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Home > In-Focus Features > Crummy 2019 Earnings toThunder Back This Year, Seers Say. Uh, Really?

February 4, 2020

Crummy 2019Earnings to ThunderBack This Year,Seers Say. Uh,Really?Unexciting economic growth andthe Chinese virus are among the illsthat could ruin predictions of anelectrifying rebound.

Art by Tim Bower

Wow, a blitz of good corporate earnings ison the way. Or not. This buzzy prospectmay end up grounded out.

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

https://www.ai-cio.com/in-focus/market-drilldown/crummy-2019-earnings-thunder-back-year-seers-say-uh-really/ 2/19

Sure, to listen to analysts, corporate

earnings are due for a turnaround this

year after a punk 2019. Analysts, pointing

to positives like the truce in the US-China

trade war and still-strong American

consumer spending, figured that the

profit picture will grow brighter as 2020

progresses.

But will it? What would prompt

companies to log appreciably better

earnings after 2019’s blah performance?

For last year’s fourth quarter, with almost

half the S&P 500 companies already

reported, the consensus is for a slightly

down showing (negative 0.3%), which

makes last year basically flat, according

to FactSet Research.

Regarding 2020, though, the S&P 500

outlook becomes downright flashy, with

earnings increases accelerating every

quarter, starting with a 3.7% gain in the

first period and ringing out the finale at a

13.2% rise, for an overall yearly tally of

9.1%.

Quite a comeback, considering that US

economic growth slowed to 2.3% in 2019

from 2.5% the year before. Forecasts for

2020 are similarly unspectacular. What’s

more, optimism about a better 2020 seem

problematical if the growing coronavirus

in China manages to choke off the output

of the world’s second largest economy.

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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Looking at the turnaround projections,

William Dellwiche, a Baird investment

strategist, commented, “That’s a whole lot

of optimism without a lot of optimism in

the economy.” Analysts tend to be

sanguine about the future as a rule, he

said, and become less so as time goes by,

meaning some of these rosy scenarios

might become less alluring. “It’s a big

dance.” We’ll only really have a good idea

at this year’s mid-point, he added.

Earnings Ups and Downs

The earnings story since the Great

Recession has been erratic, Yardeni

Research data indicate, as the US and the

world climbed out of a slough of despond

amid fears that the bad times would

reappear soon.  In 2010, the first full year

after the recession, a nice 40.3% increase

showed up. After that, earnings growth

moderated, with a string of mid-single

digit boosts.

Then, profits fell into a pit again during

the 2015-16 mini-recession. This slump,

which technically did not constitute an

actual recession as gross domestic

product didn’t quite turn negative,

resulted from a crash in oil prices and a

Chinese economic slowdown

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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The picture improved by late 2016 and

into 2017, the first year of the Trump

Administration (earnings up 11.8%), with

talk of lighter business regulations and

corporate tax cuts. The tax reduction, to

21% from 35%, proved to be a bonanza

for US companies when it took effect in

2018. Earnings expansion swelled 22.7%.

So, that made the 2019 fall-off more

disappointing. Many market observers

label the 2018 jump as a “sugar high,”

pleasing yet temporary as a general

economic unease took hold. While the

long-term effects of the tax reduction

remain debatable—the new law did make

US tax rates more competitive with those

of foreign competitors—it hasn’t

provided much fuel lately.

Some reports during the current earnings

season look pretty good. Apple, for

instance, saw fourth-quarter profits

return after a tumble in iPhone sales,

posting $22.2 billion amid record sales

that included renewed interest in the

iconic smartphones. The unknown here is

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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China’s situation. China accounts for

almost a fifth of Apple’s revenue and

assembles most of the iPhones, iPads and

Macs it sells all over the earth.

The Case for Profit Pessimism

Virus scares have harmed stocks during

the past two decades, with the S&P 500

dropping between 6.9% and 12.9%,

depending on the epidemic, a Citigroup

report found. What’s frightening about

these outbreaks is that they might

become Black Plague-like scourges that

kill millions and slam the world economy,

as happened in the 1918 Spanish flu

outbreak. 

The last time China suffered a virus

upheaval was in 2003, when SARS, or

severe acute respiratory syndrome,

sickened almost 90,000 and killed 774.

But China at the turn of the century was a

much smaller player on the global

economic scene. The international impact

of SARS was small and fleeting.

