investors continue their search for income.

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder Fixed Income portfolios maintained the following allocations during the month:

 

+ OVERWEIGHT INVESTMENT-GRADE CORPORATE BONDS RELATIVE TO U.S. TREASURIES
» This position was a contributor to performance.
» Spread narrowing across corporate bonds made them relatively more attractive over U.S. Treasuries.

 

+ OVERWEIGHT HIGH-YIELD CORPORATE BONDS AND U.S. DOLLAR-DENOMINATED EMERGING MARKET DEBT
» Core-plus sectors were a strong driver of our portfolios’ performance during the month.
» High-yield spreads have dropped below their 20-year average of 5.5% helping sector performance.
» The U.S. dollar’s decline has helped USD-denominated emerging market bond holdings.

 

DURATION POSITIONING:
» Our portfolios maintained a duration of 5.5 years, in line with the market benchmark. U.S. Treasury positions detracted from portfolios’ overall relative performance in July as longer maturities rallied during the month.

 

OUR TOP POSITIONS
+ Investment-Grade Corporate Bonds
+ High-Yield Corporate Bonds
+ Emerging Market Bonds (USD)

 

MEEDER FIXED INCOME ALLOCATIONS
» Meeder Total Return Bond Fund
» Meeder Conservative Allocation Fund
» Meeder Moderate Allocation Fund
» Meeder Balanced Fund
» Meeder Global Allocation Fund

 

 

Data Sources: Bloomberg, Meeder Investment Management, Financial Times/ ICE Data Services

COVID-19 volatility period: 02/21/2020–03/20/2020

Post-Fed Action period: 03/23-2020–07/31-2020

Year-to-date data as of 07/31/2020

Fixed Income asset class data is represented by the following indexes: Bloomberg Barclays US Agg Total Return Value Unhedged USD, Bloomberg Barclays US Corporate Total Return Value Unhedged USD, Bloomberg Barclays U.S. Securitized: MBS/ABS/CMBS and Covered TR Index Value Unhedged USD, Bloomberg Barclays US Corporate High Yield Total Return Index Value Unhedged USD, Bloomberg Barclays EM USD Aggregate Total Return Index Value Unhedged USD, Bloomberg Barclays US Aggregate: Government-Related Total Return Unhedged USD, Bloomberg Barclays Municipal Bond Index Total Return Index Value Unhedged USD.

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios, or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third parties.

Investment advisory services provided by Meeder Asset Management, Inc.

©2020 Meeder Investment Management, Inc.

0116-MAM-08/04/20

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Negative Interest Rates

In the U.S., the Federal Reserve adjusts the level of short-term interest rates as their primary way of tightening or relaxing their monetary policy. Recently, unprecedented events have caused extreme volatility in the economy. The Fed has used additional methods of providing liquidity to the market to get the U.S. back to full employment and maintain a modest level of inflation, but what if it is not enough? Many investors fear the only arrow that the Fed has left in their quiver is to introduce negative interest rates. So, what do negative interest rates really mean? We invite you to watch the short video below to view our simple explanation of how negative interest rates work in today's economy.

 

 
The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.
 
Capital markets commentary, historical analysis and benchmark performance is provided for informational purposes only. Benchmarks and financial indices may not be available for direct investment, are unmanaged, assume reinvestment of dividends and income, and do not reflect the impact of trading commissions, fund expenses or management fees. Opinions and forecasts regarding sectors, industries, companies, countries, themes and portfolio composition and holdings, are as of the date given and are subject to change at any time based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector. Certain historical research and benchmark data has been provided by or is based on third party services to which Meeder Investment Management subscribes. The company makes every effort to use reliable, comprehensive information, but can make no representation that it is accurate or complete.
 
Advisory services provided by Meeder Asset Management, Inc.
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Is Fed Policy Appropriate? 
By Abe Sheikh, Co-Cio, Amisha Kaus, Portfolio Manager, and Joe Bell, Portfolio Manager  •  July 2020

Key Takeaways:

  • Federal Reserve’s aggressive policy actions have pushed U.S. interest rates to historic lows. The Congressional Budget Office and Fed Fund futures point to interest rates remaining low well into the next decade.

  • The U.S. dollar has fallen, and gold prices have surged in response to Fed policy. We expect these moves to continue over the short term, as a reflection of likely slower U.S. economic growth vs. rest of the world and a lack of safe-haven alternatives to Treasuries.

  • A decline in the U.S. dollar is a significant tailwind to international stocks and bonds. International stocks have lagged their U.S. counterparts for more than a decade and we may be at the beginning stages of a reversal in performance if U.S. dollar weakness persists.

 

1. Fed Policy Actions Have Pushed Interest Rates Down

As Exhibit 1 shows, the Federal Reserve’s aggressive monetary policy response to the COVID-19 global pandemic has pushed U.S. interest rates across all maturities down significantly, compared to a year ago. The Fed Funds rate has been slashed to zero to reduce borrowing costs for consumers and businesses. Simultaneously, the Fed has embarked on large scale asset purchases and unique direct lending programs to businesses to ensure proper functioning of credit markets. The Federal Reserve’s Open Market Committee—responsible for setting interest rates—has committed to maintaining an accommodative monetary policy well into the future, and Fed Fund futures confirm this “lower for longer” view. The Congressional Budget Office is also projecting very low interest rates well into 2025.

EXHIBIT 1: FED’S AGGRESSIVE POLICY ACTIONS HAVE PUSHED INTEREST RATES ACROSS MATURITIES LOWER

Source: Bloomberg, Current as of July 27, 2020

 

2. U.S. Dollar Is Falling, And Gold Is Surging In Response

The U.S. dollar and gold have experienced sharp moves this year, due primarily—in our view—to monetary policy expectations. However, there may also be other factors at play. The drop in the U.S. dollar may be reflecting the market’s expectations of slower U.S economic growth vs. the rest of the world over the next few years. One driver of this might be the widespread impact of COVID-19 on the U.S. economy. Similarly, in addition to monetary policy, surging gold prices may also be reflecting a lack of attractive safe-haven assets—with Treasury yields at record lows.

EXHIBIT 2: U.S. DOLLAR AND GOLD PRICES ARE MOVING SHARPLY IN RESPONSE TO FED POLICY


Source: Bloomberg

 

3. Decline In U.S. Dollar Has Historically Been A Tailwind For International Assets

According to the U.S. Currency Education Program, as much as half of the total dollars in existence are estimated to be in circulation outside of the U.S. In addition to being used as hard currency in day-to-day transactions, debt issued by some foreign corporations and governments, especially in the emerging markets, are priced in U.S. dollars. A decline in the U.S. dollar provides certain benefits for international investments. When the U.S. dollar declines in value, dollar-denominate debts for foreign governments and corporations become cheaper to pay back. This may reduce default risk and improve earnings for these companies.

