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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • September 17, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Momentum has been weak across U.S. equities

» Second half of September is historically weak

» Small businesses aren’t very optimistic 

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Capital Markets Commentary: Stock Market Drifts Higher, Further Impacts of COVID-19, and Manufacturing Expansion
By Joe Bell, Co-Chief Investment Officer • August 2021

» Stock Market drifts higher on low volume

» COVID-19 impacting consumer behavior & jobs picture

» Manufacturing expands but still dealing with bottlenecks

» Fed’s comments calm investors


Stock market drifts higher on low volume
Through the end of August, the S&P 500 Index is up +20.4%, marking the 6th best start to a calendar year since 1950. In fact, the current bull market is off to the fastest start since World War II, doubling in August in only 354 trading days.  

Despite the strong trend, we have seen poor market breadth and below-average volume. As a reminder, market breadth is simply a running tally of how many individual stocks are participating in an uptrend. As Exhibit 1 demonstrates, with many indexes at or near all-time highs, less than 70% of S&P 500 stocks are above their 50-day moving average. While this began to improve in the last week of August, this picture has been in place for more than three months.

EXHIBIT 1: MARKET BREADTH HAS BEEN WEAK DURING THE PAST THREE MONTHS

Source: Bloomberg

 

COVID-19 Impacting Consumer Behavior & Jobs Picture
Consumers are starting to react to concerns about the rise in COVID-19 cases. For example, the University of Michigan Consumer Sentiment survey recently reached 70, its lowest level since 2011. Alternative data is showing the same things, as the number of restaurant diners, airline travelers, and hotel revenue per room have all slowed during the month of August.

EXHIBIT 2:  THE RISE IN COVID-19 CASES AND HOSPITALIZATIONS HAVE IMPACTED CONSUMER BEHAVIOR

Source: Our World in Data

The U.S. labor market showed signs of slowing in August as well. The U.S. Bureau of Labor Statistics August employment report revealed that the economy added a disappointing 235,000 jobs during the month, falling well short of Bloomberg-surveyed economist’s median forecasted gain of 733,000. This comes after a strong July, during which companies added just over 1 million jobs. Labor force participation in August remained elevated at 61.7%.  The total nonfarm payrolls remain 5.3 million shy of its February 2020 peak.

 

Manufacturing Expands but still Dealing with Bottlenecks
The ISM U.S. Manufacturing PMI has averaged 59.9 for the past 12 months and the survey for the month of August came in at 59.9.  As a reminder, a figure above 50 is a sign of economic expansion. While the economy continues to expand, U.S. manufacturers are struggling to keep products flowing, dealing with a combination of shortages in raw materials and intermediate components, along with a lack of labor supply.

EXHIBIT 3: MANUFACTURING GREW IN AUGUST, SLIGHTLY HIGHER THAN JULY

Source: Institute for Supply Management

 

Fed’s Comments Calm Investors
Fed Chairman Jerome Powell spoke at the annual Jackson Hole Economic Symposium, and investors largely walked away feeling a little bit less nervous about tapering and rising rates.  While Powell remained unclear about just when the 2021 tapering process would begin, he did send a message of caution around less-than-stellar employment levels and stuck to the central bank’s message that the current bout of inflation is due in part to supply-chain disruptions and will likely be transitory.

The Fed is currently purchasing $120 billion a month of Treasury and Agency mortgage-backed securities (MBS). Since early 2020, these purchases have grown the balance sheet by more than 80%. The Fed is likely to start to taper its bond purchases either in late 2021 or early 2022, with most expecting the Fed to steer clear of any rate hikes until at least 2023.

 

 

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.

©2021 Meeder Investment Management, Inc.

0116-MAM-9/9/21-13987

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • September 3, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Small-cap stocks show signs of life

» Bond market is still not expecting high long-term inflation

» U.S. personal savings headed lower 

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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[SPECIAL EDITION] Markets in Focus: Cracks in the Foundation
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • August 20, 2021

CLICK ON THE VIDEO BELOW TO WATCH NOW

CLICK HERE TO DOWNLOAD OUR LATEST WHITEPAPER

 

The S&P 500 reached a new all-time high in August and officially posted its fastest start to a bull market since World War II, doubling its value in just 354 trading days (Exhibit 1). While this momentum is certainly impressive, we are not convinced the next leg of this bull market will be so easy.

 

EXHIBIT 1: THE CURRENT BULL MARKET IS OFF TO THE FASTEST START SINCE WORLD WAR II

Source: Blomberg

 

3 reasons for caution 

» Market breadth is not supporting the trend

» Rise in Covid-19 cases negatively impacting consumer behavior

» August & September are the worst-performing months, historically

 

MARKET BREADTH IS NOT SUPPORTING THE TREND
Market breadth, the measure of how many individual stocks are participating in an uptrend, has been very poor in recent months. Despite indexes like the S&P 500 and the NYSE Composite making new all-time highs, few stocks are participating in the rally.

As shown in Exhibit 2, with the NYSE Composite Index at an all-time high, the NYSE Cumulative Stocks-Only Advance/Decline Line finished nearly 2% below its all-time high. In addition, only 69% of stocks on the S&P 500 are trading above their 50-day moving average (Exhibit 3). There is weakness under the surface of this stock market.

EXHIBIT 2: A MARKET BREADTH DIVERGENCE OCCURRED BETWEEN THE NYSE COMPOSITE INDEX & A/D LINE

Source: Bloomberg

EXHIBIT 3: A MARKET BREADTH DIVERGENCE OCCURRED BETWEEN THE NYSE COMPOSITE INDEX & A/D LINE

Source: Bloomberg

 

AN INCREASE IN COVID-19 CASES IS NEGATIVELY IMPACTING CONSUMER BEHAVIOR
Consumers are starting to react to the concerns about the rise in COVID-19 cases. For example, the University of Michigan Consumer Sentiment survey recently reached 70, its lowest level since 2011. July retail sales in the U.S. also experienced a larger-than-expected decline of -1.1%.

Alternative data is showing the same thing. As Exhibit 4 illustrates, the number of restaurant diners, airline travelers, and hotel revenue per room have all slowed during the past several weeks.

EXHIBIT 4: AUGUST AND SEPTEMBER ARE HISTORICALLY THE TWO WORST PERFORMING MONTHS OF THE YEAR

Source: Guggenheim Investments, Bloomberg, STR. Data as of 8.17.2021 for Diners and TSA, 8.7.2021 for hotels

 

SEASONALITY: AN UNCERTAIN TIME OF YEAR
The ‘doldrums” is a popular nautical term that refers to the belt around the Earth near the equator, where sailing ships face windless waters, sometimes getting stuck. A place no sailor wants to be, this area serves as a collision course for trade winds from both the northern hemisphere and southern hemisphere.

This term has been popularly borrowed by investors as a reference to the stock market’s behavior between July and Labor Day weekend each year. Known as the “summer doldrums,” this period typically consists of below-average trading volume and liquidity, often leading to higher volatility and below-average returns (Exhibit 5). September 2020 was a great example, with the S&P 500 falling nearly 10% and not reaching a new high until November.

EXHIBIT 5: AUGUST AND SEPTEMBER ARE HISTORICALLY THE TWO WORST PERFORMING MONTHS OF THE YEAR

Source: Bloomberg

 

 

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.
 
©2021 Meeder Investment Management, Inc.
 
0116-MAM-8/20/21-12972
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Capital Markets Commentary: U.S. Economy Improving Despite COVID-19 Surge
By Aaron Adkins, Investment Communications Strategist • July 2021

» Earnings Propel S&P 500 Higher

» Spike In U.S. COVID-19 Cases

» Nonfarm Payrolls Increase


S&P EARNINGS
Earnings results for companies in the S&P 500 index in the second quarter continue to be impressive through the end of the month. Nearly 300 companies of the S&P 500 Index have reported earnings, and on average they have seen very strong earnings growth year-over-year. One item of note is that while the major indexes remain near recent highs, there are fewer and fewer stocks participating in the uptrend. The S&P 500 Index climbed more than 2% higher in July to reach a year-to-date total return of nearly 18%.

 

ECONOMIC UPDATE
According to the Bureau of Economic Analysis, the U.S. trade deficit widened to its largest level ever to $75.7 billion in June 2021. This is partially due to an increase in demand from reduced pandemic production sources, while exports are increasing at a slower rate. It is also a reason that inflation remains a top concern among investors. The core inflation rate rose to 4.5% year-over-year and was the largest increase since 1991. The Fed held their meeting on July 28th and remain committed to allowing rates to remain near zero until at least 2023. It also is continuing its purchases of $120 billion in Treasury and agency mortgage-backed bonds. Part of the Fed’s hesitancy to start reducing the monetary easing in the economy seems to be focused on the uptick in COVID-19 cases.

 

SPIKE IN U.S. COVID-19 CASES
According to Johns Hopkins, the 7-day moving average of confirmed cases in the U.S. increased to more than the peak confirmed cases that was seen last summer. The Delta variant is driving the vast increase in the number new cases, including those that previously received a vaccination. This abrupt change has led the CDC to change their guidance and recommend that in some instances, even fully vaccinated people should wear a mask in public indoor spaces. There are now more than 200 million confirmed cases of COVID-19 that have occurred globally. In the U.S., COVID-19 vaccinations continue to increase with 165.3 million vaccinated, according to the CDC. That brings the entire U.S. population to near 50% being vaccinated, while 60.7% of the population age 18 and older are vaccinated.

DAILY COVID-19 CASES REPORTED TO CDC

Source: CDC

As the numbers of vaccinated citizens increase, more of them are patronizing restaurants and other service-related businesses. This growth is occurring slowly, but steadily throughout the U.S. For example, U.S. GDP increased by 6.5% last quarter, but was significantly under the 8.4% estimates. GDP continues to improve each quarter after the massive drop due to the pandemic but remains more stagnant than forecasts. There are now a growing number of employers that are requiring COVID-19 vaccinations for their employees.

 

EMPLOYMENT SITUATION
In July, nonfarm payrolls increased by 943,000, exceeding the consensus estimate of 845,000. Most of the jobs created were in the Leisure and Hospitality sector which continue to grow as more businesses ramp up their employment levels. While payrolls are increasing, they are unfortunately are not even close in keeping pace with employer demand. For the first time ever, the Department of Labor reported a record high 10.1 million available jobs at the end of June. This is a significant increase even from the prior month’s 9.2 million jobs. The national unemployment rate fell from 5.9% to 5.4% in July. This rate continues to fall but for perspective remains considerably higher than the pre-COVID-19 pandemic rate of 3.5%.

 

 

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.

©2021 Meeder Investment Management, Inc.

0116-MAM-8/11/21-10122

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • August 6, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Equity indexes near highs with weak stock participation

» Despite strong Q2 earnings, 2022 earnings expectations fall

» Vaccinations outpacing new COVID-19 cases

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • July 23, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» U.S. equities experience brief volatility

» The average U.S. stock is down more than 10%

» Unusually calm 2021 faces seasonality

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Meeder Fixed Income Strategies
By Amisha Kaus, Portfolio Manager, and James Milletics, Fixed Income Analyst • Q2 2021

KEY TAKEAWAYS 

» Long-term rates declined as the Fed deemed inflation to be “transitory”

» Fixed income sector losses from the first quarter pared back as spreads narrowed during the quarter

» High-yield bonds remained strong and have improved in quality

» High-yield and emerging market bonds were contributors to Meeder portfolios’ positive performance

 

TRANSITORY INFLATION NARRATIVE EASES PRESSURE ON LONG-TERM RATES
Inflationary pressures were at the top of everyone’s mind as the second quarter started. The 10-year U.S. Treasury yield had jumped by more than 0.8% during the first quarter due to higher inflationary pressures and rates were generally expected to continue to rise during the second quarter as well. The U.S. experienced record inflation in April and May, as economic activity picked up, supply constraints struggled to keep up with rising demand, and global economies continued to receive fiscal and monetary support.

U.S. inflation rose 4.2% over its level a year ago in April and then 5.0% in May. Both were higher than the economists had expected. These were the largest increases in inflation since 2008, both marking the highest annual rate of inflation in 13 years.

EXHIBIT 1: INFLATION MOVED HIGHER AS HEADLINE CPI REACHED LEVELS LAST SEEN IN 2008

Source: Bloomberg

However, the Federal Reserve remained tolerant of the inflationary pressures, maintaining its average inflation target of 2%. This means that the Consumer Price Index (CPI), excluding food and gas, could exceed a 2% level for some time to make up for past lower-than- targeted inflation before the Federal Reserve would change its monetary policy. The central bank also continued to provide liquidity in the market through asset purchases in the second quarter, insisting that the inflationary pressures were “transitory”, and signaling that it intended to maintain easy monetary policies until there is substantial progress on its employment and long-term inflation goals. The Fed’s forward guidance in June indicated that there will not be any interest rate increases until at least 2023.

The market generally accepted that narrative, sending the 10-year U.S. Treasury yield below 1.5% by the end of the second quarter. The rate reversal provided a boost for higher maturity bonds during the quarter, as bond prices rose due to declining yields.

EXHIBIT 2: 10-YEAR TREASURY YIELDS RETREATED DURING THE SECOND QUARTER

Source: Bloomberg

 

LOSSES PARED BACK AS CREDIT SPREADS NARROWED
The second quarter of 2021 saw spreads narrow across risk-on sectors of fifixed income, including emerging market bonds and high-yield bonds.

U.S. investment-grade corporate bonds and long-term U.S. Treasuries recuperated some of their first quarter’s losses, posting quarterly returns of 3.6% and 6.5%, respectively. U.S. corporate and municipal high-yield bonds maintained their positive returns for the year.

At the end of March, the U.S. dollar reached its highest level since November 2020. As rates retreated in the following two months, the U.S. dollar declined 3.7% before rebounding in June as a majority of Federal Reserve officials agreed the first interest rate hike(s) could be in 2023. This change in the dot plot, due to improving economic conditions, moved the timeline earlier than in their March guidance. Despite a strong rebound in June, the U.S. dollar ultimately fell short of where it ended in Q1 2021.

EXHIBIT 3: YTD 2021 FIXED INCOME SECTOR PERFORMANCE

Source: Bloomberg

The securitized debt sector diverged from the broader fixed income asset classes and experienced a rise in spreads. One reason for the divergence was the anticipation of securitized debt being the first sector where the Federal Reserve would reduce its asset purchases. Since the beginning of 2021, the Fed provided additional monetary support by increasing its residential mortgage-backed security positions by 15.5%, the highest percentage increase among the four categories of securities on its balance sheet.

EXHIBIT 4: TREASURY AND MORTGAGE HOLDINGS HAVE BEEN STEADILY INCREASING IN THE FEDERAL RESERVE BALANCE SHEET

Source: Bloomberg

More than 68% of the assets on the Federal Reserve’s balance sheet are U.S. Treasuries. Federal agency debt and commercial mortgage-backed securities are the other types of purchases on the Federal Reserve’s balance sheet, which have remained minimal during the year.

EXHIBIT 5: FEDERAL RESERVE BALANCE SHEET (AS OF 06/25/2021)

Source: Bloomberg

 

HIGH-YIELD BOND RETURNS REMAINED STRONG AS CREDIT SPREADS NARROWED
High-yield bonds have been one of the best performing fixed income asset classes this year. U.S. corporate high-yield bonds ended the second quarter up 3.6% for the year, while the broad fixed income market, represented by the Aggregate Bond Index*, was down 1.6%. Energy, service, and retail securities have been the main leaders in the high-yield space, which is in line with the U.S. economy reopening this year. Corporate high-yield bond yields moved to a historic low of 3.7% at the end of the quarter, while high-yield bond spreads continued to narrow, moving closer to their 2007 lows.

