With a modified MLB 2020 season in full swing, American baseball fans everywhere are all in. But as we continue to navigate the pandemic uncertainty, we can turn to practical, applicable insights from baseball for much-needed investor psychology inspiration. One of the pivotal players, if not the most, in a team’s lineup is the leadoff batter. A leadoff batter is the first hitter in the batting order. He forges the path for the other players behind him. He sets the tone for his team by providing run-scoring opportunities to his teammates succeeding him. He is, so to speak, the tip of the spear. Being the first to step onto the plate, the leadoff batter encounters a playing field replete with uncertainty and a multitude of probabilistic outcomes. In fact, the most important competency of a leadoff batter is his ability to get on the base, a lot. Whether that is by hitting or walking, the leadoff batter must be a competent hitter. As expected, the leadoff hitter typically receives significantly more “at-bats” compared to their last teammate on the lineup roster. The more pitches they receive, the greater the opportunity to secure a spot on base and drive runs. Simple mathematics yields increasing opportunities to affect the game’s outcome. A leadoff hitter is not dissimilar to an investor today navigating the financial and economic markets. Similarly, every prudent investor-hitter starts with an awareness of their objective—to get in the game. Coupled with knowledge and insight from past market occurrences and economic cycles, he or she uses that insight to study, assess, and plan their hitting strategy. This investment knowledge, gained from investment experience and intuition, shapes how each investor-hitter navigates, responds, and adapts to the variable market conditions and economic playing field to affect the outcome of their personal financial goals. The View from the Batter’s Box: How far have we come? So, what does our playing field say about how far we’ve come? In our J.P. Morgan Mid-year 2020 Outlook, we explore this question. So let us take a trip back to the start of the 2020 decade. At the beginning of the year, the global economy appeared to be heading towards new peak elevations. Unbeknownst to most, when reported clusters of pneumonia cases overseas surfaced in early January that it was a harbinger of things to come. The strikeouts would be quickly followed by the sharpest lead retraction yet. On February 19, 2020, the S&P reached its highest point, up 4.8% year to date. Less than a week later, on February 27, 2020, the SP 500 entered a correction.[1] What would happen over the next few weeks was the game of a century. Investors, market participants, policymakers, and the citizens navigated their way through the unknown, dynamic, treacherous field. Data points and incessant news development rained down like heavy pitches, curveballs, and strikeouts. On March 23, the S&P 500 reached the game’s lowest-scoring point at 2237. This level constitutes a 37% descent from its peak.[2] In retrospect, the COVID-19 crisis inflicted one of the most severe global economic contractions and bear markets since the Great Depression. Monetary Policy Response In the weeks and months that followed, a coordinated, orchestrated response between global policymakers and central bankers steered the market back to higher ground. Globally, central banks have cut rates 122 times.[3] In the US, the Federal Reserve allocated nearly $3 trillion in a span of two months. Compare this expansionary response to the Great Financial Crisis when the Fed injected roughly the same amount over a period of six years.[4] The Federal Reserve calmed volatility in Treasury markets, which in turn reduced spreads across debt issuers and maturities by providing a funding backstop for many types of borrowers. Moreover, the Fed purchased individual corporate bonds and corporate debt ETFs through its Secondary Market Corporate Credit Facility (SMCCF). In addition to buying $6.8 billion of corporate debt ETFs, the Fed has bought roughly $430 million in individual corporate bonds of 86 companies as of June 17. So far, the facility has utilized less than 3% of its $250 billion capacity.[5] The mere willingness of the Fed to intervene, dynamically and versatilely, has allowed borrowers of all types to access markets. To date, the Fed utilized its multi-faceted direct lending facilities minimally.