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Key Private Bank Investment Briefing Notes

Monday, 9/28/20

General Takeaways:

The Supreme Court nomination process has begun. President Trump has nominated Amy Coney Barrett. In recent history, the confirmation process has taken about 74 days on average to complete. There are currently 35 days until the election and 97 days until the next Congress begins on January 3rd. Republicans will be working to secure a confirmation by or within these two dates.

The percentage of countries where COVID-19 is expanding will likely increase as we enter flu season. Net new COVID hospitalizations will be an important metric to track – hospitalizations have already begun to tick higher in the United States. That said, ICU bed capacity is not currently a concern in any US state.

Despite a lack of a Phase 4 stimulus deal, consumer confidence has continued to improve over the last several weeks, albeit off very low levels. The improvement has been gradual but is still an important indicator.

The first presidential debate is tomorrow in Cleveland. Six topics: 1) the Trump and Biden records; 2) the Supreme Court; 3) COVID-19; 4) the Economy; 5) Racial Equality and Violence in our Cities; 6) The Integrity of the Election.

Chris Wallace of Fox News will moderate. 84 million viewers tuned in to the debates in 2016, with possibly over 100 million tuning in this year.

According to Cornerstone Macro, there are three most likely scenarios coming out of the election. 1) Democratic Sweep: a modest negative for the overall market. 2) Biden win / GOP Senate: marginally positive. 3) Status quo: neutral. Overall, Cornerstone is not expecting a large amount of volatility around the election with stocks likely to be range bound between now and November 3rd.

On the other side of the coin, frequent traders are expecting a large amount of volatility around the election. Implied volatility in November and December is sitting at very high levels (note that high implied volatility is one reason that it is very expensive to hedge portfolios around election season).

Investor sentiment relative to the breadth of economic data is at an all-time low. Economic data has generally been improving off the March lows, but many investors remain skeptical. In this environment, Key Private Bank continues to believe that major portfolio shifts in anticipation of the election should be avoided, and that sticking to a long-term plan remains the best course of action.

On Tuesday, 10/6/20, Key Private Bank will be holding another national client call. Our guest will be Phil Orlando, chief equity market strategist for Federated Hermes. Phil is the head of Federated Hermes’ Client Portfolio Management team and has over 40 years of industry experience. George and Phil will be discussing the elections and possible investment implications in detail.

Equity Takeaways:

After bouncing last Friday by about 1.6%, the S&P 500 continued higher this morning by another 1.25%. The tech-heavy Nasdaq Composite rose over 2% on Friday and is up another 1.5% this morning. Small caps are also participating, up about 2% this morning. All 11 major sectors are in the green in early trading.

Last week marked the fourth straight weekly decline in the S&P 500. This is only the ninth time we’ve had four consecutive weekly declines since the 2009 bottom. The majority of these previous nine instances have marked an interim trading low. 2011 marked the last decline of more than four consecutive weeks.

Coming into September, the market was stretched higher and was above its 200-day moving average by an unusually large amount. The decline of the last few months could be the pause that refreshes the market for another move higher.

In addition, the put/call ratio has increased recently, which is a sign of reduced speculative call buying by investors. This type of reduced speculative activity could be a contrarian bullish signal.

Fixed Income Takeaways:

The tone in the credit markets has improved this morning. We are expecting about $25B of new issue supply this week, which should push us into another record month for issuance at over $150B of new supply for September.

With volatility subsiding, investors that may have sat on the sidelines last week are likely preparing to return to the market this week. Investment-grade (IG) corporate bond spreads were 4 basis points (bps) wider on Friday and 10bps wider on the week. This movement is the largest amount of widening we’ve seen in quite some time.

The municipal bond new issue calendar this week contains several new issues from sectors that have been under stress, including healthcare properties and airports. It is a healthy sign for the market that these types of deals are returning.

Friday, 9/25/20

General Takeaways:

Earlier this week, President Trump suggested that he would not commit to a peaceful transfer of power in the event of an election loss. This was met with strong rebuke from both sides of the political aisle including many high-ranking members of his own party.

The consensus among Superforecasters (via Good Judgment, Inc) is that a concession in the election will not occur until mid-November. These forecasters are also expecting the Democrats to take control of both the House and Senate and are not expecting a new federal fiscal stimulus package until 2021.

The election year of 2000 could be an interesting comparable to the current situation. The S&P 500 peaked on 8/31/20 before declining about 6% into election day. On 12/12/00, the Supreme Court ruled to resolve the election. The decline from 8/31/00 until the Supreme Court ruling was about 11%, a relatively "normal" correction.

Major difference between 2000 and today – in 2000, the Federal Reserve raised interest rates 100 basis points (bps) early in the year. In addition, the yield curve was inverted during this period, indicating tightening liquidity.