EXHIBIT 3: WEAKER U.S. DOLLAR HAS HISTORICALLY BEEN A TAILWIND FOR INTERNATIONAL STOCKS

Source: Bloomberg

Secondly, for investors using U.S. dollars, international funds and equites get a boost to performance from the currency exchange rate. Just looking at the past few decades, we can see the decline in the U.S. dollar created a tailwind for international equities from 2001 to 2008 and the U.S. dollar rise created a headwind from 2008 until now. A continuation of this downtrend would be one ingredient for better performance from international equities and fixed income.

 

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios, or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third parties.

Investment advisory services provided by Meeder Asset Management, Inc.

©2020 Meeder Investment Management, Inc.

0116-MAM-7/28/20

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US Banks remain resilient
US Banks remain resilient

U.S. Banks Remain Resilient Despite Coronavirus Headwinds 
By Jacob Billhartz, Analyst and Abe Sheikh, Co-CIO  •  July 2020



Key Takeaways:

  • Despite the economic impact of the Covid-19 Pandemic, we view commercial paper and corporate notes issued by large U.S. banks as safe and viable investments for our public fund clients.

  • Our view is driven by the banks’ diverse business lines and strong balance sheets, suggesting a stronger and more resilient financial sector. This is true for each of the large U.S. banks, including JP Morgan, Bank of America, Citigroup, and Wells Fargo.

  • We are monitoring bank earnings, specifically lower net interest margins resulting from a lower, flatter yield curve and higher loan loss reserves due to expected increases in loan losses. As always, we will endeavor to adjust our portfolios as circumstances change.

The largest US banks each reported second-quarter results last week. While first-quarter results landed in the early stages of the Covid-19 Pandemic, this round gave us more insight into how the banks are holding up four months into this unprecedented economic environment. We continue to favor debt issued by these banks, as buying these securities allows us to enhance the portfolio yield given the spread they typically trade at relative to agency bonds and treasuries.

1. Diverse Revenue Streams Support The Banks' Credit Profiles

Similar to the first quarter, record trading revenues and other noninterest income sources continue to support the banks’ bottom line and counterbalance the large reserve build. At JP Morgan, fixed income trading revenues increased 99% YoY, marking a record company for the bank. Similarly, U.S. Bank’s mortgage banking revenue increased 64% QoQ as mortgage applications soared as rates continued to set record lows. Though these are just anecdotes from the results last week, they illustrate the sector’s ability to remain resilient in the face of shrinking net interest margins and increased loan loss provisions.

FIGURE 1: QUARTERLY PROVISION EXPENSES FOR US BANKS

Source: Bloomberg Peer group includes JPM, BAC, C, WFC, USB, PNC, and TFC

Combining a weak economic outlook and a federal funds rate at the zero bound for the foreseeable future, the US yield curve has shifted lower and flatter over the last few years, compressing the banks’ net interest margins. Likewise, with the US economy still at the beginning of this pandemic, the fallout and uncertainty ahead have steered each of the banks to build substantial loan loss reserves ahead of anticipated losses over the next few years. For example, so far in 2020, JP Morgan has set aside $18.8 billion for loan losses, though actual loan losses so far in 2020 total only $1.3 billion. But loan losses take time to develop, as provisions generally front-run actual losses.

FIGURE 2: AVERAGE NET INTEREST MARGIN FOR US BANKS

Source: Bloomberg Peer group includes JPM, BAC, C, WFC, USB, PNC, and TFC

 

2. Capital Builds Shield The Banks From The COVID-19 Fallout

After the 2008 Financial Crisis, Congress passed the Dodd-Frank Act that, along with several other changes, increased the amount of capital that banks have to carry. Whereas the largest US banks had average Tier 1 capital ratios below 9% before 2008, these ratios now exceed 12%. Most banks’ capital ratios increased in the second quarter as they suspended their share repurchases earlier in the year. Over the last three years, banks returned more than 100% of their net income out via dividends or repurchases given the large capital builds. But with the Covid-19 Pandemic creating an uncertain future path for the US economy, banks are starting to retain more capital to prepare for increased credit costs.

FIGURE 3: AVERAGE TIER 1 CAPITAL RATIOS FOR US BANKS


Source: Bloomberg Peer group includes JPM, BAC, C, WFC, USB, PNC, and TFC

 

3. Asset Quality Metrics Are Holding Up - For Now

The plethora of government stimulus targeting the unemployed, small businesses, and financial markets have likely suppressed what credit losses would have been. So far, banks are reporting minor increases in nonperforming loans and charge-offs. But as the recession develops, they are likely to continue. History shows us that delinquencies increase during a recession and take time to return to prerecession levels. Enhanced unemployment benefits expire at the end of the month, and less money in consumer’s pockets could lead consumer loan portfolios to sour quicker. Likewise, the fallout in demand for travel, energy, and other goods will continue to pressure loan portfolios backing these businesses. Longer-term, the potential impact on working from home on the commercial real estate market will take years to play out.

FIGURE 4: FEDERAL RESERVE DELINQUENCY DATA

Source: Bloomberg

 
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Coronavirus article
Coronavirus article

Coronavirus Pandemic Intensifies Rotation into Technology and Healthcare
By Abe Sheikh, Co-CIO and Joe Bell, Portfolio Manager  •  July 2020

Key Takeaways:

  • In our opinion, the recent 40%+ stock market rally has legs. One supporting data point from our Long-Term model is the historical reversal in the Global Leading Economic Indicator. The Index is suggesting potential further gains in the economy and stocks over the next 12–18 months.

  • While the S&P 500 Index is down less than 2% so far in 2020, investors have been rotating out of “old” economy sectors—such as Financials, Industrials and Energy— and into “new” economy sectors—such as Technology, Healthcare and Consumer Discretionary. Technology has been the biggest beneficiary and Energy has been the biggest loser of the rotation, in terms of percentage share of market cap gained and lost.

  • Our tactical equity portfolios are overweight Technology, Consumer Discretionary and Healthcare, and underweight Consumer Staples, Industrials, Communication Services, Financials and Utilities. Our sector biases are based on bottom-up industry and stock scoring models, which tilt towards value and momentum, amongst other factors.

1. RECENT STOCK MARKET RALLY HAS LEGS

EXHIBIT 1: RECENT DATA SHOWS A HISTORICAL REVERSAL IN THE GLOBAL LEADING ECONOMIC INDICATOR INDEX ALONG WITH THE S&P

 Chart 1

Source: Goldman Sachs, Bloomberg.

Economic indicators from around the globe are rebounding in a big way. Our measure of global leading economic indicators has moved from the worst reading in its history to nearly neutral in a matter of months. This index is comprised of more than 20 different leading economic indicators from developed countries such as the U.S, Japan, and Germany, along with key metrics from emerging economies like China and South Korea. While the success of re-opening economies varies city by city, the overall data around the world is positive so far.