EXHIBIT 6: CORPORATE HIGH-YIELD BOND SPREADS CONTINUED TO NARROW, MOVING CLOSER TO 2007 LOWS

Source: Bloomberg

One of the contributing factors to lower yields in this asset class has been the improvement in its credit quality. Bonds rated BB, the highest rated bonds in the sector, have been growing as a percentage of the overall high-yield asset class. One reason for the increase in BB-rated bonds is an uptick in fallen-angels, which are investment-grade companies that have been downgraded to a high-yield credit rating. Another reason for the improvement in the quality of the sector is that many high-yield companies have been able to take advantage of low lending rates over the past few years and have refinanced their existing debt. This has resulted in lower debt obligations and an improvement in their balance sheet quality. This improved the overall credit ratings in the asset class.

EXHIBIT 7: CREDIT QUALITY HAS BEEN IMPROVING IN HIGH-YIELD BONDS

Source: Bloomberg

Higher asset quality may also be a contributing factor in keeping the overall high-yield default rates low. High-yield bond default rate by dollars is near 1.6%, much lower than its long-term average of nearly 3%.

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder fixed income portfolios are managed with a tactical approach using quantitative models. Momentum and volatility factors in our Credit Quality model strengthened in early-April. We responded by increasing high-yield positions in our portfolios. Momentum and volatility factors in our Emerging Market model also indicated strength in early-April, leading us to increase exposure to the emerging market bonds as well.

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
Our Credit Quality model guided us to remain overweight to high-yield bonds throughout the second quarter. High-yield bonds were up 2.74% in Q2 2021. This allocation was a positive contributor to portfolio performance.

 

OVERWEIGHT EMERGING MARKET BONDS
Our Emerging Market Bond model favored higher exposure to emerging market bonds throughout the second quarter. The emerging market bond sector rebounded 2.99% in Q2 2021, erasing much of the loss from the first quarter. The sector remained down 0.59% year-to-date. This allocation was a positive contributor to portfolio performance during the second quarter.

 

UNDERWEIGHT U.S. TREASURIES AND INVESTMENT-GRADE BONDS
Intermediate-term U.S. Treasuries were up 0.73% during the second quarter and down 1.48% year-to-date. The broad investment-grade bond market, represented by the Bloomberg Barclays Aggregate Bond Index*, was up 1.83% in the second quarter, but is still down 1.60% year-to-date. Our portfolios were underweight U.S. Treasuries and investment-grade bonds during the second quarter, which was a positive contributor to portfolio performance.

 

DURATION POSITIONING
Meeder fixed income portfolios’ duration remains lower than its broad bond market benchmark, the Bloomberg Barclays Aggregate Bond Index*.

 

Fixed Income asset classes are represented by the following indexes: *Bloomberg Barclays US Agg Total Return USD, Bloomberg Barclays US Corporate Total Return USD, Bloomberg Barclays US Corporate High Yield Total Return Index USD, Bloomberg Barclays EM USD Aggregate Total Return Index USD, Bloomberg Barclays U.S. Treasury: 1–3 Year Total Return Index, Bloomberg Barclays U.S. Treasury 3–7 Year Total Return Index Value Index, Bloomberg Barclays US Long Treasury Total Return Index, U.S. Dollar Index. ** Federal balance sheet holdings have been smoothed to remove cyclical impact.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. 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.

©2021 Meeder Investment Management, Inc.

0116-MAM-7/13/21-11441

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Q2 2021 Capital Markets Update: President's Perspective
By Bob Meeder, President and CEO • July 2021

CAPITAL MARKETS UPDATE
AS OF JUNE 30, 2021

» S&P 500 Index Reaches All-time High
» Labor Markets Remain Soft
» Fed Not Yet Concerned About Inflation 

 

U.S. MARKETS
The S&P 500 Index slowly and quietly reached new highs during the second quarter. At the end of the June, the total return for the S&P 500 Index was +15% year-to-date and reached a record high level of 4,297. When looking at Russell Indices, small cap stocks were the best performers followed by mid and large cap stocks. Value oriented companies still outperformed their growth peers, with nearly all the styles posting double digit returns year-to-date. Emerging and developed international markets, as represented by the MSCI EM and MSCI EAFE indices, have year-to-date total returns that are more than +7% and +8% respectively. Bonds, represented by the Bloomberg Barclays Aggregate Bond Index, continue to struggle in this risk-on environment and are -2% year-to-date.

 

ECONOMY
The U.S. economy showed broad strength throughout the second quarter of 2021. In June, the national unemployment rate remained stable at 5.9%. According to the Bureau of Labor, the U.S. manufacturing sector continued its expansion at a slower rate, as the ISM Manufacturing PMI Index fell slightly from 61.2 in May to 60.6 in June. Over the same period, the ISM Services PMI Index fell from an all-time high of 64.0 to 60.1. A level above 50 indicates that the sector is expanding, while a level below 50 demonstrates a contraction.

The housing market continues to have low inventory, as mortgage rates remain near all-time lows. This has kept single family housing prices elevated across the country. Another contributor is the fact that commodities such as steel, copper and lumber reached new highs earlier this year before retreating. This slowed new housing starts dramatically, as those planning to build homes were forced to delay or abandon construction due to the spike in raw material costs. Part of this increase is likely attributed to the Federal COVID-19 relief legislation that has put trillions of dollars into the U.S. economy to ease the impact from the pandemic and has increased the demand for a limited amount of supply

 

THE FED’S VIEW ON INFLATION
The Fed remains committed to fulfilling their dual mandate, which is to help the economy reach full employment and maintain price stability. At the most recent meeting on June 16, the Federal Reserve Open Market Committee met and forecasted that inflation will rise above their 2% threshold up to 3.4% by the end of 2021.

They will remain committed to reacting to inflation once it occurs and not when signs of inflation are beginning to become evident. The Fed also acknowledged that their actions have not always benefitted everyone equally and that certain ethnic and gender groups bore more of the economic burden than other parts of the labor force when they attempted to combat potential inflation.

The Fed also has the opinion that inflation rising above its threshold for a measured amount of time will not cause negative long-term implications for the economy. Currently the Fed believes that the inflation we are experiencing now is from parts of the economy that were impacted by the reopening after the pandemic and that it will be “transitory,” or not persistent.

Fed Chair Jerome Powell stated it is “very, very unlikely” that the U.S. would see inflationary pressures like we did in the 1970s. Meanwhile, the U.S. core personal consumption expenditure (PCE) index increased 3.4% year-over-year as of May 2021, making it the highest change since 1992. This index is different from CPI because it excludes the asset classes that have historically experienced more price volatility, such as food and energy. In addition, it also includes medical care expenses paid for by employers.

One additional update from the Fed’s most recent meeting showed a change in the dot-plot. This is a tool that many economists follow and is a poll of Fed members that forecasts when changes in interest rates could occur. The latest poll indicated that two rate hikes could be possible in 2023 and was a major shift toward monetary tightening from the prior poll. Chairman Powell reiterated that these projections should be taken with a “big grain of salt.”

 

U.S. COVID-19 UPDATE
According to the CDC, more than 58% of the population age 18 and older are fully vaccinated in the U.S., and more than 67% have received at least one dose. The success rate of the vaccinations in use remains excellent. More than 156 million people have been fully vaccinated and less than 700 people of those fully vaccinated have died with COVID-19.

Although the U.S. is getting closer to fully reopening, a labor shortage is becoming more widespread. Many businesses are not able to completely reopen, as they are having difficulty finding workers. One of the unintended consequences of COVID-19 relief is that, in some cases, the government provided stimulus checks to unemployed workers that amounted to more than the employees made while working. Therefore, many unemployed Americans are not returning to work because they are making more money than if they return to work. This is contributing to a record number of U.S. nonfarm job openings. According to the BLS the U.S. reached more than 9.2 million openings in May.

U.S. NONFARM JOB OPENINGS_SEASONALLY ADJUSTED

Source: BLS

 

POTENTIAL CAPITAL GAINS TAX CHANGES
Recently, the White House proposed a higher top capital gains tax rate for long-term investments of American households making at least $1 million. It would be an increase from 23.8% (that includes the 3.8% Medicare surtax) to 43.4% (including the 3.8% Medicare surtax). This would make it even higher than the proposed top income tax rate of 39.6%. The administration is also considering supporting the American Families Plan. The one unusual caveat is that the White House is planning to implement this tax retroactive from the date of the announcement, which was late April 2021. Finally, the administration is also proposing a capital gains tax on unrealized capital gains upon the owner’s death. This is not to be confused with estate taxes, which are also commonly referred to as “death taxes.”

 

WE STAND READY
So much has happened that it is hard to believe we are halfway through 2021. The medical community now agrees that the worst of the pandemic in the U.S. seems to be behind us, as we inch closer to herd immunity. The economy continues to strengthen from the havoc wreaked by this event and life is getting closer to returning to normal, as fans are attending indoor and outdoor sporting events and concerts. Please know that regardless of what the future holds, we will continue to follow our data-driven models and make fact-based decisions when managing our investment portfolios. Thank you for letting us continue to serve you as we stand ready for what lies ahead.

 

Sincerely,

Bob Meeder Signature

Robert S. Meeder
President and CEO

 

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. Advisory services provided by Meeder Asset Management, Inc. and/or Meeder Advisory Services, Inc. Meeder Funds are distributed by Meeder Distribution Services, Inc., member FINRA.

©2021 Meeder Investment Management, Inc.

0107-MIM-AC-7/14/2021-11317

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • July 9, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» U.S. equity trend is not very healthy

» Total products out of stock still elevated

» Global equity fund flows largest on record

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • June 25, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Laggards Lead U.S. Stocks Higher

» Yield Curve Flattens After Fed Meeting

» Lumber Prices Fall

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Capital Markets Commentary: The Economic Reopening Continues
By Aaron Adkins, Investment Communications Strategist • May 2021

» Value Stocks Gain Momentum

» Inflation Rising

» U.S. Job Openings Reach All-Time High


VALUE STOCKS GAIN MOMENTUM
The S&P 500 Index experienced increased volatility in May but still posted a total return of 0.7%. The performance disparity between value and growth stocks remained elevated throughout the month. Stocks represented by the Russell 1000 Value, Russell Mid Cap Value and Russell 2000 Value Indexes each experienced positive performance as their growth peers remained negative during May. Exports are also increasing, as more factories are getting closer to pre-pandemic output levels. Looking around the globe, developed international and emerging markets stocks, represented by the MSCI EAFE and MSCI EM indices, gained 3.2% and 2.3% respectively in May.

 

CYBERCRIME STEALS THE HEADLINES
In early May, Colonial Pipeline was a victim of a ransomware attack. This 5,500-mile pipeline is responsible for transporting roughly 45% of the east coast’s supply of diesel and jet fuel, equating to approximately 2.5 million gallons per day. Cyberthieves from a group called the DarkSide, used software to lock down data on some of the company’s servers and computers and demanded money for an encryption key to regain access. After news broke of the event, U.S. fuel prices at the pump increased to their highest levels in seven years. After the company unsuccessfully tried to regain access to the pipeline, they eventually paid the DarkSide a ransom of $4.4 million in cryptocurrency. It was the most recent example highlighting the vulnerability of the U.S. industrial grid and helped contribute to WTI Crude prices reaching a 2-year high.

 

INFLATION RISING
The increase in fuel prices contributed to recent inflation concerns. In addition, the housing market remains red hot. According to the S&P CoreLogic Case-Schiller Index, home prices climbed 13.3% year-over-year. The worldwide spike in demand following the slowdown from the global pandemic has also caused commodities like copper, lumber and steel to reach new highs. The increased demand of these resources, with the limited supply, are examples that continue driving inflation fears. The Federal Reserve may not be able to ignore the fact that in April, inflation in the U.S. climbed to 4.2%, exceeding expectations and reaching its highest level since September 2008.

 

U.S. JOB OPENINGS REACH ALL-TIME HIGH
As the economic environment strengthened in May, the national unemployment rate fell from 6.1% to 5.8%. According to the Bureau of Labor, the U.S. manufacturing sector improved as the May reading of the ISM Manufacturing PMI Index increased from 60.7 in April to 61.2. Over the same time, the ISM Services PMI Index increased from 62.7 to a record 64.0 in May, making it the highest level recorded for the index. A level above 50 indicates that the sector is expanding, while a level below 50 shows a contraction. The strength exhibited by these parts of the economy contributed to the U.S. adding 559,000 jobs in May but fell short of economist’s projections of 671,000. Although May’s jobs report was below expectations, it paled in comparison to April’s disappointing results, as analysts forecasted a gain of 978,000 jobs and only 278,000 were added.

Each day, the economy is getting closer to fully reopening, as individual states are lifting COVID-19 restrictions across the country for those that are fully vaccinated. According to the CDC, more than 52% of the population greater than age 18 is fully vaccinated, and more than 63% have received at least one dose. Yet, as these numbers continue to grow, a labor shortage is becoming more widespread. Many businesses are not able to completely reopen, as they are having difficulty finding workers. One of the unintended consequences of COVID-19 relief is that in some cases, the government provided stimulus checks to unemployed workers is more than the employees made while working. Therefore, many unemployed Americans are not returning to work because they are making more money than if they return to work. This contributed to the number of job openings in the U.S., which reached an all-time high of 9.26 million.

EXHIBIT A—TOTAL NONFARM U.S. JOB OPENINGS, AS OF APRIL 30

Source: Bureau of Labor Statistics

 

WASHINGTON CONTINUES TAX DEBATE
The White House proposed a higher top capital gains tax rate for long-term investments of American households making at least $1 million. It would be an increase from 23.8% (including the 3.8% Medicare surtax) to 43.4% (including the 3.8% Medicare surtax). This would make it even higher than the top income tax rate of 39.6%. The administration is also considering supporting the American Families Plan. The one unusual caveat is that the White House is considering implementing this tax retroactive from the date of the announcement, which was late April 2021. The administration is also proposing a capital gains tax on unrealized capital gains upon the owner’s death. This is not to be confused with estate taxes, which are also commonly referred to as “death taxes.” Currently, beneficiaries of stocks with unrealized capital gains can often receive a step-up in cost basis equal to the value as of the date of death.

 

 

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.

©2021 Meeder Investment Management, Inc.

0116-MAM-6/11/21-10122

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • June 11, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Top 3 reasons for inflation

» Job seekers may be on their way

» Stock market breadth is very strong

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Markets In Focus
Markets In Focus

Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • May 28, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» We may be at herd immunity right now

» Boost to employment could come soon

» What does history tell us to look for in the next 12 months?

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Markets In Focus
Markets In Focus

Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • May 14, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Inflation Surges Above Expectations

» Wage Growth Still Elevated

» The Fed & Bond Market Expect Inflation to Calm

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Capital Markets Commentary: Growth Propels Stock Market Higher
By Aaron Adkins, Investment Communications Strategist • April 2021

» Inflation Looms

» U.S. Economic Growth Stronger

» COVID-19 Daily Vaccination Rate Slows


U.S. MARKETS
The stock market continued its positive trend and closed at an all-time high of 4211 near the end of April. The S&P 500 Index climbed more than 5.3% for the month, bringing its year-to-date return to +11.8%. The rotation of investors pulling money from growth stocks and placing it in value stocks continued. The year-to-date performance of the Russell 1000 Value Index at 16.6% is nearly double the Russell Growth 1000 Index at just 8.6%. One reason for the increase of investor demand for value stocks is related to the fear of inflation. Value stocks have historically performed better in an inflationary environment because they have higher current cash flows and many also pay dividends.