This backdrop is not prevalent today whatsoever and is one of the reasons why we are recommending that investors refrain from making significant strategic shifts to their portfolios.

The housing market continues to rocket higher, providing a strong tailwind to the economy, with both existing and new home sales at levels not seen since the 2008 Great Financial Crisis. A strong housing market also provides a "wealth effect" for homeowners, with US consumer net worth returning to all-time highs.

Improvement in economic data continues to slow but not stall out. Initial unemployment claims were 870k last week versus 866k the week prior. Continuing claims fell less than expected, to 12.58M.

Purchasing Manager Index (PMI) updates: the Markit US Composite PMI was 54.4% in September – the Future Output Index was 57.7%. Both readings are slight declines from the previous month but remain above 50% and thus indicate continued economic expansion.

European PMIs are another story. The Eurozone Composite PMI for September was 50.1%. In the services sector, many individual country readings are below 50%, indicating that economic momentum is contracting in those areas. Weakness in Europe could be positive for the dollar.

Equity Takeaways:

September continues to be a tough month for equities. The S&P 500 bounced about 0.3% yesterday but is still down about 3.3% over the last week and over 7% during the month of September. Small caps are down over 5% in the last week and about 8% month-to-date (MTD). The recent weakness has been fairly evenly disbursed across sectors, with defensive sectors such as consumer staples and utilities outperforming over the past month.

Stocks opened essentially flat this morning, with most major indices within 0.25% of their prior closing levels. The energy sector continues to be the main laggard, down about 1% this morning and over 9% during the previous 5 trading days.

Shutdown concerns in Europe have been weighing on global markets this week. In the US, stock market participants continue to hope for additional fiscal stimulus prior to the election, but we believe a compromise to be increasingly unlikely.

Precious metals have been selling off in conjunction with equities. A global economic slowdown could reduce inflation expectations, which would negatively impact precious metals. The recent rise in the dollar is also a headwind for precious metals. We believe that both of these headwinds are likely temporary.

Fixed Income Takeaways:

During the recent equity selloff, treasury bond prices have been stable, but haven’t rallied much. Low current bond yields are reducing the effectiveness of treasuries as a diversifier within portfolios.

Credit spreads have begun to blip higher over the past several weeks. Most new corporate bond deals are still getting done, but the pace of new issuance has slowed slightly, with several issuers stepping to the sidelines to await better market conditions.

Investment-grade (IG) corporate bond spreads were 4 basis points (bps) wider yesterday. Balancing the recent slight weakness is the fact that many issuers would like to get to market before the election. IG fund flows also remain strong, with over $4B flowing into the sector last week.

The high-yield market, which tends to be more sensitive to equity prices than the IG market, has shown more pronounced weakness. High-yield corporate bond spreads were about 14 bps wider yesterday and are now 56 bps wider month-to-date. High-yield mutual funds had outflows of over $4B in the previous week, which is the 10th largest outflow on record.

Despite the weakness in corporate bonds, municipal bond prices were remarkably stable this week, and KPB is seeing good interest in new deals from clients.

Municipal bond prices continue to be supported by positive mutual fund flows. Recent weeks have shown average inflows into municipal bonds of about $2B / week. Last week, the pace slowed, with about $500M flowing into the sector.

Market participants continue to anxiously await a new fiscal stimulus package with aid for state and local governments, but most investors are not expecting a new deal until 2021.

Monday, 9/21/20

General Takeaways:

Legendary Supreme Court Justice Ruth Bader Ginsburg passed away over the weekend. Lawyers from both major parties are already lining up for a potential constitutional fight.

A nominee for the vacant seat is expected this week. Hearings are expected to begin in October, but no law exists requiring them. A simple majority in the Senate is required for confirmation. The average time for confirmation in recent years has been 74 days, with a range of 33 – 108 days. Such a timeline is noteworthy given that election day is 43 days away.

Practical implications: another round of fiscal stimulus is now highly unlikely before the election. In addition, several important cases may come in front of the court over the next few months, including cases related to the Affordable Care Act and the Mueller Investigation.

Meanwhile according to, the presidential election continues to tighten. In the electoral college, we expect Florida to play a major part in the outcome. Just a week or two ago, Florida was leaning Democratic, but now appears to be leaning slightly Republican.

COVID-19 update: trends in the United States have started to worsen again, but it’s too early to tell if we are seeing another wave of the virus or just a small blip post Labor Day. Many European countries, including Spain and France, are also seeing rising case counts once again. Excluding India, trends continue to improve in Asia, however.

US economic activity, as measured by hotel occupancy, restaurant activity, and foot traffic at retailers, continues to slowly grind higher. We’ve seen a flattening out of the pace of improvement since mid-summer. Housing and Purchasing Manager Index (PMI) data are at the forefront of the economic numbers that will be reported this week.

