February is typically a dry month in Florida, but on February 4, 2007, an active jet stream was in full force, pouring monsoon rains down on the NFL stadium in Miami. That day was Super Bowl XLI. The teams competing for the coveted Championship were the Indianapolis Colts and Chicago Bears. Like every football-loving enthusiast, I wanted, most of all, an opportunity to enjoy and appreciate an all-around, good game by two fierce, worthy competitor teams. The Colts were revered for their vaunted offensive strategy against the Bears with an equally revered defensive strategy. But as the second half of the game unfolded, the Bear’s offense produced cracks. The Colts saw the opportunity and executed a series of offensive plays to give it its insurmountable lead. Most would agree, the Indianapolis defense dominated the Chicago offense for the game, securing its lead and winning the title.
The timeless football adage, “Offense wins games, but defense wins championships,” was never more real than on that day. Coach Tony Dungy led the Colts to victory and became the first black head coach to win the Super Bowl. In his New York Bestseller, Uncommon, Coach Dungy talks about the importance of taking a risk and setting goals. Coach Dungy sets qualitative goals, never aiming for a set number of games to win, but focusing on building a talented, exceptional team. His benchmark for success is not other teams but how his team performed in relation to their potential. In other words, his benchmark is his team’s current performance against his team’s potential performance.
These same principles apply to the sphere of wealth and financial planning. Time and time again, many investors chase a benchmark’s performance or the performance of their peers’ portfolio. However, successful investors’ critical success traits and winning approach are how well their current advisory team and their investment portfolio align with achieving the investor’s return targets for their wealth plans and priorities. Successful investors demonstrate this crucial mindset shift. This mindset shift and approach aided successful investors through the supply side recession created by the COVID-19 pandemic. In the following three segments, we will discuss the following: 2020 year-end results, our J.P. Morgan Private Bank 2021 outlook, and key wealth planning steps we think investors, particularly athlete-investors, should consider in building and aligning their investment plans to their short-term and long-term wealth priorities and goals.
The Year of 2020-A Look in the Rearview Mirror
For now, the word that best defines 2020: Unprecedented. It encapsulates everything from the COVID-19 pandemic to stock market plunge and corresponding rebound; social unrest and a social awakening; and coordinated global responses by fiscal and monetary leaders to buffer the impact of a supply-side recession on everyday lives.
From a market perspective, the Dow Jones Industrial ended the year at 30,606.48, gaining +6.8%. The SP500 index rose by +18.4%; the Russell 200 gained +20%; MSCI World gained +16.5%. Technology (+43.9%), Consumer Discretionary (+33.3%); Communication Services (+23.6%); and Materials (+20.7%) outperforming their sector peers. The Barclays U.S. Aggregate rose +7.5%, and U.S. High Yield gained +7.1% on the fixed income front. This performance was against a backdrop of low rates, with the ten-year Treasury declining to 0.94%. Commodities told a slightly similar story, with Gold gaining +25% and WTI crude declined by -20.6% to close at $48.53 price per barrel.
At the beginning of 2020, the US GDP was growing steadily at a rate of 2.1%, the economy was at full employment, and the stock market was at all-time highs. In the months following the pandemic, the economy experienced the most severe contraction since the Great Depression. . The United States’ efforts to contain the virus have been uneven. But, a series of unprecedented coordinated central bank and federal fiscal policy responses, such as the CARES Act in March, and subsequent fiscal relief packages have helped move the economy forward. The Federal Reserve also swiftly deployed an unprecedented and innovative series of monetary policy responses to maintain access to liquidity, keep rates low, and support credit markets. The economy demonstrated signs of healing in the second half of the year.
There is still more work to do, and there are still segments of our economy experiencing veritable pain. Many workers remain displaced, with an estimated number of at least 3.5 million workers jobless in hospitality and leisure industries. Lockdown restrictions will continue through the winter and possibly spring. But with new, ongoing developments in vaccine creation, supply, distribution, and adoption, as well as potential future fiscal stimulus, an accommodative monetary policy, and improved trade relations, we believe global economic healing will continue.