[6] Undoubtedly, it devised a broad and agile support framework to reassure markets and keep the money supply in circulation to avoid a devastating wave of defaults, bankruptcies, and business failures. At the July FOMC meeting, the Fed extended its emergency lending programs that were set to expire in September through to the end of the year and announced rates will remain at near-zero levels for the foreseeable future. At the Jackson Hole Annual Federal Bank Summit in August, Chairman Powel announced changes to the Fed’s statement of longer-run goals. First, The Fed will target an average inflation rate of 2% over time, not just try to get inflation to 2%. Second, employment will be viewed as a “shortfall” relative to the maximum employment target, which means that a low unemployment rate, as a singular metric, is not a sole and sufficient indicator to compel the Federal Reserve to raise interest rates. Consequentially, the Fed will be more tolerant of inflation than they have been historically. As such, this is a positive indicator for risk assets across the broader spectrum. To date, the S&P 500 index is up 8.34% year-to-date, the Nasdaq stock index has recorded gains of 38.68% YTD, and the Dow Jones Industrial Average is flat. Corporate and high yield bond spreads have tightened, and 10-year Treasury yields have traded narrowly. Fiscal Policy Response During the crisis, global business activity plummeted to levels well below those seen during the global financial crisis.[7] In the United States, there have already been more than double the job losses experienced during the global financial crisis. Large-cap corporate earnings declined by 35%, and more than many US small businesses fear their ability to weather this storm.[8] Fiscal policymakers responded forcefully and quickly. Globally, policymakers earmarked an astonishing $18 trillion in support.[9] In the US alone, the US government passed three main relief packages and one supplemental one, totaling $2.8 trillion in March and April 2020. The CARES Act comprises the most substantial single relief package in US history.[10] Three out of every four workers in the United States laid off received higher compensation from their unemployment insurance than from their wages.[11] Small businesses have taken out over $550 billion in loans from the Payroll Protection Program to help keep them afloat.[12] Secretary Steven Mnuchin extended the federal individual and business tax filing date to July 15, 2020, thereby freeing up nearly $300 billion in liquidity.[13] Many countries in Europe have similar fiscal support programs to replace incomes and buffer spending. As this article goes to press, Congress is in the midst of another negotiation round for a Phase 4, Trillion dollar, coronavirus economic stimulus package. As negotiations remain ongoing, President Trump signed four executive actions in early August to provide additional jobless aid, suspend the collection of payroll taxes, avoid evictions and assist with student-loan payments. As such, our traditional economic indicators like GDP and unemployment numbers may be misleading. This compels us to consider other measures of economic health and their relationship to one another, such as low-income household spending as compared to spending by high income-earners.[14] Other indicators of labor market strength show the economic recovery has accelerated since mid-May, such as the percentage change of small business openings.[15] Workplace visits are up more than 40% from its pandemic low, and 73% percent of small businesses are now open—up from its pandemic-low of 52% right before the April report’s reference period.[16] Homeownership rates are rising to near 2008 levels. New home sales are growing at their fastest pace since the early 1990s. This dynamic is driven by low mortgage rates, consumer demand for more space and locales outside of urban, dense cities, and the Fed response to continuing to keep interest rates low for a long time. Even gasoline demand has recovered over half of the loss from its pandemic-low, indicating Americans are driving more. The market panic has subsided. However, volatility and uncertainty remain and will likely continue until we uncover a virus vaccine, and the election season passes. The Hitting Strategy: Where are we going? As we gain greater clarity into how far we have come, we can update our layout of the field and orient ourselves to where we are going. For one, as official economic data, such as labor numbers, housing activity, consumer confidence and manufacturing activity, surface at a rapid-fire pace, most beat consensus expectations for May and June. This rebound reinforces our view that the current COVID-19 pandemic more likely constitutes a supply-side recession at this stage—distinct from demand-side recessions, like the Great Financial Crisis— that typically recover more quickly. Moreover, different industries recover at varying speeds, some quickly and others over a period of years. This trend supports our overarching thesis that the economic recovery is underway, albeit slowly. We do not anticipate a “double-dip” recession stemming from a re-imposed national shelter in place directive.