Equity Takeaways:

As noted above, new fiscal stimulus prior to the election now seems unlikely, and equity traders are reacting negatively this morning as a result. The S&P 500 declined by about 2% in early trading. Small caps, after showing some relative strength last week, dropped 3%. Defensive sectors, such as consumer staples and utilities, fell the least, each dropping by about 1%.

Last week marked a 3rd consecutive week of decline for the S&P 500. This is the first time we’ve seen 3 consecutive weeks of decline since September – October 2019. Surprisingly, during the March selloff we did not see 3 consecutive weeks of declines.

The 3330 – 3350 support zone for the S&P 500 was violated on Friday. A short-term downside target could be 3100 for the next level of solid support.

Nearly 60% of the stocks in the S&P 500 moved higher last week. This type of activity underneath the surface is a positive sign for breadth.

Another possible positive – the Russell 2000 (small cap index) outperformed the S&P 500 by over 3% last week. This is an unusual occurrence – in the past this type of activity has marked short-term bottoms in the stock market.

Over the weekend, there was a large data leak at systematically important financial institutions. Large banks are under selling pressure this morning as a result.

Implied volatility (VIX) has remained relatively steady during the equity weakness of the last several weeks but popped about 4.5 points higher this morning to 30.25.

Fixed Income Takeaways:

Treasury yields are slightly lower this morning as a "risk off" tone pervades the equity markets. The 10yr treasury yield dropped 5 bps to 0.65%, while the 30yr treasury yield dropped 4 bps to 1.40%.

Overall, the credit markets continue to function well. Last week we saw $43B of investment-grade (IG) corporate bond issuance across 42 separate issuers. High-yield issuers priced $16B of debt last week, the third busiest week on record in that segment of the market. We’ve seen over $1.5 trillion of IG new issuance year-to-date (YTD).

Many of this borrowing is opportunistic – corporations are shoring up their balance sheets and taking advantage of the low rates available in the market. Some new deals are even pricing at lower yields than existing secondary market levels – an unusual occurrence.

With the volatility in the equity market this morning, seven deals have already been pulled, but we expect many of these issuers to return to the market once volatility settles down. We will be keeping a close eye on high-yield issuance to see if sentiment for risky assets continues to deteriorate this week.

A busy week is expected in the municipal new issue market. We’re expecting about $13B of new issuance this week, which is 170% of the 5-year weekly average. Positive fund flows continue – last week marked the 18th consecutive week of mutual fund inflows into the sector.

Friday, 9/18/20

General Takeaways:

COVID-19 update: favorable trends are reversing. In the United States, both cases and fatalities have blipped higher over the past few weeks. This is a trend that obviously bears close watching as we approach flu season.

Globally, COVID-19 R0 values are increasing again in parts of the world. The R0 value measures the expected transmission rate for each infected person – an R0 of 1.0 suggests that each new infected person spreads the virus to 1 additional person. The estimated R0 value in the US is 0.95 but has moved above 1.0 in several countries, including India and France.

Economic forecasts remain relatively upbeat, predicting a strong snapback off the recent trough. These estimates remain very fluid and subject to change, however. The progression of the virus throughout the winter will have a strong impact on any economic forecast.

During this week’s Federal Reserve (FOMC) meeting, no additional policy measures were announced. That said, comments from Fed Chairman Jerome Powell suggest that interest rates are likely to remain very low for years, perhaps until late 2023 or even 2024.

Consumer activity is in high gear. The housing market remains on fire, with purchase activity and homebuilder sentiment hitting recent highs. Retail sales have also been extremely strong, partially driven by fiscal stimulus.

Although we’ve seen a strong snapback in certain economic indicators, many portions of the labor market continue to experience severe stress. Headline initial unemployment claims edged down to 860K last week (from an upwardly revised 893K). Continuing claims dropped by 916K to 12.63M. The labor market is slowly healing, but the recovery is shaping up to be a drawn-out process for many workers.

Despite national polling that suggests Biden has a clear lead in the presidential election, the outcome may be tracking closer in the Electoral College. Voting in battleground states such as Florida, Pennsylvania, Michigan, Wisconsin and Ohio will be integral to the final outcome. Please see our Key Question dated 9/15/20 for more details on the Electoral College.

Equity Takeaways:

Futures had indicated a slightly higher open this morning, but US stock markets turned slightly lower in early trading. The S&P 500 was down about 0.25%. Small caps were fractionally higher.

In general, we’ve seen mixed trading since the weakness of early September. The S&P 500 has risen about 0.6% over the last five trading sessions and is now up 5.3% year-to-date (YTD).

Election notwithstanding, the period of late September through November tends to be a seasonally weak period for equities. Even if we get some near-term volatility in equities, we believe that sticking to a long-term plan will be the best way to navigate the uncertainty of the coming months.