Now, the landscape has changed. China is

a hub of worldwide manufacturing, a

vital link in the global supply chain, and a

huge buyer of goods and services that

other nations rely on for sales. If it

remains closed for business, with many

work sites silent and air travel from

abroad slashed, the damage could

become far worse.

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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More broadly, the GDP outlook for major

developed countries, which are the US’s

main trading partners, is hardly soul

stirring. For Deepak Puri, CIO Americas at

Deutsche Bank Wealth Management,

2020’s estimated earnings “rebound

seems unrealistic, given the expected

continuation of the macroeconomic

slowdown.”

The International Monetary Fund has

projected 2.4% GDP growth this year for

the US, in keeping with the country’s ho-

hum post-recession record. The IMF has a

similarly uninspiring view for the rest of

the developed world, with 1.2% projected

for Germany, 1.4% for Britain, and 0.5%

for Japan. The European economy has

slowed markedly, with the 28 countries in

the European Union expanding only 0.1%

in the fourth quarter, versus the previous

period.

A majority of CEOs, 53%, forecast a drop

in the economic growth rate for 2020,

according to consultants PwC. That’s the

highest pessimistic score since the

consulting firm started asking this

question in 2012. In 2019, 29% of CEOs

expected a decline in the pace of

economic growth; in 2018, it was 5%. To

be sure, the 2020 survey 1,600 CEOs from

83 countries answered before the

announcement of the phase one deal

halting the Sino-American trade war.

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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One worry CEOs have is rising wages due

to a tight labor market, with a mere 3.5%

unemployment rate in the US. Wages

increased at a 3.7% clip last month,

almost triple the raises granted 10 years

before. “Corporations are getting

squeezed with wages,” Baird’s Dellwiche

said. “And wages are outpacing

productivity.” Indeed, the most recent 12-

month increase in productivity, ending

September 30, was 1.6%.

A lot of the earnings heroes lately are

tech giants like Apple. This group tends to

score well in the profits arena, with the

likes of Amazon and Microsoft turning in

strong reports recently. Financial services

are having a good time these days, too.

JPMorgan Chase announced a 21%

earnings bump. Even long-suffering

General Electric managed to turn in good

numbers for a change.

Alas, the motley crew of earnings

laggards is taking the shine off these

stars. Chief offender: Boeing, with its

ongoing agony over the grounded 737

Max, its top product. The plane maker

last week reported its first loss since 1997,

what with the return of the MAX delayed

until mid-year, if not later.

Meanwhile, the oil patch is suffering

thanks to low crude prices. Industry

leader Exxon Mobil’s earnings were

down 5% in the last quarter.

Manufacturing is another problem area.

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

https://www.ai-cio.com/in-focus/market-drilldown/crummy-2019-earnings-thunder-back-year-seers-say-uh-really/ 8/19

The sector contracted for the fifth month

in a row as of December’s end. Industrial

conglomerate 3M, which makes

everything from Post-Its to power cables,

suffered a net income dip of 28% last

quarter. 

The Case for Bottom Line

Buoyancy

If the past is any guide, the coronavirus

should peter out before inflicting any

lasting impairment to the world

economy. “A virus like this will last three

to four months, as people in China hide in

their houses,” said Doug Foreman, CIO ofDoug

Kayne Anderson Rudnick Investment

Management. “But it’s transitory.”

To John Augustine, CIO of Huntington

Private Bank, the virus likely will shave a

half-point off S&P 500 earnings growth

this year, which should end up rising

8.5%. “Earnings and the economy will

pause, then come back,” he said.

Augustine said the SARS virus “made us

lose a few months, then we recovered

that.”

In addition, there’s the economic spur in

the US and abroad from central banks.

After hiking interest rates after a decade

at close to zero, the Federal Reserve did a

U-turn last year and lowered three times,

and also began buying assets again,

known as quantitative easing, or QE. “You

won’t see them going higher in 2020,”

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

https://www.ai-cio.com/in-focus/market-drilldown/crummy-2019-earnings-thunder-back-year-seers-say-uh-really/ 9/19

said Brian Kessens, a portfolio manager

at Tortoise, noting that a reelection-

minded President Donald Trump has

pressured the Fed to bring them down

even more. “That’s a big stimulus.”