[17] However, the environment warrants cautious optimism. What does this mean for the probabilistic outcomes of future games? Simply put, prudent investing requires managing volatility, finding value in a low yield environment, and investing in durable growth trends. Managing Volatility We continue to expect that volatility lies ahead, namely the virus resurgence and the political landscape. Absent a vaccine, the trajectory of the virus, the possibility of a second wave, and the fear-based perception of the virus have implications for consumer and business confidence. Second, this election year is likely to be contentious. While there is some agreement on each party’s policy platforms (i.e., infrastructure spending), there exists a wide divergence in policy and agenda responses for a variety of policy issues confronting American citizens today (i.e., taxes, income inequality, social relations). As such, the policy proposals of both parties’ nominees will factor into the market and economic landscape. So how can we manage volatility from a financial planning framework? One suggested approach is to review your balance sheet for currently depressed assets or securities which you expect to grow in the future and to gift them to family, friends, or charitable causes. This transition can be facilitated directly or indirectly through estate planning vehicles, such as Grantor Retained Annuity Trust (GRAT) or a charitable donor-advised fund. Moreover, the CARES Act provided additional flexibility concerning retirement accounts in 2020, which may be used to offset taxable income and achieve tax efficiency. Where appropriate, it may be advisable to defer Required Minimum Distributions (RMD) from tax-deferred accounts. We recommend consulting with your tax attorney or accountant first. Finding Yield Central banks acted swiftly to support the economy. In turn, the demand for safe-haven assets has lowered yields across the interest rate spectrum. In the future, the Central Banks’ monetary policy stance will likely remain accommodative by keeping interest rates low and maintaining the existence of various asset purchase programs. For investors, consumers, and businesses alike, now is a pivotal time to review cash balances to ensure emergency reserves at a minimum of up to twelve months. For excess cash reserves, investors can explore opportunities in investment-grade municipals and corporates, as well as strategies that cross over to upper-tier high yield, select preferred, international equities, or emerging market debt. While searching for yield in a low-interest-rate environment is not without challenges and risks, it offers significant opportunity to restructure existing debt or assume debt strategically. Both are critical tools for optimizing balance sheets in a low rate environment. One such example is the AFR rates, which are historical lows. Intra-family loans with a duration of 9 years+ range below 1.15%, and the 7520 rates hover below 1%. As part of a family’s gifting strategy, families may utilize intrafamily loans strategically to transition assets to the next generation efficiently. Similarly, the pricing on credit facilities secured by real estate or securities is at historic lows. For some clients, now is the opportune time to refinance home mortgages, utilize tax-aware borrowing strategies, or tactically place a line of credit against marketable securities. Doing so will allow them to take advantage of low rates and bridge short term capital needs while remaining invested and receiving the benefit of compounding yield. Investing in Durable Growth Trends The consensus posits that COVID-19 has accelerated key structural mega-trends. The games we continue to play will be markedly different from what we were accustomed to before the pandemic. These critical secular growth and mega-trends are unlikely to be reversed following the pandemic’s resolution. Anastasia Amoroso, JP Morgan Head of Cross-Asset Thematic Strategy, explores three critical mega-trends to include but are not limited to digital transformation, healthcare innovation, and sustainability.[18] Adoption of critical technologies, such as cloud computing, cloud security, and AI, were moving with increasing velocity. The COVID-19 pandemic simply accelerated the transition to a digital- forward economy.[19] This forward trajectory will likely continue both in the near and distant future, with no signs of abating or reversing. Currently, the Nasdaq Computer Index 2019-2022 earnings growth is forecast at approximately 10%. However, this index has yet to capture new revenue streams stemming from 5G and AI adoption, both of which we estimate at $700 billion revenue and $16 trillion opportunities, respectively, in the next five years are priced into stock values.[20] For investors with the appropriate risk tolerance, balance sheet, and time horizon, opportunities to participate in technology-oriented strategies, both passively and actively and in both the public and private markets abound. 