 

INFLATION
Expectations are that the economy will grow more robustly as the U.S. economy continues to reopen and the economic stimulus bills passed by Congress will also accelerate this growth. This may create higher prices for many parts of the economy. For example, companies in the travel industry are seeing an increase in hotel and airfare bookings. This will likely put inflationary pressure on restaurant and fuel prices. The Federal Reserve Chairman Jerome Powell also continues to reiterate that the committee will allow equity markets to move higher, with the hope of improvements to the stability of the U.S. economy. They are prepared to permit inflation to increase above their 2% threshold for a measured amount of time.

 

ECONOMY
Investor expectations are being validated, as companies in the S&P 500 continue to post incredible earnings results for the 1st quarter of 2021. According to Strategas, at the end of April, 303 of 500 companies in the S&P 500 Index reported earnings, with an average year-over-year increase of 46.3%. This productivity helped GDP for the first quarter reach 6.4%, just missing analysts’ expectations of 6.5%. Part of this growth was due to continued expansion in the manufacturing and services industries.

The ISM Manufacturing PMI Index fell from March’s reading of 64.7, to 60.7 in April. This was considerably below analysts’ consensus estimates of 65. The positive news is that analysts are suggesting the reason for this disappointing number was likely due to a lack of input materials needed for production. The ISM Services Index fell slightly from an all-time high in March of 63.7 to 62.7 in April. This marks the 11th month in a row of continued growth for the sector. Although the ISM Manufacturing and Services readings were each less than expectations, they show that these parts of the U.S. economy are continuing to expand as the country rebounds from the COVID-19 pandemic. ISM readings above 50 are an indication that the sector is expanding, while a score below 50 signifies a contraction.

U.S. GDP—QUARTER OVER QUARTER U.S. GDP—Quarter Over

Source: U.S. Bureau of Economic Analysis

 

CHINA TRADE DEFICIT
The U.S. trade deficit with China expanded even further in 2021. The trade deficit reached $74.4 billion in March, which is a 57.6% increase from a year earlier. Analysts expect that as the global pandemic is mitigated, Americans will patron more domestic service-based industries that will cause this gap to narrow..

 

COVID-19 VACCINATIONS
The U.S. has become a world leader in the percentage of its citizens receiving COVID-19 vaccinations. As of May 2, more than 31.5% of the U.S. was fully vaccinated and 44.3% received at least one dose. That gives the U.S. the third highest vaccination rate in the world, only behind Israel and the United Kingdom. The supply of available vaccines in the U.S. is outpacing the demand. Many medical clinics are now accepting walk-in patients for those that want the vaccine. The U.S. continues to focus on vaccinating as many of its citizens as possible but is now beginning to ship excess vaccinations to countries like India that are dealing with an extremely large second wave of new infections. For perspective, the worst number of U.S. infections over a 7-day average reached as high as 245,000 cases per day, while India recently reached close to 380,000. Other countries are also assisting India, as they attempt to recover from the spread of the COVID-19 virus, which has virtually broken their healthcare system.

 

 

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.

©2021 Meeder Investment Management, Inc.

0116-MAM-5/10/21-6985

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • April 30, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Parks & restaurants outperformed during the pandemic

» Market isn’t fully reacting to higher taxes yet

» Aging population could combat inflation

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Meeder Fixed Income Strategies
By Amisha Kaus, Portfolio Manager, and James Milletics, Fixed Income Analyst • Q1 2021

KEY TAKEAWAYS 

» Higher inflation expectations pushed 10-year Treasury yield back to its pre-COVID level above 1.7%, climbing at its fastest pace during a quarter since 2016

» Investment-grade bonds had their worst quarterly performance since 1981, while high-yield bonds remained positive

» Meeder fixed income portfolios benefitted from increased high-yield bond and shorter duration exposure

» New monetary stimulus will provide more than $300 billion in support to state and local governments

 

HIGHER TREASURY YIELDS AND INFLATION EXPECTATIONS
The first quarter began with concerns about inflation rising faster in the near-term, as multiple developments pointed to a global economic recovery. In fact, the 5-year breakeven inflation rate, a proxy reflecting market’s inflation expectations over the next 5 years, rose to a level not seen since mid-2008. Despite these concerns, global central banks insisted on keeping policy rates near historic lows to support economic activity and lower unemployment levels. The Biden administration also pushed through a massive $1.9 trillion stimulus package in the U.S., and significant progress in vaccine distributions started to ease lockdowns around the world.

EXHIBIT A: 5-YEAR BREAKEVEN INFLATION RATE REACHED 2008-LEVEL

Source: Bloomberg

Higher inflation concerns also pushed rates higher on longer-maturity bonds. 10-year Treasury yield increased by 0.83% during the first quarter, climbing at the fastest pace during a quarter since the fourth quarter of 2016. The Federal Reserve did not share the market’s view on rising inflationary pressures and kept lending rates steady on short-maturity bonds. This caused the U.S. Treasury yield curve to steepen. This change in the yield curve is also known as a “bear-steepener” and it typically suggests a rise in prices throughout the economy. The spread between 2-year and 10-year Treasury yields widened sharply to levels last seen in 2015.

 

INVESTMENT-GRADE BONDS DECLINED WHILE HIGH-YIELD BONDS REMAINED POSITIVE
The fast rise in rates induced market volatility during the quarter and caused fixed income asset prices to drop. The Bloomberg Barclays U.S. Aggregate Bond Index, representing the U.S. investment-grade bond market, was down 3.37% during the quarter, marking its worst quarter since 1981.

EXHIBIT B: INVESTMENT GRADE BONDS SUFFERED THEIR WORST QUARETLY LOSS SINCE 1981

Source: Morningstar Direct®; data represented by Bloomberg Barclays U.S. Aggregate Bond Index

High-yield bonds performed well as rates increased, as their spread tightened to market cycle highs and acted as a buffer against rising rates. Given the rise in interest rates, high-yield bonds’ tendency to have shorter-duration further helped their returns during the quarter.

EXHIBIT C: A SHARP RISE IN YIELDS CAUSED MOST FIXED INCOME SECTORS TO DECLINE DURING THE FIRST QUARTER

Source: Bloomberg

 

SUPPORT FOR STATE AND LOCAL GOVERNMENTS IN NEW STIMULUS BILL AND ITS IMPACT ON MUNICIPAL BONDS
President Joe Biden signed the American Rescue Plan Act of 2021 bill in early March. This new monetary action provides additional relief to address the continued impact of COVID-19 on the U.S. economy, public health, state and local governments, individuals, and businesses. This bill, totaling $1.9 trillion in stimulus, accounts for a distribution of $195 billion for state, territory, and tribal governments. Cities and counties will receive a total of $130 billion, including $10 billion set aside for infrastructure projects. This funding is much more consistent than the CARES Act of 2020, which only targeted states and the largest cities. Before this bill was signed into law, local municipalities estimated they were facing a combined revenue shortfall of $135 billion for their current year, according to surveys conducted in February by the Nation League of Cities. With this substantial aid being received on state and local levels, we could see a reduction in the amount of municipal bond issuance in the near-term.

A revamp of the tax code is the next item on the agenda for President Biden. The new tax proposal includes a corporate tax rate hike from 21% to 28%, a possible increasing in the individual income tax rate for those earning over $400,000, and higher capital gains taxes for individuals making over $1 million annually.

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder fixed income portfolios are managed with a tactical approach using quantitative models. Rate volatility during the quarter resulted in weakening of momentum and volatility factors in our Credit Quality model in mid-March. This led us to reduce duration exposure within the high-yield sector of our portfolios. Momentum factors in our Emerging Market model indicated weakness in mid-January, leading us to reduce portfolio exposure to the emerging market bond sector. Our model indicated continued weakness in momentum and currency factors through March, which led us to further reduce exposure to emerging market bonds in our portfolios.

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
Our Credit Quality model guided us to remain overweight to high-yield bonds through the quarter. High-yield bonds, represented by the Bloomberg Barclays Corporate High Yield Bond Index, were up 0.85% in Q1 2021. This allocation was a positive contributor to portfolio performance.

 

UNDERWEIGHT EMERGING MARKET BONDS
Our Emerging Market Bond model caused us to reduce exposure to emerging market bonds throughout the quarter. The emerging market bond sector, represented by the Bloomberg Barclays Emerging Market US-Dollar Denominated Index, was down 3.48% in Q1 2021.

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
Intermediate-term Treasuries, represented by the Bloomberg Barclays U.S. Treasury 3-7 Year Index, were down 2.20% for the quarter, while investment-grade bonds were down 3.37%. Our portfolios were underweight Treasuries and investment-grade bonds during the quarter, which helped relative performance, but these two positions were an overall detractor to portfolio performance.

 

DURATION POSITIONING
Our fixed income portfolios significantly reduced their duration exposure during the quarter, which was a shift from their duration-neutral position at the beginning of the year.

 

 

Fixed Income asset classes are represented by the following indexes: Bloomberg Barclays US Agg Total Return USD, Bloomberg Barclays US Corporate Total Return USD, Bloomberg Barclays US Corporate High Yield Total Return Index USD, Bloomberg Barclays EM USD Aggregate Total Return Index USD, Bloomberg Barclays U.S. Treasury: 1–3 Year Total Return Index, Bloomberg Barclays U.S. Treasury 3–7 Year Total Return Index Value Index, Bloomberg Barclays US Long Treasury Total Return Index.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. 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.

©2021 Meeder Investment Management, Inc.

0116-MAM-4/14/21-6572

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • April 16, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Vaccination trends indicate herd immunity by summer

» Biggest 12-month gain in S&P 500 history

» Europe is finally breaking out

 

 

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Q1 2021 Capital Markets Update: President's Perspective
By Bob Meeder, President and CEO • April 2021

TRANSITION OF POWER
There were several historic events that took place during the first quarter of 2021. On January 6th, demonstrators broke into the U.S. Capital to protest the certification of the electoral college. Later in the month, Joe Biden was sworn in to become the 46th President of the United States, and the oldest to ever hold the position. In addition, Kamala Harris became the first woman, Black American and South Asian American to hold the office of Vice President. The National Guard secured the event that was restricted to a limited number of attendees after the U.S. Capital was stormed just weeks prior.

 

STOCK ROTATION
Just as our country’s leadership transitioned, so has the stock market’s. While the price of the S&P 500 Index increased by more than 6% in the first quarter and reached a new high, the most notable event was the rotation of investors moving out of growth stocks and into value. The Russell indices, including the 1000 Value, Mid-Cap Value, and 2000 Value, were up more than 11%, 13%, and 21%, respectively, at the end of March. The performance of growth stocks, represented by 1000 Growth and Mid-Cap Growth were roughly flat, while the 2000 Growth index was positive by over 4% for the quarter.

 

TREASURY YIELDS RISE
A significant reason for this rotation is the rapid rise in the yield on the 10-year U.S. Treasury during the past year. In March, the yield moved up to 1.77%, reaching its highest level since January 2020. This increase is thought to be a major reason why there is less demand for growth stocks and more for value stocks. Growth companies often invest in long-term expansionary projects, which can reduce current cash flows. They do this for the opportunity to potentially have greater cash flows in the future. Therefore, when yields on longer-term bonds rise, it discounts the present value of future cash flows for these companies. On the other hand, value stocks will often distribute a portion of their income periodically in the form of dividends, making them more attractive in this rising rate environment.

In simple terms, when bonds pay higher yields, they tend to become more attractive to investors. The inverse relationship between stocks and bonds will sometimes cause investors to consider moving out of lower-yielding stocks and into the steady income of bonds. This is the tradeoff that has been going on between the bond and stock markets forever.

Rising rates also impact areas outside of the stock market. Consider one of the most direct ways in which Treasury yields impact the average consumer: mortgage rates. As yields rise, banks charge a higher rate of interest for mortgages of similar duration. Due to many banks borrowing money short-term in the form of checking and savings accounts, and lending long-term, rising rates are generally good for the Financials sector. While the correlation is not perfect, the 10-year Treasury yield impacts 15-year mortgages, just as the 30-year yield influences 30-year mortgages. As interest rates rise, the cost to borrow money becomes increasingly expensive and makes it more challenging for people to purchase homes. This negatively impacts GDP growth, which may impact the stock market.

 

COVID-19 PROGRESS
On a very positive note, significant progress was made in the fight against COVID-19 during the first quarter. The FDA approved Johnson & Johnson’s Janssen COVID-19 vaccine for emergency use. In addition to Pfizer and Moderna, this is the third vaccine approved for emergency use. The prevention rate for contracting COVID-19 after receiving the Johnson & Johnson shot is less than the other vaccines at 66%; however, it prevented 100% of hospitalizations and deaths and only requires a single dosage.

It also adds the benefit of remaining stable for up to three months when stored at refrigerated temperatures of 35° to 46° Fahrenheit. The vaccines from Pfizer and Moderna have created some logistical struggles, as these vaccines need to be kept incredibly cold at -94° and -4°F, respectively. While an additional hurdle for healthcare workers, the logistical effort is worth it as a study of healthcare workers showed that even just one injection of a two-shot recommended dosage of Pfizer or Moderna were each 80% effective in preventing COVID-19.


Source: CDC

Johnson & Johnson is also collaborating with pharmaceutical giant Merck to increase production of their newly approved vaccine. The new collaboration has committed to produce and deliver 100 million doses by the end of June 2021 and 1 billion doses by the end of this year. The addition of this vaccine, along with the current production efforts, gave President Biden enough confidence to assure Americans that a vaccine will be available for every adult in the country by the end of May. The President increased his administration’s goal of 100 million vaccines being administered to Americans, to 200 million in the first 100 days of his office. According to the CDC, the U.S. is administering more than 2.8 million injections per day with 36.4% of Americans receiving at least 1 dosage of a vaccine, while 22.3% of the population is fully vaccinated.

 

AMERICAN RESCUE PLAN ACT
One of the quickest ways to incentivize spending is through stimulus. That is why the U.S. Government is helping those economically impacted by COVID-19, approving a $1.9 trillion stimulus plan called the American Rescue Plan Act. Approximately $450 billion of the $1.9 trillion will send 158.5 million Americans that qualify, under established income thresholds, a payment of $1,400. The act also includes a provision for families that meet these income thresholds to receive a tax credit of $3,600 per child under the age of six. Those with children ages 6–17 may also qualify for an annual tax credit of $3,000 per child as well. There are several other measures in the legislation that will provide funding for programs to help those indirectly impacted as well.

 

THE REOPENING
The reopening of the U.S. economy and the passing of the $1.9 trillion COVID relief bill is increasing forecasts for GDP growth in 2021. As this massive influx of capital is expected to have a significant impact to the U.S. economy. In fact, some analysts have projected 2021 GDP to grow by as much as 10%. Prices of WTI crude oil also climbed above $60 a barrel, as the reopening of the U.S. economy looks more favorable. Fed Chair Jerome Powell stated that the economic reopening could “create some upward pressure on prices.” However, Powell attempted to calm fears by reiterating that if inflation rises above the Fed’s 2% targeted level for a couple of quarters, it will not have a material impact on long-term expectations.

 

HOW IS THIS IMPACTING PORTFOLIOS?
At Meeder, we manage investment solutions across different risk profiles and time horizons. Meeder manages these strategies using a systematic approach that guides us in the allocation of our portfolios. Many of these solutions employ one or more of our core investment strategies: Growth, Defensive Equity and Fixed Income.

 

GROWTH
Investment portfolios comprised of the Growth Strategy maintain a more aggressive objective and typically remain invested in the stock market. In the first quarter, the political landscape became clearer as the transition of power in the U.S. took place. The 10-year Treasury yield rose to 1.77% during the first quarter to levels not seen since early 2020. This was a contributing factor to a change in leadership as investors rotated out of growth stocks and into their value peers. Despite this transition being a reason for an increase in market volatility in February, those investors that remained in the Growth Strategy portfolios received the best performance returns in our risk-based portfolios.

