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Monthly Perspective | December 2020

16 December 2020

Geremy van Arkel, CFA® | Principal


Geremy van Arkel, CFA | Director of Strategies

As I drive down empty streets past empty restaurants on the way to my empty office tower, I have frequently found myself asking, “How is anyone making any money these days?”. I have said this so many times this year that it has become a running joke between my colleague Cliff Stanton and me. I text him something along the lines of, “I just watched a football game with no fans. How is anyone making any money?” or, “Another 700,000 people lost their job last week. That sounds like over 50 million people at some point this year lost their job. How is anyone making any money?” To these texts, Cliff always replies, “People don’t make their money at work anymore – they make money in capital markets, dummy.”  Oh, thank you for reminding me of how the economy now works.

And Cliff is correct: capital market prices are way, way up. November was a great two years, meaning investors could have earned upwards of two years’ worth of expected returns in some markets last month. The significant news: a resolution to the election and positive vaccine news (albeit skyrocketing COVID-19 cases). While the world wrestled with some form of renewed shutdowns, investors gave up on insisting that it is a bad thing. Europe, as an index, experienced what might be its best return in history – and this occurred while operating under economic shutdowns. In the logic of the new economy, bad news is considered good news, because the worse the economic news, the greater the likelihood of a bailout or stimulus.

Unlike in 2008 when stimulus and bailouts were so contentious that they helped propel both the Tea Party and the Occupy Wall Street movements, this time around it’s all in, with all in. How many times this year have we heard the comment, “The market drifted sideways today as talks of further stimulus stalled?” The common belief is that stimulus and bailouts lead to higher asset prices. But, this time around, the term “moral hazard” hasn’t even been uttered.

Yet, there is something quite unique about COVID-19 that has not only caused investors to react in an extremely bullish manner and has also made consumers blow up their wallets. And just like the pandemic itself, the consumer reaction, too, is a global phenomenon. Buried deep in the Factset S&P 500® earnings report is this nugget: “If the Hotels, Restaurants, & Leisure industry were excluded, the Consumer Discretionary sector would be reporting year-over-year earnings growth of 36.0% for the third quarter…. The other seven industries in this sector are reporting double-digit (year-over-year) earnings growth, led by the Automobiles (74%), Multiline Retail (65%), and Internet & Direct Marketing Retail (45%) industries.”

Wait, what?

That is staggering earnings growth due to consumer spending! While consumers may or may not be making money at work, they sure are spending it.

For most industries and sectors, corporate earnings are excellent[1].


It is remarkable how well the global economy has performed in the face of all that unfolded this year. I am not sure that we can simply credit consumer spending and rising asset prices to just the Fed or the bailouts. Instead, it could well be viewed as a true testament to the strength of the global economy and the will of investors and consumers. It’s almost as if investors and consumers fought their way out of the economic hole. Our main complaint way back in 2019 was that asset prices were rising rapidly in the face of a generally slowing economic backdrop and stagnating asset class earnings. Then along came COVID-19, which in itself caused a stimulus-like reaction. It’s almost as if COVID-19 was the stimulus that the global economy needed to kickstart it.


Now that is one weird statement.


Is this universal bullish reaction the last gasp of how investors “want” the world to work? Or did we bridge the economic hole with pure willpower? Now that the tide of asset prices is high and we have kickstarted a new era, are there smooth seas ahead?


For now, the will of investors has spoken, and that will was to lift the capital markets – or what I call “to fiercely defend asset prices.” So far, so good. Consumers are spending like never before, earnings reflect the spending, and the phenomenon is global. A bridge over the giant economic hole from earlier this year has not only been crossed, but we whistled and danced along the way.  If I were to be a misanthrope and scratch at the scab of the way things should be, I might harp on such a question as, ”If not under the conditions of this year, what would cause investors or consumers to ever be cautious again? Maybe there simply isn’t any more risk involved in investing.”


But for now, grant me the serenity to accept the way things are. After all, the way things are is quite remarkable and the economic outcome of the year simply couldn’t have been any better. Happy, carefree Holidays to all.

Capital Markets Overview

Clifford Stanton, CFA® | Director of Investments

The extraordinary elixir concocted this November wasn’t as much for large turkey-themed family dinners, but one for stocks and markets. List of ingredients included:

  • Robust Manufacturing Purchasing Managers’ Index (PMI) readings from around the globe,
  • 3Q Eurozone GDP that came in well above expectations (12.7% vs. 9.6%),
  • Solid improvements in earnings estimates for Emerging Markets,
  • A record high in Chinese industrial profits,
  • A few doses of ebullient vaccine news, and
  • A dash of renewed hope for additional stimulus here in the good ‘ol U. S. of A.

Oh, and you might have heard that we had an election.

Stock market breadth exploded, with more than 90% of S&P 500 constituents surpassing their respective 200-day moving averages, while short interest in the median S&P 500 stock fell to at least a 20-year low. All of this took place while the S&P 500 gained almost 11% and value stocks outperformed their growth counterparts by over 300 basis points. Small cap and international developed stocks fared even better, with the Russell 2000 advancing by approximately 18.4%, and the MSCI EAFE Index returning right around 15.5%. Emerging markets trailed, printing a pedestrian return of slightly less than 9.3%.