 

2. INVESTORS ARE ROTATING OUT OF “OLD” AND INTO “NEW” ECONOMY SECTORS

 

EXHIBIT 2: INVESTORS ARE ROTATING OUT OF “OLD” AND INTO “NEW” ECONOMY SECTORS
Chart 2

Source: Bloomberg, Meeder Investment Management

Beneath the S&P 500’s volatility in 2020 exists a massive sector rotation from “old” economy to “new” economy sectors. Technology + Communication Services stocks alone have increased their market share in the S&P 500 Index from 23.1% in 2015 to more than 38% this year. On the other end of the spectrum, the total combined market capitalization of the Financial, Industrial, Materials, and Energy sectors are just over 21%. These four industries accounted for nearly 36% of the index just five years ago. While the trend existed before this year, the COVID-19 pandemic has essentially hit the fast forward button on this evolution in the business landscape.

 

3. WE ARE OVERWEIGHT TECHNOLOGY, CONSUMER DISCRETIONARY AND HEALTHCARE

Our tactical funds and portfolios are overweight the Technology, Consumer Discretionary, and Healthcare sectors. A large share of these “new” economy stocks have provided consistent profitability and positive momentum at relatively attractive prices. On the other hand, defensive stocks in the Consumer Staples and Utilities sectors still carry hefty valuations, when taking into consideration their below-average earnings and relative underperformance. In addition, many companies in the Financial sector face obstacles in the “lower for longer” interest rate environment they find themselves in.

EXHIBIT 3: WE ARE OVERWEIGHT TECHNOLOGY, CONSUMER DISCRETIONARY, AND HEALTHCARE

Chart 3
Source: Meeder Investment Management

 

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios, or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third parties.

Investment advisory services provided by Meeder Asset Management, Inc.
©2020 Meeder Investment Management, Inc.

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Tighter Spreads, Emerging Market Strength, and Lower Rates for Longer 
By Abe Sheikh, Co-CIO and Amisha Kaus, Portfolio Manager  •  June 2020

Key Takeaways:

  • Our fixed income models added significant value over the coronavirus-driven downturn in credit markets earlier this year. We de-risked our high-yield and emerging market exposure prior to the market meltdown in March and have slowly re-risked over the last few weeks as conditions have improved.

  • Volatility and macroeconomic factors in our models turned uniformly negative in mid-late March, while momentum turned negative towards the end of March 2020. Looking ahead, momentum and volatility factors suggest strength in high yield bonds, while macroeconomic factors are signaling potential weakness. In Emerging Markets, all factors are uniformly positive.

  • In response to our signals, we have increased our exposure to High Yield and Emerging Market debt in our tactical portfolios. We believe the Federal Reserve and global central banks are likely to stay accommodative, thereby providing support to these sectors. Our trading desk has noticed strong demand and record high issuance of corporate bonds this year.

1. Navigating The Coronavirus-Driven Downturn In Early 2020

EXHIBIT 1: OUR HIGH YIELD AND EMERGING MARKET DEBT MODELS SIGNALED WEAKNESS PRIOR TO THE BROAD MARKET DECLINE IN MARCH

Source: Meeder Investment Management

Our models registered market weakness before the broad market decline in March, leading us to reduce our U.S. high yield and emerging market debt sector exposures during the periods highlighted in red. We increased portfolio exposures to the two sectors in the periods highlighted in green, as our model factors identified strength in those sectors.

EXHIBIT 2: OUR FIXED INCOME MODELS ADDED VALUE OVER THE CORONAVIRUS-DRIVEN DOWNTURN IN CREDIT MARKETS IN EARLY 2020

Source: Bloomberg

Our proprietary models added value earlier this year during the coronavirus-related market decline in early March, guiding our portfolio allocations out of High Yield and Emerging Markets during the periods highlighted in red, when the fixed income market faced historic liquidity pressures. It has also guided us to increase exposure in the two sectors, in the periods highlighted in green, as markets began to show signs of improvement in April.

 

2. Insights From Our Tactical Models

EXHIBIT 3: MOMENTUM, VOLATILITY, AND MACROECONOMIC FACTORS HAVE TURNED POSITIVE ACROSS HIGH YIELD AND EMERGING MARKETS

Source: Meeder Investment Management

The charts above exhibit the tactical nature of our proprietary models, with daily factor signals plotted along the dotted line. Market strength exists when a reading is above the line and market weakness when it is below the line. Momentum, volatility, and macroeconomic factors in our models are currently above their thresholds, signaling a continuation of strength in high yield and emerging market bonds. Although macroeconomic factors have weakened in the high yield bond market recently, both sectors continue to exhibit overall strength.

 

3. Portfolio Positioning And Insights From Our Trading Desk

Our fixed income portfolios are currently positioned with an increased weight to high yield and emerging market debt sectors, up from a 0% allocation in mid-March. Our trading desk has noticed strong demand and record high issuance of corporate bonds this year. This is due in part to very strong Federal Reserve actions to support liquidity in the credit markets. Many of the central bank’s programs announced as part of their monetary stimulus action in March have yet to launch, giving the Federal Reserve more opportunities to support the market. Global central banks are likely to continue their asset purchases in the near future and stay accommodative, which will facilitate liquidity in the fixed income markets and help support lower yields.

 

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in the Portfolios entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

Capital markets commentary, historical analysis and benchmark performance is provided for informational purposes only. Benchmarks and financial indices may not be available for direct investment, are unmanaged, assume reinvestment of dividends and income, and do not reflect the impact of trading commissions, fund expenses or management fees. Opinions and forecasts regarding sectors, industries, companies, countries, themes and portfolio composition and holdings, are as of the date given and are subject to change at any time based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector. Certain historical research and benchmark data has been provided by or is based on third party services to which Meeder Investment Management subscribes. The company makes every effort to use reliable, comprehensive information, but can make no representation that it is accurate or complete.

Investment advisory services provided by Meeder Public Funds, Inc. Public funds under advisement include funds managed by an affiliate, Meeder Asset Management, Inc.

Advisory services provided by Meeder Asset Management, Inc. and/or Meeder Advisory Services, Inc.

©2020 Meeder Investment Management, Inc.

 
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Retail Investors Turn Bearish as Coronavirus Cases Spike 
By Abe Sheikh, Co-CIO and Joe Bell, Portfolio Manager  •  June 2020

Key Takeaways:

  • We expect short-term support for stocks based on indicators from our investment models. One such indicator—the AAII U.S. Investor Sentiment Index—is near bearish extremes.

  • We are likely near the end of the Federal Reserve’s extremely accommodative policy stance. Looking ahead, the Fed is likely to gradually become less accommodative, as the U.S. and global economies recover from the coronavirus driven recession.

