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U.S. Equities Market Attributes August 2021

U.S. Equities Market Attributes July 2021

The Journey to Net Zero

Potential Impacts of Proposed Risk-Based Capital Factors

ETF Transactions by U.S. Insurers in Q1 2021

U.S. Equities Market Attributes August 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

KEY HIGHLIGHTS

U.S. Equities Market Attributes August 2021: Exhibit 1

MARKET SNAPSHOT

"I hope my meaning won't be lost or misconstrued, but I'll repeat myself," as I update the weeks, but it is now the 13th week in a row that the S&P 500 has posted a new closing high (starting the week of June 7, 2021; 27 in that time period), and it has posted 53 new closing highs YTD (tied for fourth, so far, since 1926; the record is 1995 with 77). For the month, the index posted 12 new closing highs in its 22 trading days, so the odd day was when it didn't post a new high; the index was up 2.90% for August. If that doesn't take your "breadth" away, consider that 442 of the S&P 500 issues have gained YTD (average 26.29%), with 248 of them up at least 20% (38.66% average). If you can't gasp that, from the 2019 (pre-COVID-19) close, 394 were up (average 57.51%), and 354 (average 35.96%) if you exclude the 50 that have at least doubled. To be fair to the song, and more importantly the market, "There must be 50 ways to" play this market, including "just slip out the back, Jack, make a new plan, Stan, you don't need to be coy, Roy," just take your profits given we are up 20.41% YTD (after 2020's 16.26% and 2019's 28.88%). And I might as well repeat myself on this one too, "This Market Is Nuts" (from the NYT front page), but if you’re not in it, you're nuts—and most likely out of a job.

The U.S. Senate stayed in session to pass a bipartisan USD 1 trillion (69-30) infrastructure bill, passing it on to the House, as it also passed a USD 3.5 trillion framework bill along party lines (50-49), permitting them to start the debate. The Taliban completed taking control of Afghanistan as the U.S. was leaving, taking the capital city of Kabul and occupying executive offices, as President Ghani left the country. Biden went on national TV and defended the departure, affirming the Aug. 31, 2021, total pullout date. Reports showed people trying to leave the country, as most exits were controlled and limited. On Aug. 26, 2021, two bombs attributed to suicide bombers went off at the Kabul airport, killing 13 U.S. troops (first U.S. serviceperson killed since February 2020, when an agreement for the pullout was reached) and at least 170 Afghans, as the attack was attributed to an ISIS affiliate (which is fighting with the Taliban). The U.S. completed its departure on Aug. 31, 2021, and the market did not react to the situation.

Concern grew that due to the COVID-19 variant, herd immunity may not be reached after 70% of the population is fully vaccinated and may need to be increased; discussed target rates were over 80%. The fight over requiring grade school students to be masked grew, as political beliefs appeared to overpower the issue (or wellness of children). The U.S. Food and Drug Administration (FDA) authorized COVID-19 boosters (a third shot) to medically vulnerable people. The CDC recommended that individuals get booster shots eight months after they received their first shot of either Moderna (MRNA) or Pfizer (PFE). Biden encouraged (starting the week of Sept. 20, 2021) a third booster shot for those fully vaccinated (with Moderna or Pfizer; Johnson & Johnson (JNJ) was still being reviewed), starting eight months after the second shot, utilizing a priority rollout (expected to include healthcare workers, those at risk, the elderly, etc.). Similar to the rollout of the first vaccine shots, this is expected to vary by state (since there is no federal mandate). Later in the month, the FDA officially approved Pfizer's COVID-19 vaccine, changing its emergency use approval to permanent use, and some companies and municipalities moved to require their workers to get the vaccine. Johnson & Johnson said a booster shot (to their one-shot vaccine) resulted in a strong immune response of antibody levels.

The EU recommended that its member states (27) halt all nonessential travel to the U.S. for non-vaccinated individuals, citing the high COVID-19 variant spread; it had added the U.S. to the safe list in June 2021. U.S. COVID-19 vaccinations have surged to an average 898,000 per day from 620,000 at month-end July (900,000 in June and 1.7 million in May), as the Delta variant continued to spread, reaching 280,000 cases per day, up from 67,000 at the end of July. The increase also resulted in many companies delaying their return-to-work schedule and putting back-to-school schedules in jeopardy. Florida remained the epicenter for the Delta variant, as the state continued to set infection records. The vaccine rate in the U.S. (for having at least one shot) reached 70% for adults, as the general eligible population was at 61.7%, with 52.4% being fully vaccinated. Several states (including Louisiana) and areas (including San Francisco) reinstated mask requirements, as California became the first state to require all teachers and staff to be vaccinated or tested in order to return to work, followed by New York City requiring proof of vaccination to enter events, gyms, and restaurants. The U.S. will require all military personnel to be vaccinated by Sept. 15, 2021.