At the same time, the European Central

Bank has pushed rates further into

negative territory and also revived its QE

program.  In fact, the IMF announced that

global growth in 2019 and 2020 would be

0.5 percentage point lower without the

central banks’ help. And Erica Bergsland,

senior vice president at Securian Asset

Management, noted that an easing

monetary policy takes a while to kick in,

hence its full effect has yet to be fully

realized.

Despite some remaining headwinds,

emerging markets nations should

generate decent GDP improvements in

2020, according to the IMF, which expects

3.3% global growth, compared to 2.9%

last year. EMs should be up 4.6% this

year, the agency believes. Makes sense:

Emerging nations compose an increasing

share of the global economic pie.

Absent a recession, “beaten-up sectors,

like energy and industrials, are likely to

see a rebound in 2020, even without a big

upturn in economic growth,” observed

Securian’s Bergsland. The reasoning is

that so-so economic growth might be

sufficient to stabilize such laggards, and

any hint of better earnings will appear

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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SHOW COMMENTS

strong because 2019’s comparable

readings were lousy.

Aside from the recent price slides from

virus heebie-jeebies, the stock market has

taken the rocky earnings of 2019 in

stride. If 2020 doesn’t live up to its hype,

that market sunshine may dim.

Related Stories:

3rd Quarter Earnings Are Down, but not

as Much as Expected 

Analysts: Earnings Will Improve in 2020

The S&P 500 Keeps Singing the Sour

Earnings Song

Tags: Boeing, coronavirus, earnings,

FactSet, Federal Reserve, GDP, S&P 500

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Home > In-Focus Features > How to Transform anInvestment Process

January 30, 2020

How to Transforman InvestmentProcessCIOs discuss moving the decision-making process from a board- orconsultant-driven one to one that isstaff-directed. 

Art by Dalbert B. Vilarino

Tim Barrett started as chief investment

officer of the $2 billion Texas Tech

University retirement system about seven

years ago with a mandate: reshape the

system’s investment process from a

board-driven one to one that is staff-

directed. So imagine his surprise when

the effort, including winning the

investment committee and board of

regents’ buy-in, ended up taking, oh,

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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about a year. “This is a huge

transformation,” says Barrett. “If the

process hasn’t been set up before, it’s a

big change for any institution.”

Multiple models exist, of course, for how

investment processes are shaped. In

some places, the board basically makes

the final decision about such issues as

asset allocation and the hiring and firing

of managers. In others, much of the work

is done by consultants or OCIOs. Then,

there are others where the board

assumes a more hands-off role, with

responsibility for areas such as oversight

and resource allocation, and puts the CIO

in the driver’s seat.

But, as Barrett can testify, no matter how

enthusiastic the board may be, CIOs can

expect the transition to be slow and often

unwieldy. “When board members are

used to pulling the levers, to put it in the

hands of your staff—it’s difficult,” says

Barrett.

That’s not to say having a consultant

doesn’t make sense in many cases.

Smaller organizations with less-complex

portfolios and staff-thin resources, for

example, can get access to investment

strategies they couldn’t otherwise tap.

Global OCIO assets were close to $2

trillion in 2018, according to Cerulli;

assets in the US grew 7.8%. “At a bigger

portfolio, you’re able to fund more

esoteric options than at a smaller one,

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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which is more likely to focus on more

traditional investments,” says Alyssa

Rieder, CIO of CommonSpirit Health. Plus,

a consultant with multiple clients might

be able to negotiate lower fees with

accounts than a one- or two-person

investment staff could.

Reasons to Make the Move

Still, there are lots of reasons to change

an investment process to a system

controlled by the CIO and investment

team. A case in point is CommonSpirit,

which was formed by a 2019 merger

between Dignity Health and Catholic

Health Initiatives. Rieder was hired in

2011 as CIO of Dignity Health, where she

worked with a consultant who had

handled investments for many years. She

describes the process as a hybrid staff-

consultant one. Over the next six or so

years, as assets grew, she built up an

investment team to about 10 staffers—

including staff from Catholic Health—

and, last year, stopped working with the

consultant. The portfolio grew from

under $5 billion in 2011 to over $11

billion just before the merger; assets are

now $22 billion.