  • Recent spike in coronavirus cases across the U.S. is a serious issue that could derail the economic recovery. We are closely monitoring developments and at this stage, we do not believe a full-scale shutdown of the global economy is in the cards.

  • We believe a disciplined systematic process is our differentiator and key to achieving long-term positive results for clients.

1. Retail Investors Turn Bearish

AAII% BEARISH / (AAII % BULLISH + AAII % BEARISH)

Source: AAII Sentiment, Meeder Investment Management.

This week’s American Association of Individual Investors (AAII) Sentiment survey1 showed that more than 66% of respondents are bearish over the next six months. With U.S. stocks — as measured by the S&P 500 Index — less than 10 percent from their all-time high, many retail investors are feeling quite skittish over worrisome headlines related to COVID-19, the re-opening of the economy, and civil unrest. Our research shows that such extreme bearish sentiment has historically been associated with positive performance of the stock market in the weeks that follow.

 

2. Fed Likely to be Less Accommodative

EXPECTATIONS FOR FED POLICY

Source: RavenPack, Meeder Investment Management. The chart shows the standardized 10-day moving average of interest rate forecast sentiment. This is calculated by analyzing relevant news stories and assigning a score to each one, depending on the implied interest rate forecast. This score is then smoothed and standardized over the last year. Extreme positive readings imply expectations of loosening Fed policy and vice versa.

The stock market’s tailwind from the Fed policy is likely over. Although lower interest rates and quantitative easing have historically been positive for equities, our quantitative measure of Fed expectations has turned decidedly negative. With economic data quickly improving and the Fed’s balance sheet reaching record levels, the path forward is likely to be less accommodative than we have witnessed during the past few months. We do not expect the Fed “put” to be as effective at buoying stock markets in the future, as it has been over the past few months.

 

3. Spiking Coronavirus Cases Could Derail Economic Recovery

DAILY CONFIRMED NEW CASES (5-DAY MOVING AVERAGE)
OUTBREAK EVOLUTION FOR THE CURRENT 10 MOST AFFECTED COUNTRIES

Source: John Hopkins

Several states across the U.S. are experiencing a resurgence in new coronavirus cases. With China shutting down schools, many people wonder if the U.S. will soon follow. While different states and countries re-open their economies with varying degrees of success, researchers from around the world continue to focus on drug and vaccine testing. While this recent surge is important to monitor, we don’t believe there will be a global shutdown like we experienced this spring.

 

Since 1987, members of the American Association of Individual Investors (AAII) have been answering the same question each week;
Which direction do you feel the stock market will go in the next six months? The responses are tracked by the AAII Sentiment Survey,
which provides a useful gauge of the expectations of individual investors.

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in the Portfolios entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

Capital markets commentary, historical analysis and benchmark performance is provided for informational purposes only. Benchmarks and financial indices may not be available for direct investment, are unmanaged, assume reinvestment of dividends and income, and do not reflect the impact of trading commissions, fund expenses or management fees. Opinions and forecasts regarding sectors, industries, companies, countries, themes and portfolio composition and holdings, are as of the date given and are subject to change at any time based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector. Certain historical research and benchmark data has been provided by or is based on third party services to which Meeder Investment
Management subscribes. The company makes every effort to use reliable, comprehensive information, but can make no representation that it is accurate or complete.

Advisory services provided by Meeder Asset Management, Inc. and/or Meeder Advisory Services, Inc.

©2020 Meeder Investment Management, Inc.

 

 

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Meeder Investment Management Taps Abe Sheikh as New Co-CIO 
May 2020

Meeder Investment Management has been tactically managing portfolios since 1974. Our capabilities include mutual funds, investment portfolios, separately managed accounts, cash management solutions and investment consulting. Our team continues to refine our disciplines and develop solutions that stay true to our founding principal, no matter the market environment. It is because of our deep commitment to this principle that we have evolved into a client-focused firm specializing in custom solutions. We continue to add resources to ensure we deliver these solutions with unmatched responsiveness. The latest addition of expertise to join Meeder Investment Management is Co-Chief Investment Officer, Abe Sheikh, FSA.

 

TELL US ABOUT YOUR PREVIOUS EXPERIENCE

I have been in financial services industry for almost 18 years. Prior to joining Meeder, I served as Chief Investment Officer and Portfolio Manager at Cougar Global Investments, a global macro downside risk manager and affiliate of Raymond James Financial. Prior to that, I spent 11 years at J.P. Morgan Asset Management, during which I developed and managed a range of tactical asset allocation and factor based systematic strategies. While at JPMorgan, I was also responsible for retirement research geared toward their Target Date platform and Post-Retirement product development. I started my career as an Actuary at Willis Towers Watson—an actuarial consulting firm—where I developed and implemented a range of assetliability models for a range of pension funds and insurance companies. I have a bachelor’s degree in actuarial science from the London School of Economics and Political Science and a master’s in computational finance from Carnegie Mellon University. I am also a fellow of the Society of Actuaries (FSA) and a Member of the American Academy of Actuaries (MAAA).

 

When at Cougar Global, what was your primary focus, and what funds/products were of note?

As Chief Investment Officer and Portfolio Manager at Cougar Global, I was responsible for managing unconstrained tactical portfolios with over $1.3 billion in assets. We offered five different macro strategies in two currencies (USD, CAD) that catered to institutional, high net-worth and retail clients with different risk profiles and constraints. I also managed the Carillon Cougar Tactical Allocation Fund—a U.S. listed mutual fund with top quartile performance over a one- and three-year basis, as calculated by Morningstar. Notably, our portfolios significantly outperformed our peers and benchmark over the recession and financial market shock induced by the 2020 coronavirus pandemic. Our performance during this period was in the top decile of the Morningstar tactical allocation peer group.

 

Understanding your previous experience, what drew you toward a role with a tactical fund manager?

I believe tactical managers—such as Meeder—that follow a disciplined strategy have the potential to add significant value to risk-aware clients, especially during periods of extreme market volatility. While most investors would like the upside potential offered by the stock market they are ill-prepared for the extreme volatility and downside risk that stocks typically also present. My previous experience developing and managing tactical strategies at Cougar Global and JPMorgan reinforce this belief. I am drawn to Meeder because of my desire to help clients successfully navigate their financial journey, specifically by protecting against 
large portfolio losses.

 

What do you feel are key things to look at when evaluating the markets?

I look at a combination of fundamentals and technical factors when evaluating markets, the former when looking at an intermediate and long-term time frame, and the latter when looking at shorter-term market movements. In addition, I recognize that technological advances—such as high frequency and algorithmic trading—have fundamentally changed the investment landscape. Over the last 20 years, financial markets have become increasingly efficient at incorporating new information into asset prices. Consider how a single tweet can often lead to large almost instantaneous gains or losses in financial markets. Finally, I recognize that—post the financial crisis of 2008—central banks have become very significant players, utilizing unconventional tools to bolster economic growth, often using large-scale asset purchases as their tool of choice. 