Many companies (Home Depot, McDonalds, Target, Tyson Foods) reinstated their mask requirements, with some companies delaying their return to office (BlackRock, Citigroup, and Wells Fargo, with Amazon delaying into 2022) or requiring vaccinations (Microsoft, United Airlines for U.S.-based employees). On Broad and Wall, the New York Stock Exchange said all people on the trading floor will need to be vaccinated by Sept. 13, 2021.

U.S. Equities Market Attributes July 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

KEY HIGHLIGHTS

U.S. Equities Market Attributes July 2021: Exhibit 1

MARKET SNAPSHOT

It was a good July for investors.  The S&P 500 continued up, which has become the norm, setting new highs along the way.  The U.S. reopening was front and center (along with the sounds of clinging registers and swiping cards at merchants), even as the COVID-19 Delta variant spread dramatically (especially among the unvaccinated).  Globally, however, things were not as good, as the recovery appeared to be on hold (or moving at a slower pace) due to the fourth wave, as countries (including the U.S.) tried to convince people to get the vaccine (markets were one sided YTD, as the S&P United States BMI was up 16.48%, compared with the S&P Global Ex-U.S. BMI’s 6.62%).  France and Italy restricted entry to certain establishments without a vaccine, while the U.K. declared a “Freedom Day” by eliminating restrictions, even as COVID-19 continued to spread in that country, and the Prime Minister was forced to isolate due to exposure.  In the U.S., the CDC updated its recommendations to advise everyone (regardless of vaccination status) to wear masks inside where there may be a risk, with Biden requiring federal employees to wear them, while Los Angeles and New York City are requiring them in schools (starting in September).

For the S&P 500, however, it has been a good year, with some thinking of closing out and going on vacation for the rest of the year—but why do that when so many people (domestic and foreign) are pouring money in (strong inflows) to support stocks?  The award-winning supporting role for the second quarter in a row was played by earnings in the second half of the month, as they easily beat estimates (both on earnings and sales, with an 88% beat rate), while margins remained high (Q2 looks like it will be at 13.1%, which would be a record) and guidance improved (with some footnotes about the Delta variant and supplies), and companies appeared to be able to pass along higher costs to the ever-spending consumer.  For July, the index posted 7 new closing highs (8 in June; 41 YTD); it has posted new closing highs in every month since November 2020 (it missed October but had new closing highs in August and September 2020).  The index closed the month up 2.27% (after June’s 2.22% gain) and up 17.02% YTD (after 2020’s 16.26% gain).

The U.S. proposal for a global minimum tax won the support of 130 countries, as part of an international taxing code change.  The proposal must now be detailed and worked out, with expected difficulties with individual nations attempting to protect their own concerns.

Democrats on the Senate Budget Committee agreed on a USD 3.5 trillion human and infrastructure bill (USD 4 trillion sought by Biden, and USD 6 trillion by progressives in his party), which could pass without Republican support.

In a separate bill, the U.S. Senate voted 67-32 to start working (and voting) on a USD 1 trillion infrastructure deal, which would actually add USD 548 billion more to the existing allocations.  Given the vote and political makeup, the bill is expected to eventually be approved.

The Journey to Net Zero

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Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

INTRODUCTION

The landmark Paris Agreement marked a sea change in the global fight against climate change. More than 190 countries are now committed to limiting global temperature rise and offsetting humanity’s contribution to it. Unfortunately, the current pledges and policies go nowhere near enough. Achieving net zero emissions by 2050 will require far more collective power than policymakers alone can provide. However, a combination of groundbreaking new datasets and index innovation is emerging, enabling investors to play an expanded role in achieving the goals of the Paris Agreement. Cutting-edge developments in Paris alignment, physical risks, and Scope 3 emissions data and the pioneering S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices) provide market participants with the option to align their portfolios with a scenario that may mitigate the most catastrophic climate impacts and at the same time, embark on the journey toward a net zero economy.

A DECLARATION OF IMPORTANCE: CLIMATE RISK IS REAL, BUT PARIS ALIGNMENT DATA CAN HELP US SOLVE IT

We hold these truths to be self-evident: that the climate is rapidly warming due to human activity; that if we don’t act soon, we’ll face certain dire consequences; and, that among these are loss of life, loss of habitat, and widespread destruction. We have a limited window to transition to a low-carbon economy and limit global temperature rise to well below 2°C (preferably 1.5°C) of warming since pre-industrial levels. Efforts are well underway thanks to the Paris Agreement and ratified commitments from at least 190 parties. Groundbreaking new datasets and index innovations are catalyzing an investor-led revolution: to reorient capital flows toward a net zero emissions trajectory by 2050. 