2021 J.P. Morgan Private Bank Outlook
Our J.P. Morgan Private Bank 2021 Outlook discusses the five key forces investors should consider this New Year. They are the virus, global policy responses; inflation; equities, and the dollar. These forces should also be considered within the larger context of three key megatrend themes we see shaping years and decades to come: healthcare innovation, digital transformation, and sustainability.
The COVID-19 virus remains an ongoing risk now and likely throughout the year. Many countries and locales still experience targeted shutdowns. Remote schooling continues, many businesses remain closed or operating at less than 50% capacity, and hospitals are still struggling with a deluge of patients. The new virus variants from the U.K. and South Africa also present an added risk. However, pharmaceutical companies have begun releasing vaccines into the broader markets and demonstrating promising signs of their efficacy with the current and new variant strains.
Moreover, as vaccine distribution increases and adoption becomes more widespread, this should have a meaningful impact on business and consumer confidence and spending. However, segments of the population might not receive the vaccine either due to personal choice, logistical challenges, or other supply constraints. That said, our 2021 J.P. Morgan Outlook centers upon the thesis that even without a vaccine, economic growth will continue as personal consumption realigns toward e-commerce, housing, and digital media. This thesis is further bolstered by indicators demonstrating that U.S retail sales have returned to the pre-COVID level. We see this occurring in Europe as well. Inventories and production are increasing, export production from China has rebounded. U.S. Home sales remain robust. We believe that this virus continues to shape and accelerate a larger trend towards improved healthcare innovation and digital transformation.
We witnessed in 2020 an unimaginable global fiscal and monetary response blunt the economic impact of the COVID-19 virus. This response helped provide relief to consumers, businesses, and local and state governments. For the United States, Europe, and some Asian countries, we expect a continued focus on an overall accommodative policy on fiscal and monetary fronts. In the U.S., the Biden Administration and Congress negotiated and passed a 1.9 Trillion dollar relief package. Infrastructure reform is next up on the docket. On the monetary front, the Fed delivered its first monetary policy update of 2021 with little surprises. Chair Powell indicated that the Fed intends to keep rates low and that it is too early to discuss tapering asset purchases.
It is important to note that there will be differences in policy support in certain global regions, which will impact economic growth rates. Growth in Taiwan and South Korea has rebounded and subsequently less dependent upon accommodative policies. The same can be said for China. For example, China is now less dependent upon monetary and fiscal support to buffer any economic gaps resulting from the pandemic. As a result, the country has initiated steps to wind down some of its limited liquidity easing measures and resume focus on limiting fiscal spending to ensure its debt levels remain sustainable. As such, we believe investors will have an opportunity to invest globally in both U.S. and Asian equities and may look to companies participating in physical and digital infrastructure investment, next-generation transportation opportunities, and renewable energy projects.
A key question on many investors’ minds is the rate at which prices may rise given the global accommodative stimulus. The rate of inflation remains hotly debated, and rightly so. Inflation informs central bankers’ view on monetary policy and the directional vector of short and long-term rates. For consumers, rising inflation decreases their purchasing power, causing prices for goods and services to increase, directly impacting our wallets and spending patterns.
In our 2021 Outlook, we believe that rising inflation may not be as much of a risk as previously contented. On the contrary, we see a potential for rates to remain low. For one, employment wages have risen modestly, many workers remain permanently unemployed, and the labor market has room for improvement. We also believe the digital economy lacks some of the system constraints, which typically contribute to higher price pressures. However, this view may change if we witness broad-scale massive federal spending plans pushing prices higher or continuing de-globalization trends driving supply chain disruptions. For now, neither seem to be an immediate risk as companies have been for several years realigning their global supply chains to other countries for efficiency and security. Also, a voting majority in Washington’s legislative branches will need to work in a bipartisan manner to enact major fiscal spending plans.