 

Why Meeder Investment Management?

Meeder offers clients a truly unique value proposition, with a long history of superior risk-adjusted performance. I am attracted to the culture of collaboration, innovation, and growth that the firm has fostered since its founding. With a wide range of solutions to meet client demands for accumulation, preservation, and distribution of capital, I believe my professional experience and educational background is a great fit for the investment team and the firm. I look forward to partnering with clients to meet and exceed their long-term financial goals.

 

What are you most looking forward to accomplishing in 2020?

Professionally, I am looking forward to helping our clients navigate the extremely complex financial and economic environment that has resulted from the global coronavirus pandemic and accompanying recession. The situation is dynamic and—despite the concerted efforts of the central banks, governments, and health organizations—the investing environment remains extremely uncertain and risky. Together with the rest of the investment team at Meeder, we are looking to navigate these uncertain times with an eye towards minimizing large losses. Personally, I am looking forward to becoming a dad and getting settled in Columbus, Ohio!

 

What are some personal interests that may be of note?

I am an avid reader, tennis player, runner, traveler, and—in my spare time—enjoy exploring new cultures, languages, and cuisines!

 

©2020 Meeder Investment Management, Inc.

0052-MAM-7/22/20

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Meeder Tactical Update: Perspectives on Recent Market Volatility

 

Market Volatility
On February 19, the S&P 500 finished trading at 3,386, marking a new all-time high.  Just six trading days later, on February 27, the S&P 500 closed 12.7% below this level, making it the fastest 10% or greater correction from an all-time high in the index’s history.  Following the S&P 500’s rapid decline on Monday, March 9, it is now down nearly 19% from its all-time high.  In addition, U.S. small-cap stocks, as represented by the Russell 2000 Index (RUT), have fallen nearly 22%.  If it wasn’t clear by the end of February, it is certainly clear now; volatility has arrived. 

 

The Coronavirus
The spread of the coronavirus has significantly impacted the stock market.  Starting in China, the world’s second largest economy, the coronavirus has spread to other countries around the globe.  While the economic impact of the virus is still unknown, uncertainty related to the potential economic impact concerns investors.  For a closer look at the coronavirus and potential implications for the stock market, we encourage you to review a recent paper we released in late February titled “Coronavirus: What Does This Mean for the Economy.” 

 

The Fed’s Response
In addition to the stock market decline, interest rates have fallen dramatically.  For example, the 10-year and 30-year U.S. Treasury rates are now at all-time lows; both yielding under 1%.  In response to the recent market volatility and uncertainty surrounding the spread of the coronavirus, the Federal Reserve slashed short-term interest rates by 0.50% on March 3.  Between Fed meetings, this was the first emergency rate cut since 2008, and it also marks the biggest single cut since then.  Based on the Chicago Mercantile Exchange’s Fed Watch Tool,  the market is expecting additional rate cuts at the March Fed meeting.

 

Oil Prices Shock the Stock Markets
Late last week, OPEC, which includes Saudi Arabia and Russia, failed to agree on production cuts.  The discussion was aimed at combatting the fall of oil prices, which had already plummeted more than 30% year-to-date on fears of slowing growth related to the spread of the coronavirus.

Early Sunday, Brent crude oil futures dropped an additional 30%, which was the largest drop since the Gulf War in 1991.  The drop came after Saudi Arabia announced a sudden discount in oil prices to its customers in Asia, the United States and Europe.  Saudi Arabia, the world’s second largest producer said it will increase oil production instead of cutting it.  With no deal reached in OPEC, there is now fear that there will be a price war that could send prices even lower. 

 

Tactical Model Positioning
Our tactical exposure is based on a combination of risk vs. reward.  The reward value of the stock market is determined by the Meeder Investment Positioning System (IPS) which ranks over 70 factors.  The IPS has three different components; our long-term, intermediate-term, and short-term models.  The reward value is then compared to market risk, our measure of expected stock market volatility. 

Our partially defensive position primarily stems from a weakening of short-term trends and the significant increase in volatility.  Historically, many of the largest drawdowns in history were preceded by an increase in volatility.  All else equal, we prefer to be more invested when market volatility is low.  In stark contrast, volatility is well above its long-term average now.

The reward component of our model has actually improved since the February 19 peak.  One of the primary reasons for this improvement is the high level of investor pessimism.   For example, investment newsletters are displaying significant fear and option activity is showing extreme levels of panic from hedgers and speculators.  As a reminder, we view this type of pessimism from a contrarian point of view. 

While it is difficult to identify the actual day of a market bottom, we are observing certain characteristics that historically occur during market turning points.  For example, the ratio of declining securities volume relative to advancing securities volume on the New York Stock Exchange is displaying panic selling.  On three days last week, we observed three different ratios above 8:1 and on March 9 an extraordinarily high ratio of 28:1.  This type of bearish selling is typically something we observe during market capitulation.

Another sign of capitulation that we are closely monitoring is correlation among equities.  During normal market environments, the performance of individual stocks, industries, and sectors varies based on the expectations of investors.   During periods of exhaustive selling, investors tend to “throw in the towel” and correlations increase dramatically.  This is often a sign that a turning point in the market has developed.

Within the Intermediate-term model, we also track the expectations of Federal Reserve policy.  Historically, an accommodative Fed that is cutting rates has been positive for future equity returns.  The recent Fed activity and change in interest rate expectations has been one reason for the reward value remaining relatively positive.

 

Fixed Income Positioning
Within several of our tactical funds and portfolios, there is a fixed income allocation.  During this drawdown, both our high yield and emerging market fixed income models switched to a risk-off position.  As a result, we have significantly reduced our high yield and emerging market fixed income exposure.

 

Our Objective
At Meeder, we are dedicated to keeping clients committed to their investment strategy through a full market cycle. To achieve this objective, our tactical funds and portfolios aim to reduce equity exposure when market risk is high and increase equity exposure when market risk is low. We believe our systematic approach, based on the highest probability outcomes, will generate a better risk-adjusted return over a full market cycle.

 

Materials offeredfor informational and educational purposes only. Certain information and data has been supplied by unaffiliated third-parties. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third- parties. Meeder does not provide accounting, legal or tax advice. Consult your financial adviser regarding your specific situation.

© 2020 Meeder Investment Management, Inc.

 
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Meeder's Take on the 3/3/20 Federal Reserve's Surprise Rate Cut

 

Today, the Federal Reserve Board made a surprise move by lowering the target federal funds rate by half of a percentage point to a range from 1.00% to 1.25%. The Federal Reserve has faced increasing pressure to cut rates amidst the rise in concern among market  participants over the global coronavirus spread. What does this mean for the market and what can we expect from the FOMC regarding rates for the remainder of 2020? We invite you to watch a video featuring Jason Headings, Director of Fixed Income at Meeder Investment Management, where he shares a brief overview of today's rate cut and what impact this action could have on the economy.