 

DEFENSIVE EQUITY
Portfolios that utilize the Defensive Equity Strategy follow a rules-based and data-driven approach using the Meeder Investment Positioning System (IPS) model. This model is used to determine the risk relative to reward in the marketplace and identifies when we should be increasing or decreasing the portfolio’s target equity exposure.

At the beginning of the quarter, the Meeder IPS model indicated that we have an equity target exposure of 100%. This was primarily driven by the strength in the short- and long-term model scores. The long-term model remained in very positive territory, as both long-term trends and market breadth were extremely positive in January. The short-term model showed improvement early in the quarter after the Georgia Senate run-off election results as we saw an extremely large inflow of purchases into bearish ETF’s relative to bullish ETF’s. We view this negative sentiment from a contrarian perspective, and it lifted the short-term model score. Near the middle of the quarter, there were nearly two times the number of securities that advanced than those that declined, on the New York Stock Exchange. This very positive market breadth contributed to the strong IPS score.

By the end of March, the long-term model continued to show a combination of strong trends, improving macroeconomic data, and low credit risk, all providing support. Market risk continued to decline throughout the quarter and was significantly below its long-term average. While stock market volatility remained elevated during the past 12 months, it recently returned to its pre-pandemic level. These were primary factors as to why the IPS guided us to remain 100% invested throughout the first quarter of 2021 and captured the market’s rebound to all-time highs.

 

FIXED INCOME
The Meeder Fixed Income Strategy tactically shifts portfolio exposure utilizing our proprietary investment models. These models are designed to actively monitor factors to guide us in determining the credit quality, emerging market debt exposure, and the portfolio’s U.S. Treasury duration.

Momentum factors in our Emerging Market model indicated weakness in mid-January, leading us to reduce portfolio exposure to the emerging market bond sector. Our portfolios remained overweight to high-yield bonds through the quarter, which was a positive contributor to portfolio performance.

Rate volatility during the quarter resulted in the weakening of momentum and volatility factors in our Credit model mid-March. This led us to reduce duration exposure within our fixed income portfolios significantly during the quarter. Our Emerging Market model indicated continued weakness in momentum and currency factors through March, which led us to further reduce exposure to emerging market bonds in our portfolios. Our relative underweight in Treasuries and investment-grade bonds during the quarter helped relative performance.

 

CLOSER TO NORMAL
As things in the U.S. continue to reopen and life starts to look more “normal,” this pandemic provided time to reflect and appreciate all the small things that many of us used to take for granted. While it is not over, this global and historic event has highlighted many struggles and tragedies, but it has also made what is truly important much clearer. I want to thank all of you for entrusting us to help you meet your financial goals. It is something we will never take for granted. 

 

Sincerely,

Bob Meeder Signature

Robert S. Meeder
President and CEO

 

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 thirdparties 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. Advisory services provided by Meeder Asset Management, Inc. and/or Meeder Advisory Services, Inc. Meeder Funds are distributed by Meeder Distribution Services, Inc., member FINRA.

©2021 Meeder Investment Management, Inc.

0107-MIM-4/14/2021-6606

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • March 31, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Americans are moving again

» Rapid rise in interest rates weigh on technology stocks

» The riskiest parts of the stock market outperformed during the first year of the recovery

 

 

 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • March 19, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» Implications of inflation rising in February

» Interest rates continue higher, but don't panic just yet

» The U.S. consumer is loaded with cash

 
 

 

IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Will the $1.9 Trillion Stimulus Cause Inflation?
By Aaron Adkins, CFP®, Investment Communications Strategist • March 2021

 

WATCH THE 10-YEAR TREASURY AND OIL FOR EARLY SIGNALS
Two data sets that are worth examining when thinking about inflation and the impact on your retirement portfolio are: the rise in the 10-year Treasury yield and the price of West Texas Intermediate (WTI) crude oil. The first might foreshadow inflation whereas the second might contribute to it.

 

10-YEAR TREASURY YIELDS CONTINUE TO CLIMB
The yield on the 10-year U.S. Treasury has more than doubled in the past year. The steep increase in bond yields will absolutely impact the stock market, but to what extent is anyone’s guess. In simple terms, when bonds are paying higher yields, they tend to become more attractive to many investors. The inverse relationship between stocks and bonds will sometimes cause investors to consider moving out of lower-yielding stocks and into the steady income of bonds. This is the push-pull-dance that has been going on between the bond and stock markets forever.

10-YEAR U.S. TREASURY YIELD CMT

Source: FRED

Consider one of the most direct ways in which Treasury yields will impact the average consumer: mortgage rates. As yields rise, banks charge a higher rate of interest for mortgages of similar duration. Due to many banks borrowing money short-term in the form of checking and savings accounts, and lending long-term, rising rates are generally good for the Financials sector. While the correlation is not perfect, the 10-year Treasury yield impacts 15-year mortgages, just as the 30-year yield influences 30-year mortgages.

As interest rates rise, the cost to borrow money becomes increasingly expensive and makes it more challenging for people to purchase homes. This negatively impacts GDP growth, which may impact the stock market.

 

OIL PRICES ARE CLIMBING
WEST TEXAS INTERMEDIATE (WTI) PRICE PER BARREL

Source: FRED

WTI is trading near $65/barrel, a price not seen in about 2.5 years. The increase in the past 3 months has been dramatic. Oil and inflation are linked because oil is such a huge component of our economy. As a barrel of oil rises in price, that means fueling our cars and heating our homes gets more expensive. But even this simple example shows a broader implication. Oil is used in the production of a large number of products. As an example, let's review plastics. The input price (oil) rises, so does the end-product (the plastic). That means that virtually any item that contains plastic could be more expensive to produce, which often leads to the inflation of prices for those products.

 

FUELING THE ECONOMIC REBOUND
One of the quickest ways to incentivize spending is government stimulus. Now, consider the fact that Congress recently passed the $1.9 trillion American Rescue Plan Act. This legislation will send approximately $450 billion of the $1.9 trillion directly to the wallets of 158.5 million Americans. As consumers have more money in their pockets, the demand for goods and services could increase.

Also, consider that the FDA just approved a third COVID-19 vaccine. According to the CDC, the U.S. is now administering more than 2.1 million injections per day with 18.8% of the country already receiving at least 1 dose, while 9.8% of the population is already fully vaccinated. President Biden is encouraging each state to permit Americans of any age to be eligible to receive a COVID-19 vaccine beginning on May 1, 2021. This means the economy could begin operating at full capacity sooner than many expected. A return to travel for business and leisure could occur for many as early as this summer. As the demand for services in the travel industry increases, so will the demand for goods and services.

 

INFLATION IS NOT ALL BAD, RIGHT?
An optimist would suggest that higher inflation is the product of a healthier economy and rising demand, so a move toward higher longer-term rates is a sign that confidence in the economic rebound is also rising. But at some point, as the economic rebound from the COVID-19 pandemic strengthens, inflation pressures could cause the Fed to intervene by hiking rates prematurely.

Remember when the Fed initiated its first interest rate hike at the beginning of 2016? There was a 10% correction in the market. The stock market corrected again in 2018, when Wall Street thought the Fed had hiked rates too fast. The Fed has been clear that they have no intention of raising short-term interest rates until at least 2023. Therefore, we are a long way from the Fed raising interest rates….or are we?

 

INFLATION & RETIREMENT
On a personal level, inflation has a direct impact on how much retirement dollars are worth. Over time, it can take a serious bite out of one's nest egg. Understanding how inflation might hurt one's retirement strategy is a requirement for ensuring investors have enough money to last through their retirement years. Making sure to account for inflation as investors develop various retirement scenarios and goals is key. Failing to account for inflation is a mistake investors can easily avoid.

To learn more about how this potential rise in inflation could impact your personal situation, reach out to the professionals at Meeder by calling 866.633.3371, or visit us online at meederinvestment.com.

 

 

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.

©2021 Meeder Investment Management, Inc.

0131-MAM-3/12/21-5842

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Markets in Focus
By Joe Bell, CFA, CMT, Co-Chief Investment Officer • March 5, 2021

CLICK ON THE VIDEO BELOW TO WATCH

 

KEY TAKEAWAYS 

» U.S. IPO activity at record levels

» Record equity ETF flows in February

» S&P 500 performance after bear market lows

 
IMPORTANT DISCLOSURES:
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings should not be construed as predictions or recommendations.  All information is given as of the date shown and is subject to change at any time. Nothing herein should be construed as an offer to sell, solicitation, or recommendation of any security or investment product. 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. 
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Capital Markets Commentary: A Better Year Ahead?
By Aaron Adkins, Investment Communications Strategist • January 2021

» Transition of Power

» Short Squeeze

» Unemployment Stagnation


TRANSITION OF POWER
The series of unfortunate events that occurred during 2020 continued in early 2021. On January 6th, demonstrators broke into the U.S. Capital to protest the certification of the electoral college results from the U.S. Presidential election. After the security breach, the National Guard was dispatched to secure the area for the electoral college certification, as well as the presidential inauguration. Fortunately, the transition of power on January 20th was relatively uneventful as Joe Biden was sworn in as the 46th President of the United States.

One of the first initiatives of the new administration was to promote and increase the use of renewable energy. Later in the month, one of the world’s largest auto manufacturers, General Motors, announced that all their production models will be electric by the year 2035. This provided a boost of legitimacy to around the trend toward electric cars, led by Tesla. The car manufacturer committed to advancing its battery technology and saw its share price increase more than 700% last year. Other companies that continue to gain market share during the pandemic include Apple and Amazon. Both companies reported revenue of more than $100 billion each last quarter. It was the first time that either company accomplished this feat and the two tech giants now join Walmart and Exxon Mobil as the third and fourth companies respectively, to do so.

 

SHORT SQUEEZE
The most unusual market-related story involved a Wall Street hedge fund manager that placed a very large short position on GameStop. Investors on the social media platform Reddit, launched a movement to collectively try to short squeeze the fund manager by greatly increasing the demand of the stock to spur the stock price higher. The price of GameStop rose from $17 a share to several hundred dollars a share in less than 3 days. Ultimately, the hedge fund was forced to cover the short positions to prevent further losses. This meant the hedge fund was forced the purchase back the stock at the new elevated price, which went as high as $469 per share. Nearly a week later, the stock price recoiled, and GameStop was trading at nearly $100. The event is a reminder that even the most powerful investors on the street can be on the wrong side of a trade if there is a collective effort from a group of retail investors.

Many investors lost their appetite for risk after witnessing the large volume of speculative behavior surrounding GameStop. This was a contributing driver for broader U.S. equity markets pulling back for the month, as the total return for the S&P 500 Index was -1.01%. The U.S. Dollar gained strength in January and yields moved higher on longer-term maturity bonds. The inverse relationship of bond prices and yields pulled the price of bonds down for a total return of -0.71% as represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Developed international markets were also negative as the economic impact of a delayed COVID-19 vaccine rollout continued. Emerging market equities were one of the only major benchmarks to post positive returns. The MSCI EM Index total return gained 3.07% in January driven by a report that showed China’s economy still managed to grow at 2.3% in 2020.

The manufacturing and services industries continue to expand in the U.S. The ISM Manufacturing PMI Index fell from its three year high in December at 60.5 to 58.7 in January. Although it was a reduction in output, it remains a very strong number. The ISM Services Index increased to 58.7 in January from 57.7 in December. This result exceeded consensus estimates of 56.8. Both scores are positive signs as the economy continues to rebound from impact of the COVID-19 pandemic. ISM levels that exceed 50 indicate that the sector is expanding, while a score below 50 indicates that a contraction is occurring.

 

UNEMPLOYMENT STAGNATION
According to the Bureau of Labor Statistics, the U.S. created 49,000 new jobs in January and reestablished positive monthly job gains. Since April 2020, the only job losses in 2020 were in December of 227,000, after the U.S. economy was in a freefall from March through April due to the COVID-19 pandemic. Although job growth continues to occur, it is at a much slower pace than economists and workers hoped. At the end of January, the unemployment level fell from 6.7% to 6.3%.

UNEMPLOYED 27 WEEKS OR LONGER AS A PERCENATGE OF TOTAL UNEMPLOYED (SA)

Source: BLS

Looking at unemployment further, a more concerning number is represented by those that are defined as long-term unemployed. This group is defined as those workers that have been unemployed for at least six months. As you can see from the chart, the average is approaching nearly 40%. The only period that saw more long-term unemployed Americans was during the Great Recession. Someone who is monitoring the job picture closely is Janet Yellen, the former head of the Federal Reserve, who was recently confirmed as the U.S. Treasury Secretary and is working with the new administration on a stimulus plan. The new administration is actively garnering support for a stimulus bill and Yellen stated that if the current $1.9 trillion proposal is passed, it could bring the U.S. back to full employment in 2022.

 

 

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.

©2021 Meeder Investment Management, Inc.

0116-MAM-2/16/21-4710

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Meeder Fixed Income Strategies
By Amisha Kaus, Portfolio Manager, and James Milletics, Fixed Income Analyst • February 2021

KEY TAKEAWAYS 

» The 10-year U.S. Treasury yield climbed above 1% once again with higher stimulus expectations

» Inflationary pressures increased in January, leading longer-maturity bond prices to decline

» The U.S. Dollar rebounded in January as emerging market bond ETF saw outflows of $280 million

» Meeder fixed income portfolios’ overweight to high-yield and emerging market bonds reflects our models’ positive outlook towards both sectors

 

THE 10-YEAR U.S. TREASURY YIELD IS BACK ABOVE 1% AS STIMULUS EXPECTATIONS RISE
The 10-Year U.S. Treasury yield reached a historic low of 0.50% in August last year and has been moving up at a somewhat steady pace since then. The 10-year U.S. Treasury yield climbed higher in early January, reaching above 1% for the first time since March 2020, as the Biden administration pushed for a nearly $2 trillion stimulus package. The Democratic Party winning two seats in the U.S. Senate runoff elections last month also gave them more leverage in stimulus talks with the GOP. This also increased possibility of higher government spending and increased inflation expectations in the market. Rates moving higher can be a sign of improving economic strength.

EXHIBIT A: EXPECTATIONS OF FISCAL STIMULUS PUSH 10-YEAR U.S. TREASURY YIELD ABOVE 1%

Source: Bloomberg

 

INFLATIONARY PRESSURES ON THE RISE AS THE 10-YEAR BREAKEVEN RATE REACHES ITS TWO-YEAR HIGH
Market’s expectation for inflation is on the rise along with higher expectation of U.S. economic recovery. The bond-market’s inflation gauge, the 10-year breakeven rate, which is the difference between the 10-year Treasury yield and its inflation-protected equivalent, rose above 2% for the first time in two years. The rise in 10-year breakeven rate implies an increase in the pace of inflation. This market gauge reached a decade low of 0.55% in March 2020.

EXHIBIT B: BOND MARKET NOTED A RISE IN INFLATIONARY PRESSURES AS THE U.S. 10-YEAR BREAKEVEN RATE ROSE ABOVE 2% FOR THE FIRST TIME SINCE 2018

Source: Bloomberg

As inflation expectations rise, investors may demand higher compensation for their long-term investments, potentially pushing yields higher on longer-maturity bonds. As yields rise, bond prices decline. January’s spike in yields resulted in longer-maturity bond prices declining during the month. The fixed income market benchmark, Bloomberg Barclays U.S. Aggregate Bond Index, which has a duration of nearly six years, declined 0.72% in January as a result.