As such, we expect monetary policy will remain accommodative for the foreseeable future, with rates rising modestly for the next 12-18 months and hovering near 2% in the United States. A modest rise in rates bodes well as it indicates that economic growth conditions are improving. For investors, low rates offer opportunities to pay off outstanding debt, refinance existing residential mortgages, or even purchase a home with residential financing. However, low yields mean that holding excess cash in savings, money that exceeds nine to twelve months of emergency reserves or not allocated to upcoming spending projects will hurt investors. Yields on savings and investment-grade fixed-income neither provide sufficient income nor maintain pace with inflation to protect investors’ purchasing power. As such, investors should consider complementing their allocation with other “income-producing” opportunities and extended credit, such as U.S. high yield, preferred securities, emerging market debt, or expand into different sectors to include real estate and infrastructure, where appropriate and suitable. One new reality resulting from this pandemic is evident: investors will need to “re-imagine” how they view fixed income in their portfolios, reevaluate what they consider are appropriate yields for their goals, and seek expanded opportunities to achieve it.
This mindset shift is necessary for equities, as well. Before the pandemic, investors looked to key financial ratios to ascertain equities and individual securities’ value. Traditionally, analysts looked to key metrics such as price-to-earnings ratios, free cash flow, and enterprise value to sales ratios to determine a stock’s underlying value. Today, these metrics suggest that equities may be overvalued. Our view is quite the opposite. Upon examining the largest companies’ balance sheets closely, investors will note that these balance sheets are leveraged efficiently. There are fewer corporate defaults than the 2008 Great Financial Crisis. Perhaps most importantly, these companies demonstrate strong growth rates buoyed by the mega growth trends underway in digital transformation. Many companies are either technology companies or have become “tech-enabled,” which allows them to capture growth outside of traditional “brick and mortar,” manage balance sheets optimally, and re-orient supply chains more efficiently.
This thesis, espoused in our 2021 Outlook, is buffered with the earnings results from Q4 2020. To date, 81% of reporting S&P 500 companies have beaten analyst estimates. These results are well above the 74% 5-year average and on pace for the highest rate on record. Analysts and companies have been much more optimistic than normal in their estimate revisions and earnings outlooks for the first quarter to date. As a result, expected earnings for the S&P 500 for the first quarter are higher today compared to the start of the quarter. The index is now expected to report the highest year-over-year growth in earnings since Q3 2018 for Q1. Moreover, during the crisis, the Federal Reserve provided liquidity to capital markets, thereby offering structural support even as companies drew on the credit facilities minimally. In a low-interest-rate policy environment, equities appear more attractive to investors as investors receive a higher dividend and price appreciation than traditional fixed income. That said, an unexpected, rapid rise in interest rates is a potential risk to this thesis. However, we believe this risk remains low for now as global economic healing continues and central bankers remain accommodative. Investors looking for value may consider sectors trading at low relative valuations, such as financial and healthcare. These sectors stand to benefit from key megatrends in digital transformation, sustainability, and healthcare innovation. Additional value can be sought in global regions repeating benefits from a faster rate of global recovery include international and emerging market equities.
Lastly, forces driving the United States dollars remain a key consideration this year. A question on most investors’ minds is the likely impact of the dollar weakening or strengthening against other currencies. Investors view the U.S. dollar as a reserve currency and a safe haven investment, meaning investors will flock to securities and currencies they perceive will retain their value and possibly increase during the time of market volatility. We witnessed this in March and April of this past year, as lock-downs ensued and investors moved to purchase dollars. This movement increased the value of the dollar. As the global growth outlook improved in the upcoming months, the dollar value declined, and other currencies gained as money realigned to opportunities with growth potential.