Large US technology companies trade at a higher multiple than the overall stock market, but also show much higher-than-average profit margins. US big tech represents about 13.3% of the global market capitalization, more than several entire sectors.

Fund flow update: equity investors are still very skeptical. Excluding buybacks, money has continued to flow out of equities into bonds throughout 2020. This type of activity can be a long-term contrarian buy signal for equities.

Today is a "quadruple witching" day. Stock index futures, stock index options, stock options and single stock futures expire today. These expirations can drive some heightened volatility in the stock market, especially late in the session.

Both value and small cap stocks have outperformed the broader market over the past few weeks. We don’t believe this price action is the start of a longer-term trend yet, but we are closely watching for signs of a more sustained turn in sector leadership.

Fixed Income Takeaways:

The Federal Reserve statement indicated that the Fed Funds Rate will stay low until several conditions are met. "Maximum employment" (corresponding with an estimated unemployment rate of about 4%) must be reached. In addition, inflation, as measured by the core PCE, must rise above 2%. The Fed’s goal is to "achieve inflation moderately above 2% for some time so that inflation averages 2% over time."

It was a very active week in the credit markets. The new issue investment-grade (IG) corporate bond market continues to shatter records for overall issuance. Typically, during a week when the Federal Reserve meets, supply will dip, but this week over $40B of deals priced. Demand for paper continues to roll in – we saw another week of inflows into IG corporate bond funds, bringing the streak of positive fund flows to 25 weeks.

Both lower-rated issuers (BBB- rated) and infrequent issuers are returning to the market. 27% of recent new deals were BBB- rated, compared to 19% overall for 2020. We’ve also seen a strong uptick in the performance of the leveraged loan market, which had been a laggard for much of 2020.

Activity was also strong in the municipal bond market this week. The new issue calendar is expected to be robust next week as well. Municipal bond funds continue to experience strong inflows – money has flowed into the sector for 18 consecutive weeks.

Fiscal policy update: we still believe there’s a chance of a deal before the election that would provide aid to state and local governments before the end of the year. That said, there are still some major differences between the Democratic and Republican proposals.

Monday, 9/14/20

General Takeaways:

Month-to-date (MTD) and Year-to-date (YTD) equity return updates: The S&P 500 is down 4.5% for the month of September but remains higher by 4.8% on the year. Despite a correction of 7.3% during the month of September, growth stocks are still up 20.9% YTD. Value stocks have held up a little better recently, down only 1.9% MTD, but still down 11.1% YTD. Small caps are down 4.1% MTD and 9.4% YTD.

International stocks are showing signs of life on a relative basis. Non-US developed market equities are down 0.9% MTD and 6.9% YTD. Emerging market stocks are down 0.9% MTD and 2.1% YTD. Chinese stocks are down 2.8% MTD, but overall are having a strong 2020, up 9.3% YTD.

Fixed income returns have been essentially flat MTD, as the recent volatility in the equity markets has not spilled over into the credit markets. The Barclays aggregate index (a broadly diversified index of investment-grade rated bonds) is up 0.2% MTD and about 7% YTD.

COVID-19 trends in the US continue to improve. The second wave of cases over the summer was focused mainly in the sunbelt states; new cases and deaths in that region continue to fall according to the CDC. Despite this news, stocks that stand to benefit from the reopening of the economy have continued to lag.

One reason that "reopening stocks" may still be lagging: alternative economic measures, as measured by Bloomberg’s Daily Activity Indicators, have shown signs of stalling around the world. Public transit demand, electricity demand and office usage are several of the measures that are being tracked in this index.

Driven by the west coast wildfires, air quality readings in parts of the US are now worse than China / India. The California fire season typically runs from May to October. On a combined basis, the three west coast states of California, Oregon and Washington account for about 18% of US GDP.

Equity Takeaways:

Major US indices opened higher this morning. The S&P 500 rose about 1.5%, with the Nasdaq up about 2%. Small caps also rose by about 1.5%.

Today is another "merger Monday," with over $60B of transactions reported over the weekend – this type of activity tends to bolster sentiment. Merger and acquisition activity also could indicate that CEOs have increasing confidence in the economic outlook.

It is currently very expensive to hedge downside risk. An equity put option is essentially insurance against a fall in stock prices. Last week, a 3-month 5% out-off-the-money put option on the S&P 500 cost about 3.5%, versus the historical average of 1.7%. That’s a 3.5% portfolio drag if the option ends up expiring worthless.

Interesting thought experiment from Morgan Housel, a widely respected investment thinker/blogger: Warren Buffett started investing at age 10. Last month, he turned 90. When he was 30, his net worth was $1 million. He has generated a 22% compounded annual rate of return on his investments. Today, his net worth is $81 billion.

If Warren Buffett had waited to start investing until age 30, and his net worth was a more typical $25,000 at age 30, and he retired at age 60, his outcome would have been much different. Even generating the same 22% compounded annual return, his current net worth would be $11.9 million, or 99.9% less than its actual value.