EXHIBIT C: RISING YIELDS NEGATIVELY IMPACTED MOST FIXED INCOME SECTOR RETURNS IN JANUARY

Source: Bloomberg

 

THE U.S. DOLLAR REBOUNDS AND EMERGING MARKET ETF MARKED ANOTHER MONTH OF OUTFLOWS
Over the past 20 years, the U.S. Dollar has shown negative correlation with emerging market bonds. The Bloomberg Barclays EM Aggregate Total Return Index experienced a decline of 0.85% in January, while the U.S. Dollar strengthened. The U.S. Dollar Index saw an increase of 0.72% over the month of January.

EXHIBIT D: THE U.S. DOLLAR ROSE IN JANUARY AS EMERING MARKET BONDS DECLINED

Source: Bloomberg

One of the most commonly used emerging market bond securities, iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), saw a decline of 1.78% during the month. Investors also withdrew more than $280 million from the ETF over the month of January making it the highest monthly outflow since March 2020 and the second consecutive month of outflows.

EXHIBIT E: EMB ETF EXPERIENCED ITS HIGHEST MONTHLY OUTFLOW SINCE MARCH 2020

Source: Bloomberg

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder fixed income portfolios are managed with a tactical approach using quantitative models. While our Credit model continued to indicate strength in the high-yield sector, our Emerging Market model indicated weakness in momentum and currency factors mid-January, leading us to reduce the emerging market bond exposure to our portfolios. Momentum factors improved towards the end of the month, which led us to add some exposure back to emerging markets.

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
We did not make any changes to high-yield allocation in our portfolios in January, keeping an overweight exposure to the sector. High-yield bonds were one of the very few fixed income sectors with positive returns during the month. This allocation was a positive contributor to portfolio performance.

 

EMERGING MARKET BONDS (USD-DENOMINATED)
We reduced exposure to emerging market bonds mid-month as momentum and currency factors deteriorated. We added some of the exposure back as momentum factors strengthened towards month-end. This exposure was an overall detractor from portfolio performance in January.

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
Investment-grade bonds and U.S. Treasuries were down in January as yields spiked across much of the yield curve. Exposure to both sectors was a detractor from portfolio performance last month.

 

DURATION POSITIONING
Meeder fixed income portfolios’ duration declined slightly relative to market benchmark last month.

 

 

Fixed Income asset classes are represented by the following indexes: Bloomberg Barclays US Agg Total Return USD, Bloomberg Barclays US Corporate Total Return USD, Bloomberg Barclays US Corporate High Yield Total Return Index USD, Bloomberg Barclays EM USD Aggregate Total Return Index USD, Bloomberg Barclays U.S. Treasury: 1–3 Year Total Return Index, Bloomberg Barclays U.S. Treasury 3–7 Year Total Return Index Value Index, Bloomberg Barclays US Long Treasury Total Return Index, U.S. Dollar Index.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. 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.

©2021 Meeder Investment Management, Inc.

0116-MAM-2/9/21-4526

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President's Letter Thumbnail
President's Letter Thumbnail

Q4 Capital Markets Update as of December 31, 2020

By: Bob Meeder - President and CEO, February 2021

2020 A Year of Records

For many, the year 2020 could not end quickly enough. The U.S. election and quest to find a COVID-19 vaccine dominated the headlines throughout the year.

As scientists learned more about the transmission of the virus, state governments formulated various strategies and companies across the U.S. gradually reopened. Positive news on vaccine advances helped GDP in the 3rd quarter rebound by more than +33%, up from its worst-ever drop of -31.4% in the prior quarter. At the end of December, the FDA approved two different COVID-19 vaccines for emergency use. These events provided a renewed hope that the global economy could reopen sooner than previously expected and helped the Dow Jones Industrial Average, S&P 500, and Russell 2000 Indices reach new all-time highs. Small-cap stocks were the best performing U.S, market cap index for the quarter, followed by mid and large-caps, respectively. WTI oil also reached a 9-month high of $50 a barrel as the world reached another step closer to the global economy reopening.

While it seemed like things were moving back to normal economically, the disconnect between strong stock market performance and a weak economic recovery continues as significant economic problems remain. The U.S. unemployment rate remains stagnant at 6.7% as many workers still attempt to regain their footing after being displaced due to the pandemic. Unfortunately, U.S. Non-farm payrolls lost 140,000 jobs in December, making it the first loss since the economy shed almost an unthinkable 21 million jobs in April alone. The continued trend of slowing growth even compelled Congress to pass a stimulus relief bill for those impacted the most by the pandemic. The new administration is also considering an additional stimulus bill for Americans early in 2021.

COVID-19
The FDA approved a COVID-19 vaccine for emergency use developed through a collaboration between Pfizer and BioNTech. The U.S. government provided resources to vaccine manufacturers to begin proactively producing vaccine candidates. Thus, manufacturers created an inventory and began shipping the premade doses around the U.S. within hours of the FDA’s formal approval. The next day, medical facilities received and began administering the vaccine to front-line workers and those in assisted living facilities. Ironically, on the first day of vaccinations, the U.S. crossed 300,000 fatalities from COVID-19, as the country averages roughly 200,000 new contractions each day. On a positive note, Moderna’s COVID-19 vaccine was the second to be approved for emergency use by the FDA. This vaccination provides an efficacy rate of up to 95%. Oxford-AstraZeneca’s vaccine candidate may delay submission for FDA review in the spring of 2021, but is currently being used in the U.K. These vaccines will help provide the medical community with a portfolio of available medicines that fight the virus differently. To date, the virus is responsible for the deaths of more than 368,000 Americans and 1,900,000 lives worldwide.

FEDERAL RESERVE
The Federal Open Market Committee held its meeting in December and kept interest rates near zero. The committee also committed to purchasing a minimum of $120 billion of bonds each month until the economy reaches full employment and inflation expectations. They issued a statement saying, “these asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” The Fed stated that they would consider many items when determining their outlook, including the global pandemic, labor markets, inflation, and international events. As it stands, a survey of Fed officials revealed the group is committed to keeping rates near zero through 2023.

2021 Chart Image

ELECTION 2020
Joe Biden will be inaugurated as the 46th President of the United States as the electoral college officially certified
their votes, providing him with more than the 270 votes needed. Democrats will maintain control of the House
of Representatives, but their majority decreased from 38 seats to 10. On January 5, Democrats won both of Georgia’s runoff races. These seats now split the Senate in a 50-50 tie between both parties but gives the incoming Democratic Vice President the tie-breaking majority. Stock market
returns have historically been higher with a split Congress, which usually leads to less sweeping policy changes. However, performance of the S&P 500 when Democrats have maintained control of the White House and Congress are still above average.

There was a record amount of money spent during this election cycle. The nonpartisan Center of Responsive Politics estimates that the Congressional and Presidential campaigns for the November 2020 elections spent $10.8 billion. Campaigns allocated more than $1 billion to television campaign ads, with $882 million of the total directed tosix key battleground states. Despite the record amounts spent by both campaigns, expected market volatility
followed a somewhat similar pattern to past elections and rose significantly. This year, the CBOE Volatility Index (VIX) spiked more than 50% during the three months ahead of the election.

BREXIT TRADE DEAL OFFICIAL
In 2016, citizens of Great Britain voted to leave the European Union. Since then, details and logistics of the move prevented this transition from occurring. The event was officially ratified on January 31, 2020; however, Britain agreed to adhere to the E.U.’s terms to finalize the agreement until December 31, 2020. Citizens of Great Britain who travel to the European Union will now need to provide similar documentation as Americans. From a business perspective, the most critical detail in the agreement is that the two entities established a trade deal with no tariffs and no quotas. Thankfully, this resolution is one less thing that investors need to worry about in 2021.

A NEW YEAR
The events of 2020 made history for our country and in the markets that we will likely not forget. Despite all the twists and turns, I want to take a moment to congratulate everyone for navigating through one of the most turbulent market environments ever. It is essential to reflect on what an historic year it has been and all that we have accomplished together in such an unusual time. On behalf of all of us at Meeder Investment Management, I would like to wish each of you
a happy, healthy, and prosperous new year.

Sincerely,

Bob Meeder Signature

Robert S. Meeder

President and CEO

 

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Meeder Fixed Income Strategies
By Amisha Kaus, Portfolio Manager, and James Milletics, Fixed Income Analyst • January 2021

KEY TAKEAWAYS 

» High-yield and emerging market bonds led the risk on rally in December as yields of high-yield bonds fell to a record low of 4.18%

» Credit spreads narrowed across all major fixed income asset classes and mortgage rates reached a historic low of 2.67%

» Municipal bonds had a record year of issuance totaling over $475 billion

» Risk-on overweight was a positive contributor to Meeder fixed income portfolios

 

HIGH-YIELD AND EMERGING MARKET BONDS LED THE BOND MARKET IN DECEMBER
Despite a global rise in COVID-19 cases, December saw a continuation in the recovery for risk-on asset classes from their March sell-off. High-yield bonds have delivered an impressive return of 33.5% since their March 23rd lows, while emerging market bonds returned 22.9% during the same period. The high-yield bond sector saw record bond issuance of nearly $275 billion in 2020, as high-risk borrowers took advantage of low lending rates and strong investor demand for higher income. According to Bloomberg, high-yield bond ETFs saw over $20 billion of inflows in 2020. Default rates in high-yield bonds remained high at just under 7%, but defaults were primarily contained to energy and retail companies. These two sectors were under pressure before the COVID-19 related economic slowdown and, in our view, are unlikely to lead to contagion across other sectors within the high-yield asset class. With persistent investor demand, high-yield bond yields fell to 4.18% at the end of December, lower than its 20-year average of more than 8%. Rising U.S. Treasury yields could further tighten the already low yield differential between high-yield bonds and U.S. Treasuries.

EXHIBIT A: HIGH-YIELD BOND YIELDS ARE AT HISTORICALLY LOW LEVELS

Source: Bloomberg

As expected, the Federal Reserve remained accommodative at the end of 2020; however, their December FOMC meeting did note improvement in overall economic activity. The FOMC members are expected to remain patient on the rate front in the absence of inflationary pressures. We also expect the Federal Reserve to provide ample guidance before any changes are made to the current monetary policy. In addition to inflation, FOMC members will want to see a marked and sustained decline in unemployment figures, which given the second round of lockdowns, may remain high in 2021.

While inflation figures remained subdued in December, the incoming Democratic administration and Congress are widely expected to step up fiscal spending in 2021. This could push inflation premiums higher across the yield curve. While this scenario may be attractive to income-seeking investors, it could somewhat taper the appeal for risk assets with low yields.

 

CREDIT SPREADS NARROWED ACROSS THE BOARD AND MORTGAGE RATES MADE NEW RECORDS
Credit spreads, which are the difference between various asset class yields and the yields on Treasury bonds of comparable maturities, narrowed sharply across the board in 2020 after spiking in March. Narrow spreads typically mean that the compensation for taking credit risk is very low, making them relatively unattractive.

In December, the credit spread between high-yield bonds and U.S. Treasury bonds narrowed the most among fixed income assets, decreasing by 52 bps during the month, followed by emerging market bonds, asset-backed securities, mortgage-backed securities, and investment-grade corporate bonds, respectively.

EXHIBIT B: FIXED INCOME ASSET CLASS SPREADS NARROWED IN 2020

Source: Bloomberg

According to Bloomberg and the National Association of Realtors, mortgage rates reached their all-time low in 2020, with the average 30-year mortgage rate reaching 2.67% in December, while existing home sales reached its highest level since 2006. U.S. mortgage refinancing activity also picked up significantly in 2020, reaching its 2013 levels, as homeowners took advantage of historically low lending rates.

EXHIBIT C: 30-YEAR MORTGAGE RATES REACHED HISTORIC LOWS AND REFINANCING ACTIVITY PICKED UP

Source: Bloomberg, Freddie Mac

Yields for mortgage-backed securities and U.S. investment-grade bond market benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, remained relatively unchanged from November. Mortgage-backed and agency securities accounted for around 30% of the Federal Reserve’s purchases at the end of 2020, supporting the higher demand and lower yield for mortgage-backed securities. As of the December FOMC meeting, the U.S. central bank plans to continue its current pace of asset repurchases to support liquidity and stability in the markets.

 

MUNICIPAL BONDS SAW RECORD ISSUANCE
U.S. Municipal bond issuance increased by 11.5% in 2020, ending the year at an all-time high of $475.5 billion. Issuance for the month of December totaled $42.5 billion, slightly behind November’s issuance.

Tax-exempt municipal bonds ended December yielding near 1.075%, above the 10-year Treasury, with about half the duration exposure. Municipal tax-exempt, taxable, and high-yield bonds completed the year in positive territory.

Municipal bonds have had an uncorrelated performance and risk profile relative to equities and riskier fixed income assets in prior recessionary periods, with their tax advantages adding to the asset class’s appeal. With a Democratic majority in the Senate, House, and the White House, there is an expectation for higher taxes, increasing the potential for continued strong demand of municipal bonds in 2021.

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder’s proprietary quantitative fixed income models successfully navigated our portfolios’ exposure out of risk assets in early March and back into them in April, helping minimize risk and enhance return potential in our portfolios. Our models continued to favor risk-on sentiment in the market during the month of December and Meeder fixed income portfolios maintained their risk-on overweight positions to close the year.

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
Our portfolios remained overweight to high-yield bonds in December. High-yield bonds were up roughly 1.88% during the month, significantly outperforming investment-grade bonds. These positions were a strong contributor to portfolio performance.

 

OVERWEIGHT USD-DENOMINATED EMERGING MARKET BONDS
The overweight to emerging market bonds during the month also contributed to portfolio performance, as the sector benefited from the U.S. dollar’s weakness in December. Although emerging market yields have moved lower during 2020, this asset class continues to provide relatively attractive income opportunities in our portfolios.

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
Investment-grade bonds, represented by the Bloomberg Barclays Aggregate Bond Index, were up just 0.14% during the month of December and intermediate term U.S. Treasuries were up just 0.05%. The underweight to these two sectors in favor of risk-on assets contributed to the Meeder fixed income portfolios’ relative performance.

 

DURATION POSITIONING
Meeder fixed income portfolios’ duration remained in line with the benchmark(s).

 

 

Fixed Income asset classes are represented by the following indexes: Bloomberg Barclays .S.U.S. Agg Total Return Value Unhedged USD, Bloomberg Barclays .S.U.S. Corporate Total Return Value Unhedged USD, Bloomberg Barclays .S.U.S. Corporate High Yield Total Return Index Value Unhedged USD, Bloomberg Barclays EM USD Aggregate Total Return Index Value Unhedged USD, Bloomberg Barclays .S.U.S. Treasury Index, Bloomberg Barclays .S.U.S. Mortgage Backed Securities (MBS), Bloomberg Barclays .S.U.S. Agg ABS Total Return Value Index, Bloomberg Barclays U.S. Securitized: MBS/ABS/CMBS/Covered .R.T.R. Index Value Unhedged USD, Freddie Mac US Mortgage Market Survey 30 Year Homeowner Commitment National, MBA US Refinancing Index, Bloomberg Barclays Municipal Bond TR Index Value Unhedged USD, Bloomberg Barclays Municipal Taxable Bonds TR Index Value Unhedged USD, Bloomberg Barclays Municipal High Yield .R.T.R. 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.

©2021 Meeder Investment Management, Inc.