As the risk outlook continues to improve globally, we expect global manufacturing and production to rise, and trade relations improve with key partners. We expect the U.S. dollar to weaken relative to other currencies modestly. This trend will benefit key trading partners and emerging markets where potential opportunities await investors. So what does this mean for investors? Now may be the time to review portfolios to examine potential opportunities to invest in select international and emerging markets. Moreover, investors will want to check how much exposure their portfolios have towards U.S. denominated assets and currencies. Should the dollar decline meaningfully, investors may diversify some risk outside of investments concentrated in U.S. denominated assets.
2021 Key Planning Considerations
With all five fundamental forces shaping this year, investors will need to be mindful of managing volatility, finding yield appropriately, and reaping the megatrends’ benefits underway. How best to do this? Let’s draw on Coach Dungy’s critical coaching insight and approach. First, create a tailored financial plan aligned with your personal goals and life stage. Second, assemble a team of trusted advisors to help navigate this evolving landscape’s complexity and nuances. Third, measure success by how well your team has performed, achieving and executing your priorities and objectives, moving you closer towards realizing your goals.
This guidance is vitally essential to athletes at every stage of their career. For financial planning guidance tailored to players, pre-draft, mid-career, or late-stage and retired athletes, it is best to work with wealth managers focused on and with deep expertise. Rick Barragan, Managing Director & Noah Francis, Vice-President in the Los Angeles J.P. Morgan Private Bank, lead a practice along the West Coast catering exclusively to our sports and entertainment professionals. The typical success denominator recommended for all players centers upon having the best team around them. This includes a wealth manager, business manager/accountant; insurance agent; sports agent; and attorney. With the right team, industry specialists can offer valuable guidance and advice on what is essential to each athlete’s professional wealth plan and priorities at whatever stage in their professional career. Here are some of the key planning considerations Rick and Noah offer their clients.
Pre-Draft & Early Stage Career Players
It is all about financial education for pre-draft and early-stage professional athletes, creating your brand, recognizing your platform, and assembling the right team. At the most fundamental level, it begins with understanding the basics of budgeting, investing, planning, and how to evaluate and maximize business opportunities. Budgeting basics offer vital insights into daily spending needs and habits and how best to facilitate optimal cash management and personal capital reserves. Monies in excess of emergency reserves or upcoming personal spending projects should be allocated into an investment plan to help capture and realize the benefits of long-term compounding growth. Doing so also helps professional athletes identify and select appropriate strategies to capitalize on megatrend opportunities and find yield opportunities to generate additional supplemental passive income streams.
As a corollary, managing debt optimally and strategically is equally essential to facilitate long-term financial health and success. The risk for not doing so may lead athletes to acquire debt at higher interest rates or assume more obligation than their balance sheets prudently warrant. This risk can create long-term problems. At this juncture, a pre-draft and early-stage athlete should look to financial providers with expertise in pre-draft financing opportunities. Such providers will know how to evaluate pre-draft contracts and advise on the appropriate levels of leverage and the optimal type of structure and term.
Lastly, pre-draft and early-stage athletes may want to consider implementing appropriate trusts and insurance strategies to maximize gifting opportunities, optimize tax efficiency strategies for long-term compounding growth, and asset protection to manage unforeseen risk and liabilities.
Mid-Stage Professional Athletes
Many of the key financial planning considerations above apply for mid-stage professional athletes, albeit with some unique nuances. At this stage, professional athletes may begin to form their wealth intent to preserve their wealth and grow it. Rick and Noah stress the importance for athletes to know their liquidity, lifestyle, growth, and wealth preservation goals. This focus includes but is not limited to cash and liquidity management, debt optimization, philanthropic and estate planning, and broader, diversified investment implementation.
According to Rick and Noah, successful athletes maintain sufficient liquidity to manage short-term outflows for expenditures such as tax payments and large purchases. One example is to carry a cash reserve between 1-2 years of annual living expenses. This can be achieved through deposit solutions, cash alternatives, and a line of credit. For excess cash, athletes can direct assets to financial goals that support an athletes’ lifetime cash flow need, including essential and aspirational financial goals, such as fixed income, municipal bond strategies, multi-asset and income-oriented solutions, and tax-aware borrowing.
