Retirement Update – June 2020
- Market volatility continued throughout the month of May as the world continues to deal with the COVID-19 pandemic.
- The equity rally that began in April continued through the month of May, with most indices seeing continued recovery from March lows.
- Pension interest rates ended the month relatively flat, so for many plans, the equity gains would have outpaced liability growth and funded status should have improved.
May 2020 Summary
The ongoing pandemic and associated economic crisis continued into May, with many of the trends we saw in April continuing for a second month. Those trends include a volatile, although rebounding, equity market and pension discount rates that ended the month where they began. The ongoing moves towards economic reopening in Europe and North America continued to support market confidence, and the recent social unrest in the US has so far not done anything to reverse this trend.
The result of these market trends was equity appreciation of 5% – 7% in the US, with somewhat smaller gains internationally. Meanwhile, tightening credit spreads offset some steepening of the US Treasury yield curve. Most pension plans will most likely see a fairly small dip in discount rates from the end of April, with more mature plans seeing slightly larger drops. Discount rates continue to stay around the historic low levels seen at the end of February.
Pension plans with material equity exposure likely experienced funded status improvement in May, as the gains on equity portfolios would more than offset liability losses arising from decreases in the discount rate.
Discount Rates & Asset Returns
After a steep decline in April, discount rates only decreased by another 0.02% in May. Current rates are now down 0.44% since year end 2019 and are 0.91% lower than rates from this time last year. The FTSE pension discount index finished May at 2.78%.
As countries focused on reopening economies, global equities continued to climb. Corporate bonds also posted gains as the Fed committed to more corporate debt purchases including high yield. We also saw credit spreads narrow. Short term Treasury interest rates continued to decrease while long term rates slightly increased.
What’s New at R&M?
Pension Plan Annuity Purchase Update – Q1 2020
Total pension buyout sales totaled $4.5 billion in the first quarter of 2020, a decrease of 6% compared to the first quarter of last year but still only the second time first quarter sales in a given year have eclipsed $4 billion.
Structured Equity can Increase Funded Status – A Successful Investment Strategy for the Past, Present, and Future
Senior Analyst Elliott Brewer and Director James Walton explain how a structured equity strategy can protect funded status and would have performed well in both the 2010’s bull market and the volatile environment of 2020 so far.
Our June FOURcast
- Most global equity and credit markets delivered low single digit returns over the month of May. Large US companies continue to lead the way.
- Measures to contain COVID-19 are being eased in many developed countries. But there is a long road to recovery ahead for most businesses. The success of significant policy support in preventing permanent economic damage remains unclear.
- Having taken a back seat since last year, US-China trade talks are back in focus.
- Given the sharp shock to growth, spike in unemployment, and fall in oil prices, we expect inflation expectations to remain subdued. Significant stimulus may provide modest inflationary pressure when demand picks up.
- With strong competing forces acting on markets at present, we continue to advocate a selective approach to adding to return seeking assets. We favor high quality assets and areas of the market with targeted policy support.
SECURITY INDICES: This presentation includes data related to the performance of various securities indices. The performance of securities indices is not subject to fees and expenses associated. Investments cannot be made directly in the indices. The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL: For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC. Past performance cannot be relied upon to predict future results. River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.