2020 will be the year we realize the strategic importance and necessity of a functioning, versatile, and responsive healthcare system. Healthcare innovation lies beyond products such as vaccines and drugs and includes delivery, communication, accessibility, and coordination of these services. To date, we have witnessed a convergence between data and gene-based technologies, which resulted in increased biotech R&D spending. This trend further underscores the velocity of innovation underpinning this sector, which, over the next five years, may potentially yield $255 billion of additional revenues by 2024. The consensus projects at least a 27% earnings growth rate, conservatively speaking.[21] Investors looking to capitalize on this trend, we recommend investing with healthcare-focused managers that have on-staff medical and scientific expertise to provide specialist advice on the fund’s deal opportunities. Lastly, the COVID-19 pandemic surfaced and magnified at rapid speeds underlying societal issues, such as income inequality and environmental issues, among other troublesome concerns. Underscoring this new awareness is the reality that creating responsible economies go hand in glove with making sustainable investments. As such, this has led to a renewed and focused attention towards environmental, social, and governance (ESG) efforts and investing. One example is renewable energy. While still in its nascent stage, clean energy earnings are projected to grow 17% from 2019-2022.[22] There are a wide variety of investment funds, both public and private, available to help investors align their values with their investment goals. The first step towards creating a more responsible and sustainable economy begins with the home. With families spending more time at home, there is no better time than now to foster family cohesion and communication with a family project or virtual family meetings. Consider using this summer to teach heirs about responsible investing and financial education. At a bare minimum, each family should spend time reviewing and “stress-testing” their estate plans to ensure it reflects the wishes, values, and financial considerations for interested and dependent parties. In 1867, Henry Chadwick, often referred to as “the Father of Baseball,” was a preeminent writer and sportscaster of all things American Baseball. He once wrote, “let your first striker always be the coolest hand of the nine.”[23] Thanks to the long-standing traditions of baseball, the sport continues to guide and offer insight into navigating the game of life, with its many curveballs, strikeout, and home runs. For one, the spirit of agility, teamwork, and innovation, which markedly defines baseball and its player, offers today’s investor many sources of inspiration, namely, we are all today “leadoff hitters” investors. As investors step onto the base plate for the first time, he or she is armed with the view from the batter’s box, scanning the field for value, risk, opportunities, and threats. With a cool head and hand on the bat, the “leadoff hitter” investor swings for the bases. His or her sole objective is to execute their hitting strategy by getting into the market—to get on base—and to look for opportunities to manage volatility, search for yield, and capitalize on mega-trends, which will serve his or her long-term financial plan and goals. ____________________
  1. JPMorgan Mid-Year Outlook, June 2020
  2. Id
  3. Id
  4. Source: US Federal Reserve, as of June 17, 2020
  5. Source: Source: FactSet, Federal Reserve, as of June 25, 2020
  6. JP Morgan Mid-Year Outlook, June 2020
  7. Id
  8. “Tracking US Small and Medium-Sized Business Sentiment during COVID-19.” McKinsey & Company, https://www.mckinsey.com/industries/financial-services/our-insights/tracking-us-smalland-medium-sized-business-sentiment-during-covid-19.
  9. Source: https://www.whitehouse.gov/articles/trouncing-expectations-10-million-jobs-labor- markets-comeback-begun/
  10. White House. “Bill Announcement,” Accessed March 17, 2020.
  11. Wall Street Journal. “President Trump Signs Coronavirus Spending Bill,” Accessed March 17, 2020.
  12. CNN. “US tax filing deadline moved to July 15, Mnuchin says,” Accessed April 29, 2020.
  13. Wall Street Journal. “Trump Signs Coronavirus Stimulus Bill as Focus Shifts to State Funding,” Accessed April 24, 2020.
  14. Wall Street Journal. “Major Fixes Made to Small-Business Loan Program,” Accessed June 5, 2020.
  15. Source: Bureau of Labor Statistics, Haver Analytics. June 2020.
  16. Source: https://tracktherecovery.org/
  17. https://privatebank.jpmorgan.com/gl/en/insights/investing/how-quickly-will-the-us-economy- recover
  18. Id
  19. Id
  20. Id
  21. Id
  22. Id
  23. Source: Chadwick, Henry, and Jesse Haney. Haney’s Base Ball Players’ Book of Reference for 1869, Containing the Revised Rules of the Game for 1869, Together with Full Instructions for Umpires and Scorers, and Also for Pitching, Batting, and Fielding. The Whole Forming a Standard Authority on All Points of the National Game. Published by Peck &Snyder, 1869.