0116-MAM-1/12/21

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

KEY TAKEAWAYS 

» Increased exposure to high-yield bonds and emerging market bonds added significant value to Meeder fixed income portfolios

» High-yield bonds and emerging market bonds reached historic highs, gaining more than 3% in November

» Emerging market bonds offering 4% yield were more appealing as U.S. dollar weakened and over 25% of global investment-grade bonds offered negative yield

 

RALLY IN EMERGING MARKETS AND HIGH-YIELD BONDS LED TO HISTORIC HIGHS
While all major fixed income sectors took in gains in November, high-yield and emerging market bonds were the real winners. Post-election clarity, positive COVID-19 vaccine news, and upbeat corporate earnings data helped high-yield and emerging market bonds rally during the month. Subsiding volatility and stronger global growth expectations tend to support higher returns in both sectors. November’s risk-on rally helped both sectors extend their historic highs. High-yield bonds were up 3.96% and emerging market bonds were up 3.07% in November, well ahead of U.S. investment-grade bonds.

EXHIBIT 1: HIGH-YIELD AND EMERGING MARKET BONDS HAD A STRONG RALLY IN NOVEMBER

Source: Bloomberg

 

THE DOLLAR’S DECLINE AND LOW YIELDS ACROSS THE GLOBE ADD MORE APPEAL TO EMERGING MARKETS
The U.S. dollar declined in November, returning to levels last seen in early 2018. The dollar is considered a safe haven and it tends to get stronger as volatility spikes. Positive sentiment during the month lowered market volatility, thereby weakening the dollar’s appeal. The dollar’s weakness tends to be positive for local currency-denominated emerging market bonds.

On another front, governments and corporations across the world issued record debt to combat the impact of the COVID-19 pandemic, pushing negative yielding bonds’ level up by more than $700 billion during November. Nearly $18 trillion of global bonds now offer negative yields, which is a new record high. This number represents more than 25% of world’s investment-grade bonds.

EXHIBIT 2: GLOBAL NEGATIVE YIELDING BONDS’ MARKET VALUE REACHES A NEW HIGH

Source: Bloomberg

As for U.S. Treasury yields, the Federal Reserve has expressed their intention to keep the benchmark lending rate in the U.S. near zero until at least 2024 and are not expected to implement a negative rate approach. Emerging market bonds offering nearly 4% yield in November have been more attractive to income-starved investors in this historically low yield environment.

EXHIBIT 3: EMERGING MARKET BOND YIELDS OFFER A HIGHER INCOME INVESTMENT-GRADE OPTION

Source: Bloomberg

Looking ahead, the Biden administration is widely expected to move towards easing global trade restrictions. Emerging markets will likely benefit from this trade rebound over the next couple of years and further provide more opportunities for investors as COVID-19 vaccines help global economies recover in the upcoming years.

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder’s proprietary quantitative fixed income models signaled strength in emerging market bonds and high-yield bonds as momentum and macroeconomic factors improved while volatility subsided mid-month. This led us to increase exposure to high-yield and emerging market bonds in our portfolios in November. Meeder fixed income portfolios maintained the following positions during the month:

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
Our portfolios increased their exposure to high-yield bonds in November. These positions were a contributor to portfolio performance as high-yield bonds returns led all fixed income sectors during the month.

 

OVERWEIGHT USD-DENOMINATED EMERGING MARKET BONDS
Our portfolios increased their exposure to emerging market bonds during the month. This exposure was a contributor to performance as the sector had a strong rally in November. This sector continues to provide income opportunities in our portfolios.

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
U.S. Treasury and investment-grade bond positions were reduced to accommodate increased exposure to risk-on sectors. This tactical move was a contributor to performance, as treasuries and investment-grade bonds’ performance lagged risk-on sectors.

 

DURATION POSITIONING
Meeder fixed income portfolios continued to maintain an intermediate-term duration of nearly 5.5 years in November, in line with their benchmark(s).

 

 

Fixed Income asset classes are 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 US Corporate High Yield Total Return Index Value Unhedged USD, Bloomberg Barclays EM USD Aggregate Total Return Index Value Unhedged USD, Bloomberg Barclays Global Aggregate Index, Bloomberg Barclays Global Agg Treasuries Total Return Index, Bloomberg Barclays US Treasury: Long Index, Bloomberg Barclays US Mortgage Backed Securities (MBS), Bloomberg Barclays Global Agg Neg Yielding Debt Market Value Index; Bloomberg Barclays US CMBS: Erisa Eligible Index, Bloomberg Barclays US Agg ABS Total Return Value Index

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-12/9/20

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Looking Ahead to 2021: Investment Implications of Potential Covid-19 Vaccine, Possible Divided U.S. Government and Accommodative Monetary Policy
By Joe Bell, Co-Chief Investment Officer, and Amisha Kaus, Portfolio Manager • December 2020

KEY TAKEAWAYS 

» A POTENTIAL COVID-19 VACCINE IN 2021 WOULD BE A BIG POSITIVE FOR THE ECONOMY. Moderna, Pfizer and AstraZeneca have all separately released what appears to be promising results for COVID-19 vaccine candidates. A widely available and effective vaccine for the virus in 2021 could benefit economic activity very significantly.

» A DIVIDED U.S. GOVERNMENT HAS HISTORICALLY BEEN VERY ATTRACTIVE FOR STOCKS. The S&P 500 Index has averaged a return of 15.9% a year during a divided government—3% higher than the average return from 1950–2019. Should the executive and legislative branches be divided (depending on results of the Georgia Senate race), the chances of significant pieces of legislation being passed become smaller, providing investors with the potential of more certainty about the future.

» U.S. STOCKS ARE LIKELY IN A SECULAR BULL MARKET. U.S. real GDP has rebounded 33% in Q3 2020 after falling 31% in Q2 2020, while U.S. stocks have risen sharply off their lows in late March 2020. The combination of overwhelming fiscal and monetary stimulus has likely succeeded in halting deleveraging by businesses and consumers brought on by the COVID-19 recession. We expect credit to expand going forward and the business cycle to continue for many years to come.

» MONETARY POLICY IS LIKELY TO REMAIN ACCOMMODATIVE. With inflation still below targets, and elevated unemployment rates, central banks around the world are likely to keep interest rates anchored to near zero levels for the foreseeable future.

» MEEDER’S TACTICAL PORTFOLIOS FAVOR RISK-ON ASSETS. At the asset allocation level, our tactical portfolios are overweight stocks vs. bonds. Within fixed income, we favor high yield and emerging market debt over treasuries and investment grade debt.

 

Why Meeder? We are dedicated to improving investor outcomes by keeping clients committed to their investment strategy throughout a full market cycle. We view tactical allocation as a risk management tool. We believe that tactical managers can provide downside protection, lower volatility, and offer more complete diversification than strategic managers.

 

POTENTIAL COVID-19 VACCINE IN 2021 WOULD BE A BIG POSITIVE FOR THE ECONOMY
EXHIBIT A: TRIAL RESULTS FOR COVID-19 VACCINES SHOW A VERY HIGH RATE OF EFFECTIVENESS

Source: CDC, University of Oxford, Moderna, Pfizer

Given the economic disruption caused by COVID-19 due to shutdowns and quarantines, a widely available and effective vaccine for the virus would likely benefit economic activity significantly by allowing a return to normal life for billions of people around the world. As Exhibit A shows, Moderna, Pfizer/BioNTech, and Oxford (UK)/AstraZeneca have all separately released promising results of clinical trials for potential COVID-19 vaccines. Historically, vaccines available for the common flu have had between a 40 to 60% success rate at preventing infection. Results for the COVID-19 vaccine are demonstrating effectiveness as high as 95%, which is much higher than most scientists anticipated. 

 

A DIVIDED U.S. GOVERNMENT HAS BEEN ATTRACTIVE FOR U.S. STOCKS
EXHIBIT B: U.S. EQUITIES HAVE HISTORICALLY DONE WELL WHEN THE GOVERNMENT IS SPLIT

Source: LPL

Based on a historical analysis of stock market returns, should we have a divided government—a Democratic president and split Congress—it would offer one of the most attractive opportunity sets for stock market investors. The results of the Georgia Senate race on January 5, 2021, will provide investors with more clarity on this front. The S&P 500 Index has averaged 15.9% a year with a Democratic President and a divided Congress—about 3% higher than the average return on the S&P 500 from 1950-2019. One explanation for this is the higher degree of certainty about the future that a divided government provides investors. Should the House of Representatives and Senate be divided, the chances of any significant pieces of legislation being passed becomes smaller.

 

U.S. STOCKS ARE LIKELY IN A SECULAR BULL MARKET
EXHIBIT C: U.S. GDP GREW AT A RECORD PACE IN Q3 2020 FOLLOWING ITS SHARP DECLINE IN Q2 2020

Source: Bloomberg

Massive fiscal and monetary stimulus in 2020 in response to the economic damage from COVID-19 has resulted in a sharp bounce back for the economy and stock market. U.S real GDP has rebounded 33% in Q3 2020 after falling 31% in Q2 2020. While the S&P 500 has rallied more than 40% off its bear market low on March 23, the Russell 2000 small-cap and S&P 400 mid-cap indexes have gained more than 80% and 79% respectively during this same time frame. In addition, we have observed strong participation from a variety of sectors and industries outside of the big tech stocks that have dominated performance in recent years. These are historically characteristics of a healthy stock market and an economic expansion.

EXHIBIT D: FISCAL AND MONETARY SUPPORT HAS ENABLED CORPORATE BOND MARKETS TO RECOVER AND EXPAND DESPITE THE GLOBAL COVID-19 PANDEMIC

Source: Bloomberg

Evidence suggests that the combination of fiscal and monetary stimulus has likely succeeded in halting—and reversing—deleveraging by businesses and consumers. Exhibit D shows the market value of U.S. investment grade bonds. It suggests that credit expansion continue, with year-to-date U.S. bond issuance already surpassing $2 trillion through the end of October 2020. That is already higher than any calendar year in history. As economic activity picks up again, we expect credit to expand and the business cycle to continue for many years to come.

EXHIBIT E: HIGH U.S. PERSONAL SAVINGS RATES MAY PROVIDE FUEL FOR FUTURE ECONOMIC GROWTH

Source: FRED (Federal Reserve Bank of St. Louis)

As we move into 2021, we expect credit to continue to expand, helping the economic recovery. In addition, pent up savings may help boost the economy too. The most recent data suggests that U.S. consumers are saving more than 14% of their income, which is more than 5% higher than its long-term average of 8.9% (1959–present). A widely available vaccine could improve consumer sentiment, leading to a potential unwind of the large savings consumers have built up over the last year or so.

 

MONETARY POLICY IS LIKELY TO REMAIN ACCOMMODATIVE
EXHIBIT F: LOW HEADLINE INFLATION ACROSS G-10 ECONOMIES WILL LIKELY KEEP GLOBAL CENTRAL BANK POLICIES ACCOMMODATIVE

Source: Bloomberg

Headline inflation levels remain low across much of the developed world. G-10 economies’ average headline inflation number remains well below its 20-year average. The Federal Reserve and other global Central Banks are likely to keep their respective policy rates low until they see significant uptick in inflation figures. The Federal Reserve is expected to keep their benchmark short-term interest near zero percent through at least 2023.

EXHIBIT G: LOWER INFLATION EXPECTATIONS ARE KEEPING 10-YEAR GLOBAL BOND YIELDS BELOW 1%

Source: Bloomberg

Lack of inflationary pressures are keeping yield premiums low across much of the global government debt. 10-year global bond yields that typically respond to inflation by rising, remain below one percent, and in some cases negative, across most developed economies. This implies market expectations of low interest rates over the next few years.

 

MEEDER’S TACTICAL PORTFOLIOS FAVOR RISK-ON ASSETS
Meeder’s tactical models suggest a more favorable outlook for risk-on assets compared to risk-free assets. At the asset allocation level, our tactical portfolios are overweight stocks vs. bonds, with the Meeder Muirfield Fund being fully invested in stocks.

EXHIBIT H: THE REWARD OF OUR STOCKS MODEL OUTWEIGHTS THE ABOVE-AVERAGE MARKET RISK

Source: Meeder Investment Management

Although market risk is still higher than its long-term average of 16, the reward component of our tactical allocation model outweighs the above-average risk in the stock market. Exhibit I displays some of the reasons for this strong reward reading.

EXHIBIT I: DRIVERS OF THE REWARD COMPONENT OF OUR TACTICAL MODEL

WHAT IS DRIVING REWARD HIGHER? REWARD COMPONENT 
Historically low interest rates and inflation favor
equities
 Long-term model
Trends and Momentum Positive  Long- and Short-term models
Market Breadth indicates high participation from
many sectors and industries
 Long- and Short-term models
Global Leading Economic Indicators continue to
improve
 Long-term model
Credit markets remain healthy and showing signs
of improving
 Long-term model
Institutional demand has been strong  Intermediate-term model

Source: Meeder Investment Management

Within fixed income, our proprietary fixed income models favor exposure to high yield and emerging market bonds over U.S. Treasuries and investment grade bonds.

EXHIBIT J: OUR PROPRIETARY FIXED INCOME MODELS ARE SIGNALLING STRENGTH IN HIGH YIELD AND EMERGING MARKET DEBT OVER U.S TREASURIES AND INVESTMENT GRADE BONDS

Source: Meeder Investment Management

 

At Meeder, we are dedicated to improving investor outcomes by keeping clients committed to their investment strategy throughout a full market cycle. We view tactical allocation as a risk management tool. We believe that tactical managers provide downside protection, lower volatility, and offer comprehensive diversification to help investors to arrive at their ultimate investment destination.

Please contact your Meeder Advisor or Consultant at 1.866.633.3371 if you have any questions.

 

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-12/2/20-3078

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

KEY TAKEAWAYS 

» Market volatility spiked with uncertainty on multiple fronts

» Stimulus expectations steepened the U.S. Treasury yield curve, with 10-year treasury yield climbing to nearly 0.90%

» High yield bonds remained positive even as they gave up early momentum

» Overweight positioning in high yield bonds was a positive contributor to Meeder portfolios in October

 

VOLATILITY SPIKES AS MARKET UNCERTAINTY PERSISTS ON MULTIPLE FRONTS
The month of October noted sentiment swings in the markets from bouts of optimism to pessimism as investors faced many unknowns. Investors awaited news on COVID-19 vaccine, dealt with rising economic threat from global resurgence in COVID-19 cases, faced a deadlock in the U.S. fiscal stimulus bill, and remained uncertain on the fate of the US Presidential election. Judging by the record level of mail-in voting for this year’s Presidential election, investors expected the decision process to drag out for days. The investment-grade market lacked a general direction as the resulting policy implications remained unclear for much of the month, ultimately settling lower at month-end.

Rising uncertainty pushed yields higher, casting downward pressure on prices in most fixed income asset classes. It triggered a spike in market volatility and the U.S. Treasury volatility gauge, the MOVE Index, rose to a level last seen in early June. The MOVE index had noted historically low readings in September. Gauges of credit risk in the investment-grade market, as measured by credit default swaps, rose during the month indicating a lack of appetite for risk, even in the high-quality bond market. Safe-haven instruments like 10-year U.S. Treasury bonds also ended the month in negative territory. The 10-year U.S. Treasury returns were negative, as the benchmark yield rose to nearly 0.90%, its highest level since June

 FIXED INCOME SECTOR RETURNS OCTOBER YTD 
 U.S. Aggregate Bond Index  -0.45%  6.32%
 Intermediate-term Treasury Index  -0.44%  6.80%
 Investment Grade Corporate Index  -0.18%  6.44%
 U.S. Mortgage-backed securities Index  -0.04%  3.58%
 High Yield Corporate Index  0.51%  1.13%
 Emerging Market Debt Index  -0.12%  1.82%

 

EXHIBIT A: 10-YEAR TREASURY YIELD REACHED EARLY-JUNE LEVEL


Source: Bloomberg

One front that remained steady last month was the Federal Reserve’s commitment to an accommodative monetary policy for the foreseeable future. The FOMC meeting in October proved to be non-eventful as the Federal Reserve maintained its stance on keeping short-term lending rates lower for longer. The central bank support has kept the corporate bond market strong in the aftermath of the pandemic and we expect it to continue to provide stability as needed. Although, recent statements by FOMC members shows more emphasis on the need for another fiscal stimulus in the U.S. to sustain the current economic recovery

 

U.S. FISCAL STIMULUS EXPECTATIONS MOVED THE TREASURY YIELD CURVE
The U.S. Treasury yield curve steepened in October, as the short-term rates remained steady, while the longer maturities moved slightly higher. Yields for 20-year and 30-year treasuries have recovered back to levels seen in early March, before the widespread COVID-related shutdowns impacted the U.S. economy. Even though a second round of U.S. fiscal stimulus was not passed by the U.S. Congress in October, the increase in rates was partly driven by expectations that an agreement will follow the Presidential election results.