Wealth preservation will be focused on strategies that support multi-generational wealth by utilizing annual gifting exclusions, lifetime exemptions, charitable gifting, and educational funds for the next generation. An athlete can use balanced or growth-oriented investments, donor-advised funds, 529 educational savings plans, as well as multi-asset investment strategies to facilitate these goals. Lastly, for wealth goals earmarked for long-term wealth creation, athlete-investors can utilize opportunistic and private investments and business ventures to realize these objectives. Some examples include alternative investments, private market investments, and concentrated holdings. The appropriateness of these strategies centers upon each individual’s time horizon, risk tolerance, and overall suitability considerations.
Late-Stage & Retired Professional Athletes
Late-stage and retired professional athletes are at the top of their game, and this stage either looking toward or entering the next phase of their professional careers. Rick and Noah characterize this stage as a time when professional athletes explore the next career stage and participate in outside business opportunities. This guidance may include building a family office partnership, exploring opportunities for community engagement and philanthropic branding opportunities, seeking business advisory guidance to have media and entertainment advice and access to private company deal flow.
Managing volatility, finding yield, and harnessing megatrends comprise a more nuanced and multi-faceted lens at this stage. Nonetheless, it depends on having a strong wealth advisory team to partner effectively and in a coordinated fashion with multiple external advisors. For example, late-stage or retried athletes may look for an advisory team that can partner effectively with their family office advisor. A strong partnership between an advisory team and a family office advisor can facilitate the effective handling of the athlete’s family office banking administration and cybersecurity needs. The partnership may also deliver complex credit strategies tailored to the unique assets and rights the athlete has acquired over their career. The partnership could also assist with philanthropic and board guidance for the effective management of the athlete’s private foundation and gift administration, including estate planning and family board governance. Lastly, access to direct and co-investment opportunities in real estate, non-public companies, and private equity, sourced from proprietary and third-party sources with periodic deals may also be of interest and consideration at this stage.
As 2020 and the start of 2021 have shown us, change, opportunities and risk abound. Sometimes it is foreseen and at a manageable rate, and other times, like during this global pandemic is nothing short of rapid-fire and life-altering. We have key forces still shaping our year and the many risks at the forefront. Our individual, professional, and community lives and norms are changing, and our mindset and how we confront, tackle, and optimize our perspective and response to this rapidly evolving dynamic should as well. The effective execution of offensive and defensive tactics and strategy materialized Coach Dungy’s and the Indianapolis Colts Super Bowl offers a relevant example. But as Coach Dungy writes, “I continued to focus on a goal that was within my control… I never aim for a particular number of games to win, but rather for a team that is as good as it can be and guys who are an asset to the community and good role models.” These are the attributes and mindset that Coach Dungy employs to manifest his team’s collective qualities and win the championship title. Successful investors apply a similar model. They develop a mindset to embrace and optimize performance in any environment, recognize the risks, opportunities, and forces shaping the landscape; surround yourself with the right wealth coaches and experts, and then most importantly, they get in the game. Now, let’s go win it!
This material is intended as a general market commentary and not intended to be a forecast of future events, or guarantee of future results or investment advice. The opinions expressed are those of Yolla S. Kairouz, as of March 15, 2021, subject to change, and may differ from those of other J.P. Morgan employees and affiliates. This material should not be regarded as research or as a J.P. Morgan Research Report. Nothing in this material shall be considered a solicitation to buy or an offer to sell securities, other investments or services to any person in any jurisdiction where such an offer, solicitation, purchase or sale would be unlawful under the laws of such jurisdiction. Any mention of an individual security, investment or strategy is provided for informational and educational purposes only and should not be construed as a recommendation. Outlooks and past performance are not guarantees of future results. The strategies discussed often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice.
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