Interest rates, as measured by the 10-year Treasury, barely moved, declining from 0.88% to 0.84% by month end. The Barclays U.S. Aggregate returned almost 1.0%, propelled by credit. Duration actually paid off despite modest moves on the long end of the curve, as the Barclays U.S. Treasury Long Index gained about 1.2%. Junk bond yields marched steadily toward new all-time lows, and the Credit Suisse HY Index returned a little over 3.7%. Commodities continued to move higher on constructive economic news, and the Bloomberg Commodities Index advanced by a little more than 3.5%.

Strategy Overview

As our clients know, Frontier develops and manages strategies with a keen eye on risk and a focus on the long-term. We dynamically manage exposures month-to-month, and base our actions on ever-changing fundamentals and valuations. The resulting asset allocation changes are typically more evolutionary than revolutionary. November fit this profile: Frontier made modest additions to emerging markets within the Balanced strategy, and to small cap stocks in Growth & Income. Both purchases were funded by the sale of long-term Treasuries. Within our alternatives offerings, our Absolute Return Plus strategy decreased commodity and global value exposure in favor of emerging equities and Treasuries.

Post trading, our strategies remained more conservatively oriented relative to their long-term strategic allocations. To be clear, though, the more aggressive strategies certainly carry significant equity risk. Global Opportunities, as an example, had 91% in equities and another 5% in REITs at the beginning of the month. There is risk to be had in our strategies for those desiring that kind of exposure.

For the month as a whole, our overweight exposures to domestic small caps within our more conservative strategies, and to international small caps within our more aggressive strategies were beneficial. However, the overweight to emerging markets in the more aggressive strategies hurt relative performance despite strong absolute returns for the asset class. Underweight positions in international large cap stocks and to equities overall was detrimental, given the massive outperformance of stocks over bonds.

Lastly, given the rally in risk assets, our long-term return expectations for all equity classes decreased as we entered December, as did the expectation for high yield bonds. The outlooks for high quality bonds and long-term Treasuries improved but remain at unattractive levels and are held primarily for risk reduction. Happy Holidays to all, and we hope to see you in person in the new year!



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It is generally not possible to invest directly in an index*. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
S&P 500®
Represents .S.U.S. large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
S&P Growth
Constituents are drawn from the S&P 500. Growth stocks are measured using three factors: sales growth, the ratio of earnings change to price, and momentum. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments.
S&P Value
Constituents are drawn from the S&P 500. Value stocks are measured using three factors: the ratios of book value, earnings, and sales to price. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments.
Measures international equity performance. It is comprised of the MSCI country indexes capturing large and mid-cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets
Measures large and mid-cap equities across 23 Emerging Markets (EM) countries which include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
Barclays US
Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital
Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
Credit Suisse Frist
Boston High Yield
Represents domestic non-investment grade corporate bonds. Floating-rate and convertible bonds and preferred stock are not included.
Bloomberg Commodity
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.
Benchmark Composition. The Benchmarks for the Long-Term Growth, Growth & Income, Balanced, Conservative and Capital Preservation strategies are combinations of the Wilshire 5000 Total Market Index, MSCI All Country World ex .S.U.S. Index, Bloomberg Commodity Index, HFRX Global .F.H.F. Index, Barclays .S.U.S. Aggregate Bond Index and 3-Month T-Bills. The blends of the indices are currently.
Capital Preservation Bench
Conservative Bench
Balanced Bench
Growth & Income Bench
Long-Term Growth Bench
Wilshire 5000
MSCI AC World ex US
Bloomberg Commodity
HFRX Global HF
Barclays US Agg
3M T-Bills
Benchmarks for the Global Opportunities, Focused Opportunities, Absolute Return Plus, Absolute Return and Tax-Sensitive Short Term Reserve portfolios are the MSCI World, S&P 500, HFRX Global HF, HFRX Absolute Return and Barclays Municipal 3-year Indices respectively.
 The “Benchmark” is provided as a tool to help you assess the value of Frontier’s strategy management decisions. The benchmark provides a standard against which to compare the performance of your account. The Benchmark is not actively managed and contains a limited number of asset classes. Each Frontier strategy consists of actively managed mutual funds, contains more asset classes than the Benchmark and its asset allocation is adjusted periodically. In the case of indices that include foreign securities, index returns are still presented on a total return basis but will be net of foreign taxes on income generated by these securities.
Glossary of Indices for Frontier Benchmarks.
Barclays Capital US Aggregate Bond: Measures the performance of the US investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in US dollars and must be fixed rate, nonconvertible and taxable.
Bloomberg Commodity: This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.
HFRX Global Hedge Fund*: Represents the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The index is weighted based on the distribution of assets in the global hedge fund industry. It is a trade-able index of actual hedge funds.
MSCI All Country World ex US: The MSCI ACWI ex-USA is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI ex-USA consists of 44 country indices comprising 23 developed and 21 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom excluding the United States. The emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Three Month T-Bills: 3-Month T-Bills are a short-term debt obligation backed by the US government that serve as a proxy for money market instruments.
Wilshire 5000 Total Market: The Wilshire 5000 Index is an unmanaged individually market capitalization weighted index that represents the total dollar value of all common stocks in the US for which daily pricing information is available. The index consists of US-headquartered and traded issues, including common stocks, REITs, and limited partnerships, and excluding bulletin board issues.
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