Key takeaway: compounding is a powerful force – doing nothing is often the best course of action. We remind clients that long-term asset allocation strategies are designed to withstand short-term gyrations such as those we may experience in the weeks and months ahead.

Fixed Income Takeaways:

Ten new issuers have already lined up to price new investment-grade (IG) corporate bond deals this week. For the month of September, $73B of new issuance has priced. This heavy volume continues to be met with strong demand.

Despite the recent volatility in the equity markets, fixed income spreads have remained stable over the past few weeks. This morning, spreads opened about 3 basis points (bps) tighter in IG-credit.

In the municipal bond market, we’re also seeing strong volume, with over $10B of new issuance expected to price this week. A good portion of this issuance is taxable debt. Due to recent changes in the law, certain types of municipal refinancings must be completed with taxable bonds.

Through the end of July, state tax receipt data for the 47 states that publicly report this data was down about 2.9% year-over-year. During the height of the COVID-19 panic over the March, projections for the number were for a drop of as much as 20-30%, so the actual results have come in much better than expectations.

Friday, 9/11/20

General Takeaways:

Stocks put in another weak session yesterday. The S&P 500 was down 1.75%, bringing its 5-day decline to 6.7% and its year-to-date (YTD) return to 4.7%. The Nasdaq 100 was down 2.1% yesterday – it has declined about 10% in the last 5 trading sessions but remains up 28.6% YTD. Small caps were down about 1.3% yesterday and continue to lag large caps – small caps are now down about 14% YTD.

The S&P 500 had been very extended relative to its 200-day moving average several weeks ago, so the recent pullback was not surprising. We think continued volatility is likely in the near-term. Short-dated options trading volumes have exploded, led by retail investors, contributing to the volatility.

Improving employment trends may be stalling. Permanent job losses have also begun to tick higher – many workers initially expected their furloughs to be temporary but are now being permanently laid off. That said, small business hiring intentions have jumped over the past few months, so job mobility does appear to be increasing.

The prospects for additional fiscal stimulus before the election continue to wane. The $600 weekly Federal Pandemic Unemployment Compensation benefit expired in July. The $300 Lost Wages Assistance benefit will likely expire at the end of September.

Against the backdrop of waning income support, consumer spending bears watching. In that light, consumer spending relative to January 2020 has seen robust spending at grocery stores, while spending on arts & entertainment, lodging and dining remains depressed. Overall spending levels have recovered significantly but are still slightly off January 2020 levels.

Key Private Bank analysts recently attended a virtual healthcare conference. There was a tone of optimism around the potential of various COVID-19 vaccine candidates. Participants also noted that the recent temporary pause of one large-stage vaccine trial is not an unusual event – pauses are relatively common in large-scale clinical trials.

70% of the participants at this healthcare conference believe that a vaccine will be available for wide-scale use in early-mid 2021. Longer-term, the revenue from any potential vaccine will probably just be a temporary tailwind for the healthcare sector.

After tightening into the end of August, Biden’s probability of winning the presidency seems to have improved again based on certain prediction markets. That said, polling in key states, such as Florida, has tightened significantly, suggesting an increasingly tight race in the electoral college.

It is expensive to hedge portfolios for the election outcome due to the increased cost of options with strikes around the election date. Staying focused on the long-term is likely the best course of action over the next several months.

Equity Takeaways:

US stocks opened fractionally higher this morning, with the S&P 500 about 0.4% to the good. Small caps also rose slightly.

Stock market participants are clearly expecting continued earnings improvement. Earnings estimates dropped sharply in the second quarter and have now begun to rebound. Given the steepness of the earnings fall earlier this year, there is a long runway for directional improvement – a possible future tailwind for stocks.

There have been only 5 instances in the history of the Nasdaq where the index fell over 8% in a period of three trading days after hitting a 52-week high. The instances: three times in 2000, once in 2007, and once in early 2020. The composition of the index has changed significantly since 2000, however.

On the margin, hedge funds were slightly net sellers of growth and momentum stocks in August, but they are still overweight both of those factors. Hedge fund gross and net equity exposure is at multi-year highs.

Possible catalysts for the end of the recent speculative retail trading wave in the stock market: end of stimulus checks; return of the NFL (and the associated gambling). We will be watching the data for any changes in retail options trading trends.

Fixed Income Takeaways:

The credit markets remain very stable. It is a positive environment for issuers to come to market, and investor demand continues unabated. Estimates for investment-grade (IG) corporate bond issuance were for about $50B in new deals this week – the actual result was $66B of new IG issuance this week alone.

Lipper reported another $6.5B inflow into IG bond funds last week, the 22nd consecutive week of inflows. YTD inflows have now topped $70B.