 

 

This information is provided for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Past performance is no guarantee of future results. Analysis offered for illustrative purposes only. Tactical asset management, asset allocation and diversification techniques do not assure a profit or protect against loss. All investing involves risk. Principal loss is possible. Investors are advised to consider carefully the investment objectives, risks, charges and expenses of any investment before investing.

Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third-parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third-parties. Meeder does not provide accounting, legal or tax advice. Consult your financial adviser regarding your specific situation. 

Copyright © 2020 Meeder Investment Management 6125 Memorial Drive, Dublin, OH 43017

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Coronavirus: 
What Does This Mean for the Economy? 


 

 

WHAT IS IT?

Coronaviruses are a category of viruses that cause respiratory illness. This includes viruses like the common cold and flu. These can originate in animals and can occasionally infect people. MERS and SARS are a couple examples of types of a coronavirus. This new specific strain, the COVID-19, was first reported in Wuhan, China in December 2019. While officials are still unsure of how the disease was spread to humans, the infection is believed to have come from wildlife that was sold at a local farmer’s market. Wuhan is the 11th largest city in China and is home to more than 11 million people.

 

WHAT ARE THE SYMPTOMS?
According to the World Health Organization, some of the symptoms include aches and pains, fever, cough, runny nose, shortness of breath and breathing difficulties. In severe cases, infection can cause pneumonia, severe acute respiratory syndrome, kidney failure and even death.

 

HOW BIG OF A PROBLEM IS THIS?
According to the World Health Organization, the number of people infected globally has exceeded 80,000 and the number of deaths total more than 2,700. As of February 25, the World Health Organization states that it is still too early to declare the coronavirus a pandemic. The definition of a pandemic is an epidemic that occurs over a wide geographic area and affects an exceptionally high proportion of the global population. While we are not trying to minimize the severity of this outbreak, it is important to put the magnitude of this virus into context. By comparison, the CDC estimates that in the 2018-19 flu season more than 35,500,000 people contracted the influenza in the United States alone, resulting in over 34,200 deaths.

 

Number of New Confirmed Cases Declining

Source: Johns Hopkins Center for Systems Science and Engineering

 

WHERE IS IT THE MOST PREVALENT?
Currently, Mainland China is experiencing the largest impact with more than 96% of confirmed cases. The threat was thought to be contained within China, however, on Monday, February 24, 2020 reports confirmed that the virus had spread to other countries including South Korea, Italy, Germany and Iran.

 

Cumulative Number of Cases

Source: Johns Hopkins Center for Systems Science and Engineering

 

WHAT DOES THIS MEAN FOR THE ECONOMY?
While the economic impact of the virus is still unknown, the U.S. stock market has experienced significant volatility related to uncertainty. Although China, the world’s second largest economy, remains most impacted by the virus, there is concern that the global supply chain may impact businesses and the world economy. Some U.S. economists have even lowered their GDP forecast for the first quarter of 2020.

 

Past Epidemics and Stock Market Returns

 

Source: Dow Jones Market Data

 

The Federal Reserve Chair Jerome Powell stated the FOMC is closely monitoring the economic impact that this virus may have in China and how that could potentially impact other parts of the global economy. Since this outbreak began, the expectations of the Fed making additional rate cuts in 2020 has increased.

While it is impossible to predict the outcome of this epidemic, there have been several outbreaks over the years that have incited panic among investors. The list above shows a list of epidemics that have occurred in the past. From the onset of an epidemic, on average, stock market returns were higher six-months following the outbreak. History has shown that often these types of outbreaks tend to delay, rather than stop, economic activity. As always, at Meeder we will continue to monitor the market utilizing our multi-discipline/multi-factor approach, which is designed to take the emotion out of the decision-making process.

 

Materials offered for informational and educational purposes only. Certain information and data has been supplied by unaffiliated third-parties. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third- parties. Meeder does not provide accounting, legal or tax advice. Consult your financial adviser regarding your specific situation.

© 2020 Meeder Investment Management, Inc.

0098-MAM-02/26/2020

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The End of a Historic Decade 
A Reality Check...


 

As we enter a new decade, it is important to take a moment and reflect on what has occurred and learn from the past.

 

The last ten years provided strong investment returns fueled by slow-and-steady economic growth. It is easy to understand why many investors have likely become complacent in this current “Goldilocks Economy”—it may not be too hot, or too cold and seems to be “just right.” At Meeder, we believe that the one thing you can always count on is change. That’s why we think it’s important to take a closer look at some specific examples of why we believe that has been such an historic decade.

1. The U.S. economy expanded for a record 126 consecutive months through the close of 2019, making it the first decade in U.S. history without an economic recession. The National Bureau of Economic Research (NBER) tracks U.S. expansions and recessions going back to 1850. There has never been a decade without a recession before the 2010s.

2. The S&P 500 never experienced a drawdown of 20% during the past decade—this has only happened one other time in the past 100 years, and that was the 1990s.

 

U.S. RECESSIONS BY DECADE

 

 

 

 

The 1990s were the only other decade in the past 100 years to avoid an S&P 500 drawdown of 20% or greater. Let’s reflect on what happened in the decade that followed.

 

THE 2000s
» Two separate declines of more than 45%
» Two recessions, including “The Great Recession,” the worst economic contraction since the 1929 Great Depression
» Negative annual returns in 4 out of 10 years
» Finished decade in negative territory for first time since the 1930s.

Are we predicting for this to happen during the next 10 years? Certainly not. But it does bring to mind a popular quote; “History does not repeat itself, but it often rhymes.” At Meeder, we believe that now is not the time to get complacent. It may be reasonable to assume the next decade will be more volatile than the last. Statistically speaking, one must realize how unique the past decade was and the probability of the 2020s repeating this type of performance is very low. If there is one thing we can count on, it’s change.

 

OUR MISSION
As we begin a new decade, it is important to remember Meeder’s goal. We are dedicated to keeping clients committed to their investment strategy through a full market cycle. To achieve this objective, our tactical funds and portfolios aim to reduce equity exposure when market risk is high and increase equity exposure when market risk is low. We believe our systematic approach, based on the highest probability outcomes, will generate a better risk-adjusted return over a full market cycle.

 

Materials offered for informational and educational purposes only. Certain information and data has been supplied by unaffiliated third-parties. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third-parties. Meeder does not provide accounting, legal or tax advice. Consult your financial adviser regarding your specific situation.

© 2020 Meeder Investment Management, Inc.