EXHIBIT B: U.S. TREASURY YIELD CURVE STEEPENED

Source: Bloomberg

 

A TALE OF TWO HALVES FOR HIGH YIELD BONDS
In line with U.S. stocks, high yield bonds gained momentum in early October as investors were still optimistic about the progress on U.S. fiscal stimulus talks and held out hopes for a COVID-19 vaccine. Their direction changed swiftly in the second half of the month as COVID-19 cases started to rise and fresh lockdown measures in some economies casted doubts on the continuation of global economic recovery. Despite a drop in momentum in the second half, the high yield sector ended the month positive, with the high yield index taking in 0.51% in gains. On the risk front, defaults rose in the month of October, leaving the default rate elevated well over 6%. Credit rating downgrades for companies rated high yield also continued to outpace rating upgrades during the month, adding to the level of risk. Given the heightened volatility in high yield bond sector, our strong conviction in a tactical approach to the high yield sector remains strong.

EXHIBIT C: U.S. HIGH YIELD DEFAULT RATES REMAIN HIGH

Source: J.P. Morgan

 

OUTLOOK
A second round of fiscal stimulus in U.S. is highly likely in the upcoming months, although the size of the stimulus depends on the Presidential election’s outcome. We expect any additional stimulus to be additive to the U.S. economy, thereby helping subside market volatility. With the uncertainty surrounding the results of this year’s Presidential election, we expect market volatility to persist in the near-term, highlighting the need for an active, tactical approach in risk sectors.

 

PORTFOLIO POSITIONING AND PERFORMANCE

Our proprietary quantitative fixed income models recorded an increase in high yield and emerging market debt volatility factors. Emerging market debt sector also exhibited weakness in momentum factors. During the month of October, Meeder fixed income portfolios maintained
the following positions:

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
High yield corporate bond positions were a contributor to performance in October as high yield bonds were one of the few positive spots in the fixed income landscape. These positions remain unchanged and have provided a higher level of income and continue to provide positive attribution.

 

OVERWEIGHT USD-DENOMINATED EMERGING MARKET BONDS
This position was a detractor from performance as emerging market bonds lost momentum in October. This sector continues to be a source of higher income in our portfolios.

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
U.S. Treasury and investment grade bond positions were a detractor last month as yields climbed across much of the curve.

 

DURATION POSITIONING
Meeder fixed income portfolios continued to maintain an intermediate-term duration of nearly 5.5 years in October, in line with their benchmark.

 

 

Fixed Income asset classes are represented by the following indexes: Bloomberg Barclays US Aggregate Bond Index, Bloomberg Barclays US Treasury: Intermediate Index, Bloomberg Barclays US Corporate Bond Index, Bloomberg Barclays US Mortgage Backed Securities (MBS) Index, Bloomberg Barclays US Corporate High Yield Bond Index , Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index, Bloomberg Barclays Municipal Bond Index Total Return Index

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-11/04/20

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Volatility Spikes as COVID-19 Cases Move to New Highs
By Aaron Adkins, Investment Communications Strategist • October 2020

 

 

The U.S. recently set another all-time high for the number of confirmed new COVID-19 cases in a single day. On October 23, the U.S. confirmed 83,757 new cases, breaking through the previous levels set in July. Volatility is trending higher in the stock market, as investors become more concerned about the uncertainty of the economic impact of these new COVID-19 cases.

INCREASE IN POSITIVE CASES

Source: Johns Hopkins

In addition to the current difficulties of containing the spread of the global pandemic, the U.S. is unfortunately entering flu season, which may add even more stress to the current situation. Hospitals around the country are bracing for what impact this may have on their ability to provide care and for the toll this will have on their healthcare workers.

On a positive note, since July, the number of patients hospitalized due to COVID-19 peaked and have trended downward since then.

There has also been a decline in the number of patients admitted into the Intensive Care Units of hospitals, as well as those that were on put on a ventilator due to the respiratory complications of the disease. It will be important to monitor these potentially lagging indicators to see if they increase in the coming weeks.

DOWNWARD TREND SINCE JULY

Source: Johns Hopkins

These are unprecedented times, but it is important to not allow short-term volatility to impact long-term goals. Wide swings in the markets often lead investors to make decisions based on emotion (rather than data), especially in periods of market selloffs. At Meeder, we developed quantitative models to analyze data to make fact-based decisions when allocating our portfolios. These models attempt to identify the risk/ reward relationship of the market. By having the flexibility to dial-up or dial-down equity exposure within the portfolio based on a high-risk or low-risk market environment, we can provide better client outcomes.

 

 

 

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.

0131-MAM-10/28/20

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Meeder Fixed Income Strategies
By Amisha Kaus, Portfolio Manager and James Milletics, Fixed Income Analyst • October 2020

KEY TAKEAWAYS 

» U.S. Treasury rates hold steady as interest rate volatility gauge, MOVE Index, hits record low

» 30-year mortgage rates make new record lows and propel housing demand

» High-yield bonds lose momentum and high-quality bonds remain steady

 

INTEREST RATE VOLATILITY SUBSIDES AS U.S. TREASURY RATES REMAIN STABLE
U.S. Treasury rates remained largely steady during the month, as longer-maturity Treasuries saw a minimal rise in yields. The MOVE Index, which measures 30-day volatility for U.S. Treasury yields, reached an all-time low in September. In other words, Treasury rates experienced the lowest amount of movement since this volatility gauge was introduced in the 1980s. This index typically rises when the market is concerned that interest rates will shift significantly. The index has seen a steady decline since reaching its monthly high in early September. Interest rates have been supported by the Federal Reserve’s commitment to keep rates low through at least 2023.

EXHIBIT A: MOVE INDEX: DECLINING INTEREST RATE VOLATILITY

Source: Bloomberg

 

HOUSING MARKET GETS STRONGER AS MORTGAGE RATES DROP
The housing market has been one of the shining spots in the U.S. economy this year. Lower borrowing costs have continued to strengthen and propel U.S. sales of new and existing homes, both of which have continued to reach new highs since the global financial crisis. 30-year mortgage rates dropped to a record low of 2.86% in mid-September, marking its 9th record of lows since the coronavirus-related recession began this year.

EXHIBIT B: HOME SALES RISE AS MORTGAGE RATES MAKE NEW LOWS

Source: Bloomberg, National Association of Realtors, Freddie Mac

The Federal Reserve is in part to thank for the sector’s resurgence and resilience. Fed Chairman Jerome Powell’s remarks after their September meeting assured the markets that the benchmark lending rates will not rise until at least 2023, adding fuel to the already hot housing market.

 

HIGH-QUALITY PREVAILS AS HIGH-YIELD MOMENTUM FADES
Higher-quality and shorter-maturity bonds remained positive amid September’s market decline, as shorter-maturity yields declined slightly. High-yield corporate bonds were one of the best performing fixed income asset classes in the third quarter, but they lost momentum last month as coronavirus-related concerns resurfaced, along with election uncertainty and the lack of any notable progress on the fiscal stimulus front. High-yield bonds recorded their first negative month since March, declining nearly 1% in September. Even though default rates are up this year, they remain contained to select segments of the market, namely energy and retail. We expect near-term volatility in high-yield bonds to persist until new fiscal stimulus bill is passed.

The spread of U.S. high-yield bonds, similar to U.S. Treasuries with the same maturity, increased in September. Yields on high-yield bonds have decreased significantly since March but are still higher than where they started the year, while yields across all other major fixed income asset classes have moved lower this year. U.S. high-yield bonds continue to be a source of higher income relative to other fixed income alternatives. 

EXHIBIT C: YIELDS ACROSS ASSET CLASSES

Source: Bloomberg

 

PORTFOLIO POSITIONING AND PERFORMANCE

Our proprietary quantitative fixed income models recorded a decline in high-yield momentum, spread and currency factors, while the emerging market debt sector also exhibited weakness in momentum and currency factors. During the month of September, Meeder fixed income portfolios maintained the following positions:

 

OVERWEIGHT HIGH-YIELD CORPORATE BONDS
High-yield corporate bond positions were a detractor from performance in September as high-yield momentum slowed. These positions remain unchanged and have provided a higher level of income and positive attribution during the third quarter.

 

OVERWEIGHT USD-DENOMINATED EMERGING MARKET BONDS
This position was a detractor from performance as emerging market bonds recorded a decline last month. The U.S. dollar posted its first monthly gain in September since the coronavirus-related recession started in March.

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
U.S. Treasury and Investment-grade bond positions were a positive contributor to performance relative to the Bloomberg Barclays Aggregate Bonds Index last month and during the third quarter.

 

DURATION POSITIONING
Meeder fixed income portfolios continued to maintain an intermediate-term duration of nearly 5.5 years during September, in line with their benchmark.

 

 

Fixed Income asset classes are represented by the following indexes: Bloomberg Barclays US Corporate TR Value Index, Bloomberg Barclays US Corporate High-Yield TR Index, Bloomberg Barclays EM USD Aggregate TR Index, Bloomberg Barclays U.S. Securitized: MBS/ ABS/CMBS and Covered TR Index, Bloomberg Barclays U.S. Municipal TR Index

MOVE Index: ICE BofA MOVE Index

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-10/06/20

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Meeder's Tactical Update: Despite Market Correction and Uncertainty, Meeder IPS Continues to be Positive
By Bob Meeder, President and CEO, and Joe Bell, Co-Chief Investment Officer • September 2020

KEY TAKEAWAYS 

» Reduced expectations of fiscal stimulus from Congress and the upcoming presidential elections led to an increase in stock market volatility in September. We anticipated the potential for increased volatility in late August following concerns over market breadth, and slightly reduced our equity exposure in the tactical portion of our portfolios.

» However, despite these uncertainties, recently our IPS model indicates an improvement in the risk/reward relationship of the stock market.

» Long-term market trends, bearish sentiment, and a favorable valuation of stocks versus bonds have historically been a tailwind for stock prices.

» Looking forward, we have positioned our portfolios to be overweight stocks, increasing exposure slightly during the sell-off in September.

 

1. WE REDUCED OUR EQUITY EXPOSURE IN LATE AUGUST, EARLY SEPTEMBER
EXHIBIT A: MARKET BREADTH NARROWED AS THE S&P 500 MADE NEW HIGHS IN AUGUST

Source: Bloomberg

Our Meeder IPS model picked up on a narrowing of stock market breadth as we approached the highs in the S&P 500 Index in early September. The New York Stock Exchange (NYSE) Cumulative Advance/Decline line made a lower high as the S&P 500 made a new high. This is commonly referred to as a negative market breadth divergence and indicates that there were fewer stocks participating in the late August, early September rally. This type of development often takes place towards the end of an uptrend, as the internal strength of the trend weakens. The narrowing participation that led to this divergence is illustrated in Exhibit A. Another point of interest is how a handful of technology stocks have impacted the performance of the S&P500 Index so far this year. In fact, as Exhibit B shows, removing just the top 5 stocks (AAPL, MSFT, AMZN, FB, GOOGL) from the S&P 500, produced returns of just +1.00% vs +10.70% for the S&P 500 as of September 2, 2020. 

EXHIBIT B: FIVE LARGE-CAP TECHNOLOGY STOCKS HAVE BEEN RESPONSIBLE FOR A MAJORITY OF THE S&P 500’S

 S&P 500 PERFORMANCE 1/1/2020 TO 9/2/2020
 S&P 500                                                          10.70%
 ex. Top 5                                                           1.00%

Source: Bloomberg

Based upon the Meeder IPS model, we reduced our equity exposure in the tactical portion of our portfolios from 91% to 80% in late August, early September. Our reduction turned out to be productive, as the S&P 500 experienced nearly a 10% correction from its highs, as of September 23, 2020.

 

2. LONG-TERM TRENDS, SENTIMENT AND VALUATIONS CONTINUE TO INDICATE A FAVORABLE RISK/ REWARD RELATIONSHIP FOR THE STOCK MARKET
EXHIBIT C: LONG-TERM TRENDS IN THE STOCK MARKET REMAIN FAVORABLE

Source: Bloomberg

While the S&P 500 and NASDAQ indices experienced declines of nearly 10% and 12% respectively, over the three weeks ending September 23, 2020, our long-term trend indicators remain positive. Exhibit C illustrates two examples, the S&P 500 128-day/252-day moving average crossover and the S&P 500 189-day price slope. Both demonstrate that the longer-term bull market trend, which started approximately 6-months ago, remains in place.

EXHIBIT D: INDIVIDUAL INVESTORS REMAIN VERY BEARISH

Source: American Association of Individual Investors

Irrespective of the last six months historic stock market gains, individual investor sentiment remains very bearish. As shown in Exhibit D, the AAII Sentiment survey indicates that 46% of individual investors are bearish, which is nearly two times the percentage that are bullish (24.9%). Incredibly, the percentage of respondents that are bearish has been greater than the percentage that are bullish for a record 31 consecutive weeks, as illustrated by the shaded portion of the chart it Exhibit D. Historically, from a contrarian point of view, when this survey reaches bearish extremes, it has often signaled a more positive stock market environment.

EXHIBIT E: DIVIDEND YIELDS ON STOCKS ARE CONSIDERABLY HIGHER THAN TREASURY YIELDS

Source: Bloomberg

Finally, when evaluating the current interest rate environment, stock valuations are still attractive. As illustrated in Exhibit E, the S&P 500 dividend yield sits at 1.9%, while the 10-Year Treasury yield is below 0.7%. The spread between these two investments is near historic levels, which currently favors stocks over bonds.

 

3. RECENTLY WE INCREASED OUR EXPOSURE TO STOCKS
EXHIBIT F: MUIRFIELD EQUITY EXPOSURE AND THE S&P 500 INDEX

Source: Bloomberg

We monitor our Meeder IPS model on a daily basis to determine the equity allocation of the tactical portion of our portfolios. Due to a recent improvement in the Meeder IPS, we increased our equity exposure in the tactical portion of our portfolios to 85%, as of September 23, 2020.

 

 

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.

Charts illustrating the performance of revised quantitative models are hypothetical and reflect the benefit of hindsight. Backtested quantitative model performance is presented for illustrative purposes only and does not reflect actual trading using client assets. Past performance of a quantitative model does not guarantee future returns.

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-09/28/20

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

KEY TAKEAWAYS 

» Federal Reserve’s lower-for-longer stance on interest rates gets reaffirmed and U.S. treasuries and long-term bonds take a hit from inflation expectations

» Low-quality (high-yield) bonds gain over high-quality securities

» Global negative yielding debt declines as rates rise across the globe, signaling improving economic conditions

» U.S. dollar’s weakness could have an inflationary impact

 

FEDERAL RESERVE SHAKES UP THE BOND MARKET WITH INFLATION TALK
The Federal Reserve’s annual Economic Policy Symposium was a major market moving event in August, as the Federal Open Market Committee (FOMC) reviewed the U.S. central bank’s monetary policy framework and stated their intention to maintain a flexible and accommodative policy towards inflation and the labor market for an extended period. The Federal Reserve plans to hold short-term interest rates near zero as long as necessary to support the U.S. economic recovery and will seek to keep inflation at an average of 2% over time, which means inflation numbers could run higher than 2% at times. The bond market digested the news by sending long-term Treasury yields higher, perhaps a message that investors expect higher inflation to erode purchasing power over time and will require more compensation for owning longer term bonds.