Foreign investors have also been a continued source of demand for US corporate bond issuance. With negative rates in many areas around the globe, US rates remain attractive on a relative basis.

State and local governments are not slated to receive much additional new aid in current Republican-sponsored versions of fiscal packages. Time is running out for the passage of additional fiscal aid prior to the election.

Fund flow data from the last two weeks showed net outflows in the high-yield municipal bond sector. Higher-quality municipal funds continue to see inflows. High-yield municipals have exposure to student housing as well as nursing home debt – these sectors face continued stress due to COVID-19.

Tuesday, 9/8/20

General Takeaways:

Keeping it simple – three things underlying the market backdrop:

  1. Science: vaccines, will they work, will they be used?
  2. Stimulus: already unprecedented. Is more yet to come?
  3. Rebound: bulls argue a new economic expansion is underway – how strong is the recovery?

Three things that could undermine the market backdrop:

  1. Science: will cases reaccelerate in a "Labor Day letdown" or back to school/back to home wave?
  2. Politics: election uncertainty, US / China tensions and political brinksmanship will likely continue.
  3. Valuations: while not a catalyst in and of themselves, stocks remain expensive relative to history.

Overall, COVID-19 trends remain a mixed picture in the United States, with certain states worsening and certain states showing stability or improvement. Testing has increased, and the positivity rate continues to decline. Overall, the general trend remains one of gradual improvement.

High frequency data also continues to gradually improve in the United States. US discretionary spending (hotel occupancy, dining, air travel) all continue to grind slowly higher. Foot traffic at auto dealers and big box retail stores has returned close to pre-pandemic levels. Traffic at malls and casual dining restaurants has improved but remains depressed.

Overseas, the picture is mixed. In China, reported cases are very low (12 as of September 6) and passenger traffic has returned to normal. COVID-19 cases in Japan are declining. In Europe, both Spain and Italy are experiencing another increase in caseloads. India is also experiencing a troublesome wave of cases.

August’s US employment report was universally "better." Household employment surged 3.9mm in August, pushing the unemployment rate down to 8.4%. The unemployment rate among younger workers and minorities also declined significantly.

That said, the pace of the recovery will be moderate. Permanent job losses are increasing – many of the recent job gains have been recoveries of temporary job losses.

In general, the US has experienced a very sharp bounce back in a wide variety of economic data, in part due to the speed of the decline. Many countries around the world have experienced similar bounce backs – the recovery is global in nature, but clearly some dispersions exist.

Brexit update: it’s deja-vu all over again. UK Prime Minister Boris Johnson is now threatening to leave the European Union without a deal on October 15. Continued issues surrounding the Northern Ireland / UK border, as well as EU concerns around UK-state subsidized businesses exporting freely into the EU, are hampering negotiations. Fishing rights are also being disputed. All in all, it seems like the outlook for the UK remains challenged.

Equity Takeaways:

Despite an afternoon rally, US stocks closed about 0.8% lower on Friday. Technology shares were weak once again, with the Nasdaq 100 down about 1.3% (after having been over 3% lower earlier in the day). Small caps declined about 0.5%.

This morning, US stocks are once again showing weakness. The S&P 500 was over 2% lower in early trading, with small caps also down over 2%. The Nasdaq was down over 3%.

The prospects for a new fiscal stimulus package could be waning, which is weighing on sentiment. Late last week, an agreement was reached to ensure that the federal government stays open through the election. This compromise does not appear to have moved the ball forward on new stimulus, however.

The S&P 500 quarterly rebalance is now in the spotlight. One large electric car company was not added to the index, which is affecting those shares negatively while weighing on the technology sector in general.

The US administration announced possible future restrictions on semiconductor equipment sales to China. The bulk of the growth in the semiconductor equipment sector has been sales into China’s nascent industry. This action is another headwind to technology shares this morning, and another indication that tensions between the US and China remain a source of volatility.

Valuations are stretched and technology shares have been rising at a torrid pace, causing some to compare the current period to the late-1990s. That said, the current situation does not mirror 1999-2000 exactly. Back in 2000, interest rates were increasing quickly, oil prices had recently doubled, and the yield curve had inverted by 150 basis points (bps). Those three factors were all negative for liquidity, and none exist today.

Fixed Income Takeaways:

Weakness in stock prices is not preventing borrowers from tapping the investment-grade (IG) corporate bond market early this week, as at least 10 deals have already been announced this morning. Last week was very slow in terms of new issuance, but we are estimating that $50B of new IG corporate bond deals will price over the next week.

Spreads have held up well during the recent stock market weakness. High-yield spreads widened by about 10 bps last Friday, with IG spreads out about 1-2 bps.

Lipper reported over $10B inflows into IG corporate bond funds during the week ending September 2nd. This inflow marks 21 consecutive weeks of positive fund flows, averaging over $6B per week during that time period.