As for changing from a board-directed

process, top of the list is a need to allow

for speedier and more-informed

decisions. If a board meets, say, four

times a year, and CIOs seek more-

sophisticated strategies, like direct real

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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estate or co-investments, waiting for

board approval can undercut potential

performance. “A GP calls you up and says,

‘I need to know your decision by next

Monday,’ but the board isn’t meeting for

another week—If you don’t have the

authority, you’ll have to pass on that

opportunity,” says David Kushner, a

partner in Global Asset Management

Consultants and former CIO of Los

Angeles County Employees Retirement

Association (LACERA) and San Francisco

Employees’ Retirement Association.

Infrequent meetings also lend themselves

to being hijacked by a few forceful

personalities. “You end up relying on the

strong opinions of one or two board

members who typically tend to sway

decisions,” says one former CIO.

According to some industry observers,

the trend towards a staff-driven process

is especially pronounced in certain

sectors. “In endowments, I see a

monumental shift in this direction,” says

Barrett. That’s largely due to the

increasing complexity of factors affecting

decisions. According to current and

former CIOs, board members don’t have

the time or inclination to stay on top of

everything from the Federal Reserve’s

latest moves to the state of the balance

sheet and trade relations with China,

much less tracking the progress of

managers.

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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The move from an investment process

where the board has manager hiring and

firing discretion is most problematic

among public pension plans, according to

many accounts. For one thing, they tend

to have non-finance experts on their

boards. Plus, there’s also a tendency for

board members to be reluctant to give up

some of the perks. “All too often, board

members like to feel they need to be in

control,” says one industry expert. “If not,

who’s going to take me out to play golf

and nice dinners?”

The Slog

These changes generally happen when

the board has already made the decision

to take the step. But the task can be a slog.

“It’s an iterative process that takes a lot of

work and buy-in,” says Barrett. He was

hired in 2013 as CIO after stints as

Eastman Kodak’s director of pension

investments and San Bernardino County

Employees’ Retirement Association’s CIO.

He was given the task of building up an

investment team, which now has nine

people, and creating a staff-driven

process. What he discovered was, “You

have to sell your vision across multiple

constituencies,” he says.

That involved many discussions over

many months with the investment

committee to hammer out policies and

strategies that often were much more

complex than previous ones. Often it

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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required education sessions going step-

by-step through each part of the proposed

portfolio. Once one section was finalized,

then they’d tackle the next. “When people

aren’t used to derivatives and portable

alphas, it’s a huge undertaking to explain

how all that works, how it will be

managed, why it’s safe,” he says. Finally,

when the process was completed, Barrett

had to sell it to the board of regents,

though in considerably less detail.

While the CIO had the authority to do

things like hire and fire managers and

determine investment strategies, Barrett

decided the most persuasive approach

was to make presentations to the board

that included a summary of

recommendations. “We pitched everyone

the old school way,” he says. There have

been only two or three times when the

board vetoed a proposed strategy,

according to Barrett.

In some cases, it’s comes down to reality

vs. theory. One former CIO says that the

board of his organization had authority

to hire and fire managers as well as

strategic asset allocation decision-making

authority. But all recommendations were

made by the staff and almost always

approved by the board, which usually

paid close attention when only the

biggest managers were suggested. Plus,

the board handed over responsibility for

the hiring of certain alternative

investment categories, partly because

2/20/2020 Crummy 2019 Earnings to Thunder Back This Year, Seers Say. Uh, Really?

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board members knew they lacked the

necessary expertise to evaluate those

choices.

Building a Portfolio and a Team

As for whether or not to stick with the

existing portfolio, at least in the case of

consultants or OCIOs, CIOs often decide

against starting from scratch when they

determine investment performance has

been strong enough. In 2015, Stefan

Strein joined the Cleveland Clinic, which

had been working with an OCIO since

2009. By 2017, the investment office made

the full transition away from the OCIO.

But Strein decided to transition the

portfolio intact, while going through an

underwriting of each manager and

strategy to decide what would stay. Assets

are now around $12 billion, up from

about $8 billion when he started.

But, Strein still faced the task of building

a team from scratch. It took 18 months to

organize the investment office, create job

descriptions, and hire his investment

team, which now includes 12 people. To

make sure he had a wide array of

expertise, Strein brought on staff from a

variety of sectors, from endowments and

insurance companies to health care

systems and family offices. “We

borrowed the best practices from all

those organizations,” he says.

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SHOW COMMENTS

Tags: Alyssa Rieder, Catholic Health

Initiatives, cio, CommonSpirit Health,

investment process, Los Angeles County

Employees Retirement Association, OCIO,

Tim Barrett, transition

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