Don't Panic: A Bull Case for Equities For Southern California Edison Employees

DON’T PANIC

Both stocks and bonds are off to one of their worst starts to the year in history. The S&P 500 Index declined -12.92% through the end of April 2022, and other broad market indices were similarly down double digits. ¹

What’s worse, investors, like those living in Texas or New York, are losing nearly as much on the fixed income side of their portfolios as they are on the equity side. The Bloomberg U.S. Aggregate bond index, a broad measure of domestic fixed income, suffered its largest quarterly loss (-5.93%) since 1980 to start the year ² and is down -9.50% through the end of April. The current environment has left investors feeling like there is nowhere to hide, and even prompted some to exit markets or go to cash, which is why we find it important to discuss this with our clients from Southern California Edison.

Such a rash response could lead investors to miss out on an eventual rebound since historical equity performance post-corrections, as well as strong underlying economic fundamentals, suggest a bounce back in stocks will occur sooner rather than later. If you are unsure about your specific situation, feel free to speak to one of our retirement-focused advisors today !

THE BULL CASE FOR EQUITIES: USING HISTORY AS OUR GUIDE
The S&P 500 fell back into correction territory just 22 trading days after leaving; its fastest re-entry into negative 10% performance since November 2008, during the turmoil of the Great Financial Crisis. ³ The table provided below for our clients from Southern California Edison excludes periods when a correction turned into a bear market, and maps out how the S&P 500 has performed after exiting a correction. Based on data going back to 1928, the S&P 500 saw a median gain of +11.5% after exiting a correction, and an average gain of nearly +14%—rising nearly 77% of the time. ⁴

We'd like to remind our clients from Southern California Edison that a bad start to the year is not always a sign of things to come. 2022 ranks as the third-worst start to a year ever for the S&P 500 Index.

Still, looking at the 10 worst starts shows that stocks tend to bounce back nicely thereafter, up 10% on average. As you can see in the charts provided for our Southern California Edison clients, continued losses in the final eight months are rare, and double-digit gains are more than possible. ⁵

THE BULL CASE FOR MARKETS: STRONG ECONOMIC FUNDAMENTALS
Beyond historical performance supporting a second-half rally in stocks, the critical fundamentals underlying the U.S. economy remain quite strong. Resilient demand, healthy corporate and consumer financial positioning, and rising earnings can act as shock absorbers through the volatility market observers expect to persist in the near- to medium-term.

The initial estimate for first-quarter economic growth showed an unexpected contraction. U.S. real GDP (inflation-adjusted) declined 1.4%, versus +6.9% growth in the previous quarter. ¹ This sharp deceleration was due to a drag from exports, a decline in inventory spending following a sizable increase the prior quarter, and to a lesser extent a contraction in government spending. More importantly, consumer spending, which accounts for nearly 70% of the U.S. economy, continued to grow at a solid pace. Personal consumption accelerated slightly to 2.7% from 2.5% the previous month, driven by spending on services. For perspective, consumer spending grew at an average pace of 2.3% over the past decade. ¹

In another positive sign for the economy, business investment increased 9.2%, the most in a year. Broad momentum in capital spending should persist as companies accelerate their pace of automation and investment amid ongoing labor shortages. Ultimately, consumers are benefiting from an exceptionally tight labor market and rising wages. With pandemic effects fading, we believe consumption will continue to support above-average economic growth this year and would like to remind our clients from Southern California Edison to keep this in mind. Adding one final caveat, economic growth and stock market growth can diverge significantly, as evidenced by the current state of markets.

Importantly, attempting to time the market by exiting existing positions and re-entering a perceived “safer” environment, generally leaves shareholders much worse off. Investors are best served by sticking to a plan, weathering market downturns with smart, risk-adjusted asset allocations, and holding on through the turnaround as the most significant gains are captured

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Economic Definitions
GDP: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure approach measures total final expenditures (at purchasers’ prices), including exports fewer imports. This concept is adjusted for inflation.

Index Definitions
S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bloomberg Barclays US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency
and non-agency).