Last week was also quiet in the municipal bond market. Since the all-time lows reached on August 10th, longer-dated municipals are 20-35bps higher in yield. The front-end of the curve has held up much better but has also weakened.

Municipal bond market participants continue to watch for signs of new stimulus for state and local governments. Republicans are set to unveil a new targeted stimulus package today.

Friday, 9/4/20

General Takeaways:

Yesterday saw a strong selloff in equities. The Nasdaq 100 was down over 5%, with the S&P down 3.5%. Small caps were down 2.6%. Value stocks were down about 2%.

Fixed income did provide some diversification benefits. Long-term treasuries were up slightly, about 0.2%. The Barclays Aggregate Index (a widely followed investment-grade index comprised of corporate bonds and government-backed securities) was flat. High-yield bonds were down 0.6%.

One day does not a trend make, and technology shares are still up significantly year-to-date (YTD). Through the end of August, the Nasdaq 100 was up 40% YTD, which is the best first eight months of the year for the Nasdaq since 1999.

2020 has truly been a year of extremes. Long-term treasuries are up over 20% YTD. Gold prices are up 27% YTD. WTI crude oil prices are down 55.5% YTD. (all data a/o 8/31/20)

The US unemployment rate fell to 8.4% last month, which was better than expectations. The unemployment rate was 14.7% just a few months ago.

Real-time data also continues to improve. US auto sales have rebounded significantly, and restaurant reservations continue to grind higher. HFD trucking load data is off the charts (perhaps related to increased online ordering / delivery).

Equity Takeaways:

Major US indices were mixed this morning after yesterday’s sharp selloff. Both the S&P 500 and Nasdaq opened lower by 0.5% – 1.0%, while the Dow rose about 0.75%. Small caps also opened fractionally higher.

Yesterday was a 3-standard-deviation move lower in both the Nasdaq and S&P 500. That said, the selloff occurred after a large rally and simply brings us back towards an upwards sloping trendline from the March lows.

The next few days will be very important to determine if we are just taking a pause in an uptrend, or if the market might continue lower. The market had gone 29 days since a 1% decline, so we were likely due for a correction.

On the Nasdaq 100, there were only two stocks that managed to close higher. Other measures of market internals showed similar extreme weakness.

Implied volatility (VIX) has been rising as the stock market has been making all-time highs. Individual traders have been purchasing large amount of single-stock call options, which is pushing up the VIX even as the market rallies. Single-stock call option activity has risen to over $300bb per day vs. its historical level of $50bb - $100bb. Much of this trading activity is concentrated in technology names.

The magnitude of yesterday’s selloff in the Nasdaq may be partially explained by the speed of the rally over the last few weeks. Much of this rally appears to have been driven by the aforementioned speculative call option buying. Yesterday’s selloff does not appear to have been caused by any fundamental change in the economy or markets.

Fixed Income Takeaways:

Credit spreads blipped a bit wider yesterday but did not significantly widen. IG corporate credit spreads were about 2bps wider, with high-yield credit spreads out about 9bps. The fact that credit spreads held up well during yesterday’s equity selloff is a good sign.

Overall, this was a very quiet week for new issuance in the corporate bond market. Next week we are expecting a large uptick in issuance to the tune of $40-$50bb of IG corporate bond issuance.

Two large states were able to price municipal bond deals at attractive terms this week, which boosted sentiment for the entire muni market. Another $1bb of fund flows came into municipals this week.

Wednesday, 9/2/20

General Takeaways:

In terms of investment returns, Septembers during presidential election years are historically not all that bad. Since 1896, September is typically the weakest month of the year, but that pattern does not hold during election years.

In a survey of US adults, 70% supported an additional one-time economic payment to all qualified adults. Support for additional stimulus is bipartisan and widespread. In Washington, Republicans and Democrats are still wrangling about the details of another possible fiscal package. The biggest sticking point is additional aid to state and local governments – the Democrats are looking for $915bb, while Republicans have offered $300bb.

Lawmakers face a September 30th deadline to keep the government open (fiscal year end). The first Presidential debate is on September 29th. We will continue to monitor these important negotiations.

A V-shaped rebound in the manufacturing sector continues. The August US ISM report handily beat expectations. The new orders component was an extremely strong 67.6. Recall that in diffusion indexes such as the ISM report, any number above 50 indicates expansion. We are also seeing improving ISM readings in important overseas economies such as Korea and Germany.

The ADP private employment report came in below expectations. The ADP report is typically noisy. The headline gain of 428,000 was below expectations of 1mm. We wouldn’t put too much significance into this number, as it has historically been a poor indicator for Friday’s non-farm payroll report.

A large European company announced a new rapid-use COVID-19 test. Several rapid testing kits are in the final stages of approval, with preparations for mass distribution.