0097-MAM-2/24/20

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Understanding Risk During Retirement

 

THE LIFECYCLE OF THE INVESTOR 

The lifecycle of the investor is often thought of in three distinct stages; accumulation, preservation and distribution. During the accumulation stage, an investor contributes to a portfolio that is expected to grow over time. There has traditionally been a focus on maintaining significant exposure to common stocks during this stage. It certainly makes sense. Common stocks, often called equities, are one of the few assets that have historically outpaced inflation.

This pattern of contributions continues into the wealth preservation stage, a time when many investors start experiencing the positive effects of long-term compounding. As their account balance grows over time, investors often focus on reducing risk to prepare for the big leap into retirement.

Retirement introduces the last stage; distribution. This stage often involves many significant life changes. Most retirees have focused on working for more than 40 years, all while diligently saving for retirement. Suddenly, they are no longer receiving paychecks. They just have a nest egg, which they have been contributing toward for their entire adult life. In some ways, this nest egg could be the answer to one of their greatest questions. ”Financially, am I going to be OK?”

 

RISK-BASED VS. GOALS-BASED

At the heart of financial planning is defining a person’s goals and allocating their resources so that they maximize the probability of achieving those goals. The structure of this process is traditionally built on a foundation of risk, forged by the confluence of the investor’s willingness and ability to take risk.

While equities are essential during the accumulation phase, clients who are more risk averse tend to allocate less to equities than those with a higher risk appetite. Risk averse investors are likely to miss out on greater potential upside in order to experience a smoother ride with less volatility. Working longer or saving more are common alternatives for more risk averse investors. For those who are comfortable with taking additional risk, equities traditionally offer the best opportunity for long-term growth. Balancing this risk-reward relationship is often the cornerstone of asset allocation for clients during the accumulation and wealth preservation stages.

As investors enter the distribution stage, many continue to use the same risk-based framework to make investment decisions. In some ways, it makes sense. Research shows that people have a lower tolerance for risk as they age. It is also important to keep an investor committed to their objective long enough to achieve it. A financial plan that leaves a client stuffing cash under their mattress after one bad quarter is not an effective solution. On the other hand, one indisputable fact that we must deal with is math.

Figure 1 displays the stream of future withdrawals from $1,000,000 with three different withdrawal rates. The title of each column references the Year 1 withdrawal percentage. Withdrawals in years 2-30 are increased by 2.5% annually to account for increases in the cost of living, otherwise known as inflation. At the bottom of the table are the sums of future spending needs.

 

FIGURE 1

 

As Figure 1 illustrates, if a retiree only requires 2% of their assets for spending needs, the total sum of all future withdrawals is less than the initial account balance. This retiree does not need to take any additional risk to fund a 30-year time horizon. Naturally, as the withdrawal rate increases, the total sum of future spending needs increases. It becomes clear that a retiree with a larger withdrawal rate needs more growth than a retiree with a lower withdrawal rate.

A traditional, risk-based assessment has reached a crossroad. A client may fit the criteria of an extremely conservative investor but require a higher withdrawal rate. Based on traditional risk-measures, an advisor may recommend a low-risk portfolio that may not generate the growth needed to fund future spending goals. Unlike the accumulation and wealth preservation stages, the ability to return to work may be challenging, as their skills could become less marketable over time and health issues may create obstacles to earning additional income. In contrast, a goals-based retirement solution is specifically constructed to meet the spending requirements of a retiree. By focusing on the desired withdrawal rate, the portfolio is allocated to achieve the growth needed for a retiree’s goal.

 

THE TOP THREE RETIREMENT RISKS

LONGEVITY RISK

Research studies continue to show that the top fear for retirees is longevity, or the risk of outliving their assets. Thoughts of growing old with no resources to support yourself can be a scary thought. The ability to earn income may also be impaired by diminishing physical and mental capacity, making the reliance on retirement savings even more important.

One way to reduce the impact of longevity risk is investing in equities during the distribution stage. From 1928-2018, the average annual return for U.S. equities (S&P 500 Index) is +10.4%. The average annual return for U.S. fixed income (10-Year U.S. Treasury Bonds) is +5.0%. Unless your nest egg has a starting balance that exceeds the sum of your future spending needs, long-term growth will be necessary. As Figure 1 illustrates, more growth is needed as a retiree’s withdrawal rate increases.

 

VOLATILITY RISK

The most common way to define risk for most investors is volatility, which is often measured by standard deviation. Standard deviation is a statistic that measures the variation of returns over time. The higher the standard deviation of an asset, the more volatile it is. This means its shortterm returns tend to be more extreme, higher and lower, than its long-term average returns.

Figure 2 shows the average annual return and standard deviation of U.S. fixed income (10-year Treasury Bonds) and equities (S&P 500 Index) from 1928 – 2018. Equity has a higher average return but is more volatile. Fixed Income has a lower average return but is less volatile.

FIGURE 2

Traditionally, fixed income has been a complimentary asset to equities. During this same time period, the correlation between these two assets was -0.03. With little correlation, fixed income is often thought of as good diversification for equities and a key component to reduce the volatility risk of a portfolio.

 

SEQUENCE OF RETURNS RISK
If you are a buy-and-hold investor, not making contributions or withdrawals, the order of your investment returns does not matter. Figure 3 shows the order of returns for two portfolios during a 20-year period. Portfolio A has 15 consecutive years of 10% gains, followed by 5 consecutive years of -15% losses. Portfolio B has five consecutive losses of -15% in the first 5 years but finishes with 15 consecutive years with gains of +10%. In Figure 4, both portfolios begin with
$100,000 and experience each year’s respective returns from Figure 3. The order of returns has no effect on the ending balances after 20 years.

 

FIGURE 3

 

FIGURE 4 | NO CONTRIBUTIONS OR WITHDRAWALS

 

FIGURE 5 | PERIODIC CONTRIBUTIONS

 

During the accumulation phase, it is a different story. The portfolios in Figure 5 experience the exact same order of returns, but with one difference. In this example, an investor deposits the maximum 401K contribution of $19,000 at the beginning of Year 1 and increases the contribution by 2.5% annually in years 2–20. Despite both portfolios experiencing the same average return over 20 years, the poor performance in the final years for Portfolio A caused more damage than the difficult start for Portfolio B. The string of losses occurred early for Portfolio B, before the account value was very large. The contributions also purchased more of the investment at lower prices. As counterintuitive as it sounds, investors in the accumulation phase may want to root for bear markets to occur when they are young.

 

FIGURE 6 | PERIODIC WITHDRAWALS

 

Finally, let’s review the sequence of returns risk during the distribution stage. Figure 6 shows the annual ending balances of two portfolios that both began with $1,000,000. In this example, each portfolio withdrawals 4% ($40,000) at the beginning of Year 1 and increases that withdrawal amount by 2.5% annually for the next 19 years.