 

HIGH-YIELD BONDS REMAIN STRONG
With the U.S. continuing to reopen parts of the economy, economic data released in August signaled an increase in consumer and business spending and a decline in the unemployment rate. This sign of optimism led to outperformance by lower credit quality (high-yield) bonds over their higher-quality counterparts in August. The market’s appetite for risk and higher income remains robust. U.S. high-yield bond ETFs saw an inflow of nearly $2.9 billion in August, as investors flocked to high-yield bonds that are offering rates that are about 4% above those offered by similar maturity treasuries.

We expect demand for high-yield bonds to continue, but also expect higher volatility in the sector with the upcoming U.S. Presidential election, fiscal stimulus hanging in the balance, and uncertainty surrounding a COVID-19 vaccine.

The chart below shows the change in value of $1,000 invested in high-yield bonds and high-quality bonds in the month of August.

HYPOTHETICAL GROWTH OF $1,000 IN AUGUST 2020

Source: Bloomberg

 

DECLINE IN GLOBAL NEGATIVE YIELDING DEBT SIGNALS ECONOMIC STRENGTH
A decline in the amount of negative yielding bonds is a positive sign for the global economic recovery. As interest rates rose across the globe in August, the pool of negative interest rate bonds dropped by $2 trillion, returning to pre-COVID level of $14 trillion. Negative yielding bonds, where lenders (investors) are effectively paying borrowers (corporations & governments) to lend capital, are a sign of economic weakness. Global central banks introduced accommodative interest rate policies to combat the recent economic slowdown, while already facing low and negative interest rates, resulting in the total negative yielding bonds pool to grow to more than $16 trillion in size by early August. If global economic data continues to strengthen, we could see this pool of negative yielding bonds shrink even further, signaling an improvement in global economic recovery.

 

US DOLLAR’S WEAKNESS COULD MEAN HIGHER INFLATION
Typically, an increase in the federal funds rate leads to higher interest rates throughout the economy, attracting foreign investors – who invest in U.S. dollar denominated assets. This increase in demand often strengthens the U.S. dollar. With interest rates at record low levels, we are seeing the opposite occur, as the U.S. dollar continues to plummet. As a result of the Federal Reserve’s near zero interest rate mandate, the U.S. dollar declined to a 2-year low at the end of August.

The silver lining with a weaker U.S. dollar is that it can foster a favorable export environment for U.S. companies and bolster commodity prices. Both actions may increase inflationary pressures, as imports and commodities become more expensive, adding even more importance to the Federal Reserve’s inflation mandate. 

US DOLLAR AND EXPORTS

Source: Bloomberg, Bureau of Labor Statistics

US DOLLAR AND EXPORTS

Source: Bloomberg

 

PORTFOLIO POSITIONING AND PERFORMANCE

Meeder fixed income portfolios maintained the following positions for the duration of the month:

 

+ OVERWEIGHT HIGH-YIELD CORPORATE BONDS
» High-yield corporate bond exposure was a contributor to portfolio performance as high-yield bonds were up an impressive 0.95% in August, relative to a decline of 1.38% for investment-grade corporate bonds.

 

+ OVERWEIGHT USD-DENOMINATED EMERGING MARKET BONDS
» Emerging market bond exposure was a positive contributor to performance as the sector gained 0.54% in August vs. a decline of 0.81% for the investment-grade bond benchmark, Bloomberg Barclays U.S. Aggregate Bond Index..

 

U.S. TREASURIES AND INVESTMENT GRADE BONDS
» U.S. Treasury prices declined along with investment-grade bonds in August, as economic data and Federal Reserve’s monetary policy raised inflationary fears in the bond market. These exposures were a detractor to portfolios’ absolute performance.

 

 DURATION POSITIONING
» Meeder fixed income portfolios maintained an intermediate-term duration of roughly 5.5 years, in line with the market benchmark.

 

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

 

 

Sources: Bloomberg, Bureau of Labor Statistics

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-09/02/20

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U.S. Political Insights: 2020 Election May Lead To Increased Volatility
By Joe Bell, Co-Chief Investment Officer, and James Milletics, Fixed Income Analyst • August 2020

KEY TAKEAWAYS:  

  • Odds from PredictIt.org show former V.P. Joe Biden slightly ahead of President Donald Trump in the race to win the White House. Democrats are also slight favorites to win control of Congress, which may have even greater implications for financial markets than the Presidency.

  • The two presidential candidates differ significantly on their policies towards the economy, trade, and big tech. President Trump supports lower taxes, domestic manufacturing and has initiated an anti-trust probe against large U.S. tech companies. Former V.P. Biden supports reversing Trump’s 2017 tax cuts, a “made in America” manufacturing plan and has proposed a minimum federal tax aimed at companies like Amazon.com.

  • Financial market volatility may increase as we head into the November election. Historically, 6 out of the last 7 elections have seen rising volatility in the three months prior to election day. With a historically high number of mail-in voters, the results of the election may potentially be delayed a week or more – until all votes have been counted. The delayed result of the Bush-Gore election of 2000 provides us with a potential historical precedent.

 

1. JOE BIDEN AHEAD OF PRESIDENT TRUMP TO WIN WHITE HOUSE IN 2020
EXHIBIT 1: “WHO WILL WIN THE WHITE HOUSE?” JOE BIDEN SLIGHTLY AHEAD OF PRESIDENT TRUMP


Source: Bloomberg

EXHIBIT 2: “WHO WILL CONTROL CONGRESS?” DEMOCRATS LEAD REPUBLICANS WITH A 54% CHANCE

Source: PredictIt.org

As Exhibit 1 shows, according to PredictIt.org – a prediction market for political and financial events – the odds of a Joe Biden victory in the 2020 presidential elections have increased gradually over the last few months. In part, this may be attributed to the coronavirus pandemic, and its short-term negative impact on the U.S. economy and unemployment rates. While control of the White House is significant, the even bigger prize lies in controlling Congress (both the House and the Senate), as well as the presidency. This allows the winning party to draft and sign legislation into law with a simple majority, thereby significantly changing the direction of government policy. Recall that Republicans won the White House and control of Congress in November 2016, which allowed the passage of significant tax reform. As Exhibit 2 shows, PredictIt.org is showing a greater than 50% probability of Democrats winning control of Congress

 

2. CANDIDATES DIFFER ON APPROACH TO ECONOMY, TRADE AND TECH
EXHIBIT 3: CANDIDATES DIFFER SIGNIFICANTLY ON KEY POLICY ISSUES

  PRESIDENT TRUMP FORMER V.P. BIDEN 
ECONOMY

Encourages states to reopen as soon
as possible and has signed legislation
for significant aid since the COVID-19
outbreak.

Supports additional government
spending, stimulus, and
lower taxes to spur growth.

Cautious about reopening of
U.S. economy.

Has proposed increased spending
to create new jobs in certain
industries and increase
unemployment benefits.

Pledges to reverse some of
Trump’s 2017 tax cuts by raising
the marginal tax rate on highest
income earners and supports
raising national minimum wage.

TRADE

Encourages domestic manufacturing
and cites America’s difficulties in
procuring medical supplies during the
pandemic as a reason to
encourage U.S. companies to avoid
offshoring.

Believes past trade deals have been
unfair to U.S. and has mandated
higher tariffs against China and other
countries to combat this.

Proposed a “made-in-America
manufacturing plan” in July, which
would spend $700 billion on
American-made products and
research.

Criticizes Trump’s tariff war with
China as bad for U.S. consumers
and farmers and voted for NAFTA
as a senator. Believes international
coalition against China could be used.

TECH
REGULATION

The Trump administration is
conducting a wide-range
antitrust probe into major tech
companies but has not called for firms
to be broken up yet.

Has accused social media companies
of censorship and signed an executive
order that seeks new regulatory
oversight of tech firm’s content
moderation decisions.

Has criticized tech firms over
encryption issues, including Apple for
refusing to unlock phones during
criminal investigations.

Has criticized some big tech
companies and proposed a minimum
federal tax aimed at companies like
Amazon.com.

Only Democratic candidate who
called for revoking Section 230 of the
Communications Decency Act, a key
internet law that largely exempts online
platforms from legal liability for users’
posts.

Believes the U.S. should have stricter
privacy standards.

Source: Reuters

 

3. FINANCIAL MARKET VOLATILITY IS LIKELY TO INCREASE GOING INTO ELECTION
EXHIBIT 4: 2020 ELECTION WILL EXPERIENCE LARGE INCREASE IN MAIL-IN BALLOTS ACROSS STATES 


Source: covidstates.org

Based on a July survey by covidstates.org, the percentage of voters that are likely to vote by mail will be nearly 63% this year, up from just 19% in 2016.   In addition to the extra time it may take to count mail-in votes, 18 states accept mail-in votes up to 10 days after election day if they are postmarked by the day of the election.   Absentee ballots also have a historically higher rate of rejection than machine-voting, usually from a missing signature or being received after the deadline.

 

The 2000 election between George W. Bush and Al Gore provides an interesting example of increased uncertainty because of unanticipated delays. Due to the close vote count in Florida, and the close electoral college count from the other States, it took 36 days for the Supreme Court to declare George W. Bush the winner. The stock market fell about 5% during this period, in response to increased uncertainty around future outcomes.

 

EXHIBIT 5: AVERAGE THREE MONTH CHANGE IN CBOE VOLATILITY INDEX (VIX) AHEAD OF PRESIDENTIAL ELECTIONS (1992 – 2016)


Source: Bloomberg

 

EXHIBIT 6: SIX OF LAST SEVEN ELECTIONS SAW AN INCREASE IN VOLATILITY DURING THE THREE-MONTH PERIOD AHEAD OF THE ELECTION

ELECTION
DAY
PRESIDENT
ELECT
WINNING
PARTY
3-MONTH CHANGE
IN VIX BEFORE
ELECTION 
11/3/1992 Bill Clinton
Democratic
25.40%
11/5/1996
Bill Clinton
Democratic
8.68%
11/7/2000 George W. Bush
Republican
29.87%
11/2/2004 George W. Bush
Republican
-0.19%
11/4/2008
Barack Obama
Democratic
135.94%
11/6/2012
Barack Obama  Democratic
10.22%
11/8/2016
Donald Trump
Republican 55.52%
    Average: 37.92%

Note: The CBOE Volatility Index (VIX) is a real-time market index that represents the market’s expectation of volatility for the U.S. stock market.

Source: Bloomberg

 

As shown in Exhibit 5, historically, 6 out of the last 7 elections have seen rising volatility in the three months prior to election day. U.S. stock market volatility, as represented by the CBOE Volatility Index (VIX), has on average increased 38% during the 3-month period ahead of the election.  Given the unique circumstances surrounding this year’s election, we believe financial market volatility may increase as we head into the November election.

 

 

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-8/25/20

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A Message from CEO and President, Bob Meeder

 

 
 
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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U.S. Economic Pulse: Consumer Spending Waits on a Vaccine
By Jacob Billhartz, Fixed Income Analyst, and Joe Bell, Co-Chief Investment Officer • August 2020

KEY TAKEAWAYS:  

  • Consumer spending is by far the largest part of the U.S. economy and its decline has been the biggest reason for the economy shrinking in Q2 2020.

  • Enhanced unemployment benefits, which expired at the end of July, led to an increase in consumer compensation to above pre-COVID levels.

  • While spending by lower-income workers is now close to its pre-COVID level, spending by higher-income Americans still significantly lags. The sharp spending decline by this group, who are largely still employed, has had the biggest impact on the reduction in total consumer spending.

  • We believe consumer spending will improve once there is a vaccine, drug, or improved confidence around public health..

 

1. THE CONSUMER IS KING
As Exhibit 1 shows, consumer spending is by far the largest contributor to U.S. Gross Domestic Product (GDP), and therefore, has the largest impact on whether the economy is growing or not. From 2017 to 2019, personal consumption expenditures, as a portion of GDP, ranged from 62% to 78%. While private domestic investment slowed in 2019, the consumer was resilient. But as COVID-19 changed consumer spending behavior, the decline in spending led GDP lower. While GDP declined at a seasonally adjusted annualized rate of 32.9% in Q2 2020, personal consumption expenditures declined by 34.6%.

EXHIBIT 1: CONSUMER SPENDING IS THE LARGEST CONTRIBUTOR TO U.S. GDP

Source: BEA

 

2. CONSUMER COMPENSATION SURPASSES PRE-COVID LEVELS
The CARES Act included several provisions designed to bridge the economic gap created by COVID-19 and the resulting shutdown of the U.S. economy. One of the most impactful provisions was an additional $600 a week for unemployment insurance recipients. Data from the Bureau of Economic Analysis shows that the combination of traditional compensation and unemployment benefits are well above where they were pre-COVID, even though GDP still fell by a record rate in the second quarter and unemployment remains above 10%. While these benefits expired at the end of July, it is widely expected that Congress will pass a new stimulus bill soon.

EXHIBIT 2: CONSUMER COMPENSATION HAS SURPASSED PRE-COVID LEVELS

Source: BEA

 

3. HIGH-INCOME CONSUMERS LEAD THE DECLINE IN SPENDING
The highest-earning quartile of Americans has been responsible for about half of the decline in consumption during this recession, according to economists at the Harvard-based research group Opportunity Insights. This reduction in spending has negatively affected employment in the lower-wage service industries but has also had an outsized effect on the U.S. economic slowdown.

Data shows that, at the lowest point, the highest-earning quartile reduced household spending by 36% and is still nearly 12% below their January 2020 spending level. In contrast, spending by the lowest-earning quartile has recovered faster and is just 4% below its January 2020 level. Even though a cut in unemployment benefits may reduce spending from this group, those who are still employed have had the largest impact on the GDP decline. Note that these benefits have had an outsized effect on the lives of those receiving them, so any reduction in benefits will severely affect unemployed individuals.

EXHIBIT 3: HIGH INCOME CONSUMERS HAVE LED THE DECLINE IN SPENDING IN 2020 SO FAR

Source: Opportunity Insights, Harvard, Data is based on a 7-day moving average of consumer spending, as represented by a composite of spending data tracked at www.tracktherecovery.org.

 

4. SPENDING WILL LIKELY FOLLOW AN IMPROVEMENT IN PUBLIC HEALTH
We expect consumer spending to improve once a vaccine is publicly available and confidence in public health improves. The COVID-19 pandemic has changed consumer spending behavior, and these changes are unlikely to reverse until consumers can return to their “normal” lives. For example, most of the reduction in spending has been on goods and services that rely on personal interaction, including hotels, transportation, and foodservice. According to JP Morgan’s proprietary data, debit and credit card transactions on Chase-branded cards were down less than 1% year over year on August 7. In stark contrast, in-person card transactions were down nearly 20% over the same period. 

 

 

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-08/13/20

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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 Amisha Kaus, Portfolio Manager, and Joe Bell, Co-Chief Investment Officer  •  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  •  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 Joe Bell, Co-Chief Investment Officer  •  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 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 Joe Bell, Co-Chief Investment Officer  •  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 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.

Investment advisory services provided by Meeder Asset Management, Inc

©2020 Meeder Investment Management, Inc.

0092-MAM-2/3/20

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