Among these, are the S&P PACT Indices. Compliant with the EU Low Carbon Benchmark Regulation, these indices equip investors with the tools to align with the Paris Agreement and achieve other climate objectives, while remaining as close as possible to the underlying benchmark, targeting broad and diversified exposure. The sophistication of methodology and depth, breadth, and robustness of the underlying S&P Global data set these indices apart.

This is a summary of articles that originally appeared in The Quality Imperative, by S&P Global Sustainable1:

A Declaration of Importance: Climate Risk is Real, But Paris Aligned Data Can Help Us Solve It

Let’s Get Physical with S&P Trucost’s Physical Climate Risk Data

It’s All Within Scope, With S&P Global Scope 3 Data

They have been modified with permission to be republished by S&P Dow Jones Indices.

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Potential Impacts of Proposed Risk-Based Capital Factors

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Raghu Ramachandran

Head of Insurance Asset Channel

S&P Dow Jones Indices

The National Association of Insurance Commissioners (NAIC) regularly updates its regulations. In 2020, the NAIC proposed a more granular set of designations for bonds. The proposed regulations expanded the number of designations from 6 to 20. These proposed designations align closely with the ratings provided by nationally recognized statistical ratings organizations, such as S&P Global Ratings (see Exhibit 1). The proposed expanded factors also add more transparency to the varying degrees of risk within insurers' fixed income securities.

However, the NAIC did not update the risk-based capital (RBC) factors for the proposed designations. Thus, while companies reported the proposed NAIC designations in their 2020 Schedule D filings, the RBC factors remained the same as those in the existing system. The RBC factors will remain the same until the NAIC completes its impact study and releases the final RBC factors for the proposed designations.

Potential Impacts of Proposed Risk-Based Capital Factors: Exhibit 1

When released, the proposed RBC factors will vary for Life and non-Life insurers due to the different statutory and tax accounting treatments. Separate NAIC RBC Working Groups have been working to finalize and assess the RBC factors for their respective segments. A draft set of proposed factors has been released, but the NAIC has yet to formally adopt them (see Appendix). The NAIC plans to implement the proposed RBC factors for 2021 RBC filings.

Using S&P Global Market Intelligence's RBC templates, we assessed the potential impact of the proposed RBC risk factors on the insurance industry. We analyzed the impact of the proposed factors on the asset-level capital charge (R1 for Property & Casualty [P&C] and C-1o for Life) and at the authorized control level (ACL).

The Life industry has been the primary focus of the 20-designation project, given the contribution bond risk to Life insurers' overall RBC profile. Within individual designations, the impact of the proposed factors would be broad. The reduction in AAA/Fannie/Freddie RBC charge would lower the industry level charge by 60%. At the other end, the increase in the NAIC 1.G factor would increase this capital charge by 160% (see Exhibit 2). Overall, the after-tax C-1o charge would only increase by 11.25%—from USD 55.6 billion to USD 61.9 billion. However, the ACL ratio would decrease by 37.3%—from 970.89% to 933.59%. Although the overall impact on industry-level RBC ratios is not material, scenarios at the individual company level could cause the changes to be more than superficial in certain instances.

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ETF Transactions by U.S. Insurers in Q1 2021

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Raghu Ramachandran

Head of Insurance Asset Channel

S&P Dow Jones Indices

INTRODUCTION

While the start of 2021 was not as volatile as the start of 2020, insurance companies still used ETFs actively.  Using quarterly trading data, we analyzed the trades and net flows of ETFs by insurance companies in their general accounts.  Although trade volume and net flows were down from Q1 2020, insurance companies still added USD 3 billion in ETFs to their general account portfolios and traded over USD 15 billion in ETFs.

ETF TRADES

In Q1 2021, U.S. insurance companies traded USD 15.2 billion in ETFs, representing a 38% reduction in the amount traded during the chaotic Q1 2020.  Roughly 66% of the trades happened at the end of the quarter, when both buy and sell volumes spiked (see Exhibit 1).

ETF Transactions by U.S. Insurers in Q1 2021: Exhibit 1

As of year-end 2020, only one-third of ETF holdings were Fixed Income ETFs.  However, in the first quarter, a little over half of ETFs traded were Fixed Income ETFs (see Exhibit 2). 

ETF Transactions by U.S. Insurers in Q1 2021: Exhibit 2

In the Equity space, Large Cap Equity dominated.  In Fixed Income, insurance companies once again concentrated their trades in Investment Grade Fixed Income (see Exhibit 3).

ETF Transactions by U.S. Insurers in Q1 2021: Exhibit 3

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