The sequence of returns impact is reversed when an investor is taking distributions. The poor early returns for Portfolio B have a much greater impact than the poor performance in the final 5 years for Portfolio A. Portfolio B experiences consecutive losses in the early years, while simultaneously removing money from the account at lower prices. When the market recovers, Portfolio B has less money invested and the gains after Year 5 aren’t enough to offset the bad start. After experiencing large drawdowns early in retirement, Portfolio B runs out of money during the 14th year. Using a strategy that limits downside during the early years of the distribution stage could reduce sequence of returns risk for a retiree.

 

MANAGING THE TOP THREE RETIREMENT RISKS

During the distribution stage, managing these three risks can be a balancing act. To reduce longevity risk, an investor requires growth assets to help fund future spending needs. On the other hand, equities may increase volatility risk and sequence of returns risk. How does the investor balance these competing risks during retirement?

 

MINIMIZING LONGEVITY RISK
As mentioned earlier, equities historically have a higher average return than fixed income, which reduces longevity risk. As the desired withdrawal rate increases, the total amount of future spending needs increases. To highlight the impact of including equity to a portfolio during the distribution stage, we used Monte Carlo simulations, giving an investor four portfolio choices. Each portfolio followed the parameters to the right, during the simulation process.

Figure 7 shows the probability of success for each respective portfolio and withdrawal rate. Success is measured by the portfolio funding all the retiree’s spending needs over 30 years. These charts demonstrate that adding equity to a portfolio generally increases the odds of success for a retiree with a longer time horizon. As the withdrawal rate increases, equity becomes even more important to maximize the success rate.

A Monte Carlo simulation generates a wide variety of market return scenarios from actual market returns. In this case, we used the S&P 500 Index to represent equity returns and the U.S. 10-Year Treasury to represent fixed income returns. The simulation utilizes data from 1950 through 2018. For each quarter of any given simulation, the model randomly generates one quarter of equity and fixed income returns based off of the distribution of historical returns. The simulation was ran 10,000 times to generate an estimate of likely outcomes for each portfolio. By keeping track of the number of simulations in which a portfolio meets the required spending needs, we can estimate the success rate of the portfolio.

 

FIGURE 7

 

While Figure 7 illustrates these success rates, it does not indicate whether there was $1 or $1,000,000 left in the portfolio. Equity’s upside really stands out when we observe the average ending balance for retirees after 30 years. Figure 8 shows the average ending balance for each respective portfolio and withdrawal rate. The average retiree, starting with a 6% withdrawal rate, will run out of money by investing their entire portfolio in fixed income. The lack of equity, combined with a higher withdrawal rate, causes the portfolio to run out of money before 30 years have passed. The theme is consistent. Adding more equity gives a retiree greater potential upside, which may translate to a greater legacy or additional spending flexibility later in life.

 

FIGURE 8

 

SOLVING VOLATILITY RISK
Fixed income is traditionally combined with equity to provide diversification and reduce overall portfolio risk. Although the long-term correlation between these two asset classes is nearly zero, it is important to note that this has differed throughout history. For example, from 2000 to 2017, fixed income and equity have been inversely correlated. Based on a trailing 5-year correlation, Figure 9 demonstrates that the correlation has turned positive recently. If the correlation remains positive during the next 20 years, investors may experience a period where the combination of equities and fixed income provides little diversification.

Future fixed income returns may also be lower than they have been during the past few decades. As Figure 10 shows, the average annual return for fixed income between 1950–2018 was +5.2%. Between 1950–1979, 10-year Treasury bonds returned +3.0% per year. This is drastically different than 1980–2018, when bonds gained +7.8% per year.

With interest rates near an all-time low, it is nearly impossible for bond investors to earn the average return they have achieved during the past few decades. While risk may be reduced within the portfolio, a heavy reliance on an asset class with below average returns could significantly impede longevity.

 

FIGURE 9 | 5-YEAR CORRELATION BETWEEN EQUITY AND FIXED INCOME RETURNS

 

FIGURE 10 | PERIODIC CONTRIBUTIONS

 

An interesting thing also happens to the volatility of equities when an investor holds them over longer periods of time. Figure 11 shows the annualized return of the S&P 500 Index based on various holding periods. The yellow squares mark the average annualized return and the blue bar represents the highest and lowest annualized return for each respective holding period. We can see that the longer the holding period, the less volatile an investor’s return. In fact, since 1928, there has never been a 20- or 30-year holding period where the S&P 500 Index experienced a negative return.

 

FIGURE 11

 

ADDRESSING SEQUENCE OF RETURNS RISK
As mentioned earlier, a higher exposure to equities reduces longevity risk. We also demonstrated that holding equities for longer periods of time reduces the long-term volatility of investing in equities. While this is true, Figure 11 still shows that holding equities for shorter periods may leave an investor with exposure to significant volatility. So, an investor needs equity to reduce longevity risk, but a more volatile asset like equity increases sequence of returns risk during the distribution phase. Traditional equity alone may not be the solution.

 

MANAGING RISK IN RETIREMENT WITH MEEDER
We believe that Meeder’s Defensive Equity is a potential solution for today’s retiree. Defensive Equity is an investment philosophy that we have been refining for more than 45 years. The goal of this strategy is to reduce equity exposure when market risk is high and increase equity exposure when market risk is low. We apply a multi-factor/multi-discipline approach, utilizing macroeconomic, fundamental, and technical analysis to assess the risk-reward relationship of the equity market. This approach seeks to capture most of the upside of equity returns while aiming to reduce volatility and downside risk. Defensive Equity aims to achieve this objective by having the flexibility of moving the investment in equity to cash or fixed income when market risk is high. In many ways, Defensive Equity is a diversification tool that reduces a retiree’s reliance on fixed income, while also aiming to reduce equity drawdown risk.

 

FIGURE 12

 

By focusing on reducing major market drawdowns, the inclusion of the Defensive Equity strategy complements the exposure of traditional equity and fixed income within a retiree’s portfolio.

It is also important to construct a retirement portfolio based on the retiree's desired withdrawal rate. As the withdrawal rate increases, the need for growth and Defensive Equity increases. Utilizing this goals-based framework, a retirement portfolio with all three components could minimize longevity, volatility, and sequence of returns risk.

 

FIGURE 13
KEYS TO MANAGING RETIREMENT RISK

 

 

The views expressed herein are not offered as investment advice and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses. This material is not offered as a substitute for personalized investment advice. Consult your Meeder investment adviser representative to select a solution that is right for you.

Historical analysis provided for informational purposes only. Data and forecasts are as of the date given and are subject to change at any time. Certain information and data has been supplied by unaffiliated third-parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third-parties.

Monte Carlo simulations are hypothetical in nature, do not represent actual investment results, and are not guarantees of future results. The simulations are based on assumptions and there can be no guarantee that that any particular result will be achieved. Because the simulation uses randomly generated data, results will vary with each use and over time. Actual results may be better or worse than simulated scenarios.

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