Sources

1. Bloomberg

2. Sam Goldfarb, “Bond Market Suffers Worst Quarter in Decades,” The Wall Street Journal, last modified March 31, 2022, Bond Market Suffers Worst Quarter in Decades – WSJ.

3. William Watts, “A Brutal April knocked the S&P 500 into its second stock-market correction of 2022,” MarketWatch, last modified May 2, 2022, A brutal April knocked the S&P 500 into its second stock-market correction of 2022 – MarketWatch.

4. William Watts, “S&P 500 exits correction: Here’s what history says happens next to U.S. stock-market benchmark,” MarketWatch, last modified March 30, 2022, S&P 500 exits correction: What history says happens next to stock-market benchmark – MarketWatch.

5. Ryan Detrick, “4 Things You Didn’t Know, But Need To,” LPL Research, last modified May 4, 2022, 4 Things You Didn’t Know, But Need To | LPL Financial Research (lplresearch.com).

With the current political climate we are in it is important to keep up with current news and remain knowledgeable about your benefits.

Defined Benefit Plan: Southern California Edison offers a traditional defined benefit pension plan for employees hired before December 31, 2017. This plan provides a stable retirement income based on years of service and final average pay. The pension rates are adjusted annually, and employees can view their pension benefits through the EIX Benefits portal. Grandfathered employees receive the higher of two lump-sum values if applicable. Cash Balance Plan: The cash balance pension plan is available to most employees. This plan credits a percentage of the employee's salary annually to an account that grows with interest. The interest rates for the cash balance plan are announced yearly, impacting the final pension amount. Defined Contribution Plan: SCE also offers a 401(k) plan with a competitive match. Recent hires can receive up to a 10% match on their 401(k) contributions. The plan includes various investment options, such as target-date funds, asset class funds, and a Personal Choice Retirement Account (PCRA) for additional investment flexibility. Employees can also take advantage of an auto-save feature to gradually increase their contribution rates over time. Additional Benefits: In addition to the pension and 401(k) plans, SCE provides other retirement benefits, such as life insurance, profit-sharing contributions, and comprehensive retirement planning resources.

Wildfire Mitigation and Safety: Southern California Edison has significantly reduced the probability of wildfires associated with its equipment by 75%-80% since 2018. Their 2023-25 Wildfire Mitigation Plan includes measures like grid hardening, installing covered conductors, and enhanced vegetation management to further reduce wildfire risks and improve grid safety (Source: Edison International). Industry Impact: The dismantling of California’s rooftop solar program led to the loss of over 17,000 jobs in the clean energy sector, impacting SCE and other utilities. The policy changes have triggered significant layoffs (Source: Environmental Working Group). Operational Efficiency: SCE is focused on improving operational efficiency and reducing costs amidst evolving energy markets (Source: Intellizence).

Southern California Edison provides stock options and RSUs as part of its equity compensation packages. Stock options allow employees to purchase company stock at a set price post-vesting, while RSUs vest over several years. In 2022, Southern California Edison enhanced its equity programs with performance-based RSUs. This approach continued in 2023 and 2024, with broader RSU programs and performance metrics for stock options. Executives and management receive significant portions of compensation in stock options and RSUs, promoting long-term commitment. [Source: Southern California Edison Annual Reports 2022-2024, p. 115]

Southern California Edison (SCE) has been proactive in updating its employee healthcare benefits in response to the evolving economic and political landscape. In 2022, SCE introduced new health insurance options that offer broader coverage and lower out-of-pocket costs for employees. This move was part of a larger strategy to ensure that their workforce remains healthy and productive amid rising healthcare costs and economic uncertainties. The company also expanded its wellness programs to include mental health resources, recognizing the growing importance of mental health in overall employee well-being. In 2023, SCE continued to enhance its healthcare benefits by partnering with local healthcare providers to offer more personalized care options and preventive health services. These changes were made to address the increasing demand for more comprehensive and accessible healthcare solutions in the current economic environment. Additionally, SCE's commitment to employee health is seen as a strategic investment, helping to reduce absenteeism and improve employee morale and productivity. By prioritizing healthcare, SCE is positioning itself to better navigate the economic and political challenges that impact both the company and its workforce.