Liquidity in the private equity space has begun to improve. Manager selection is extremely important in this space, as aggressive sponsors may be overly optimistic with their treatment of impaired loans.

Equity Takeaways:

September is off to a strong start. The S&P 500 was up 0.75% yesterday, the Nasdaq 100 was about 1.5% higher and small caps were up 1.2%. This morning, the S&P 500 opened higher again by about 0.4%, with technology shares also slightly higher and small caps essentially flat.

August 2020 was the best August for stock market returns since 1984, with the S&P up 7% and the Nasdaq up 10% during the month. Typically, after a strong August, the market chops sideways to lower in September before finishing strongly into year-end.

The Nasdaq 100 is up 42% year-to-date (YTD) and a whopping 88% from its yearly lows. The S&P 500 is up about 10% YTD. Given the strong recent performance and historical patterns, increased volatility going into the end of the year seems likely.

Along these lines, implied volatility (VIX) has been creeping higher even as the market has rallied over the past several weeks. The current level of the VIX is 26.4.

During strong bull runs, liquidity tends to tighten prior to the ultimate peak. We will be closely monitoring liquidity conditions as we move through the end of the year and into 2021.

Fixed Income Takeaways:

The municipal bond curve is unchanged on the week. A recent study of state tax receipts across 19 states shows a modest year-over-year decline of about 3.9%, with several states even showing modest increases in tax receipts. These numbers, while soft, are nowhere near the dire projections of 25-30% declines that we were seeing in March-April.

The same study indicated that income tax revenue is down about 1.7% on average. Sales tax revenue showed more variability, with tourist-heavy states showing greater declines.

The investment-grade corporate bond market is having a quiet week. Spreads continue to grind slowly tighter amid muted trading.

After Labor Day, we are expecting a tsunami of new corporate bond issuance. We expect $140-$150bb of new deals in the last three weeks of September. YTD new issuance is at $1.4 trillion, about 80% above last year’s pace.

Monday, 8/31/20

General Takeaways:

Year-to-date (YTD) equity returns continue to show wide levels of dispersion. The broad S&P 500 is up about 10%. Growth stocks are up a strong 29.7% YTD, while value continues to lag, down 8.6%. Small caps are down about 4.5%, with non-US developed markets down about 3% and emerging markets up about 2%, led by China’s strong 14% YTD return.

Dispersion also exists among sectors. Value-oriented sectors such as energy and financials are down 38% and 16% respectively YTD, while growth-oriented sectors continue to lead the market. Technology shares are up over 35% YTD, with consumer discretionary up 28% and communications services up 17%.

Within fixed income, we’ve seen higher-quality paper perform better YTD, with the broader investment-grade (IG) corporate and municipal indices showing solid gains. After underperforming dramatically in the March selloff, high-yield bonds have closed some of this gap recently. Fixed Income YTD returns: Barclays Aggregate: 6.6%; Muni: 3.1%, High-Yield: -0.2%.

Commodities are also showing mixed performance. Oil: -29.6% YTD; Nat Gas +21.6%; Gold + 29%; Copper +7.5%; US Dollar -4.2%. Weakness in the US dollar is something to keep an eye on but has not reached concerning levels to this point.

The presidential race has narrowed. According to the website PredictIt, Biden is at 54% to win the White House, with Trump at 46%. The race for control of the Senate has also significantly tightened and is now basically a tossup. We think these numbers should be taken with a grain of salt but are nevertheless worth watching.

Consumer income and spending data came in strong last week. Consumer spending growth was +1.9% month/month in July, or a 25.6% annualized rate. If consumer spending is unchanged m/m in August/September, it will have increased at a +40% quarter/quarter annual rate in 3Q.

On a year/year basis, "strong" sectors are up 3% in terms of total consumer spending, while "weak" sectors are down over 25%. "Strong" sectors include healthcare, tech, grocery stores, autos and furniture. "Weak" sectors include restaurants, recreation services, and air travel. The same pattern holds true with respect to employment. "Weak" sectors comprise a smaller portion of the total economy than "strong" sectors.

Equity Takeaways:

US stocks opened the week essentially flat. The S&P 500 opened unchanged, while technology shares were slightly higher and small caps were slightly lower. Emerging market shares dropped about 2%, led by weakness in China.

Last Friday was the slowest day in terms of volume on KPB’s trading desk since the start of the COVID-19 crisis. We expect another slow day today, as UK markets are closed for a bank holiday.

The stock market has closed higher five weeks in a row. The last six-week streak occurred in October through November 2019. We also completed a 7-day winning streak on Friday, and out of 20 trading days in August to this point, 16 have been higher.

The market is crowded, with many market participants chasing the same stocks, and valuations are at an extreme – both are prime backdrops for risk reversals. In the near term, some rotation away from the more crowded trades (from growth into value) seems possible. That said, growth stocks have never been more profitable, and value stocks have been very volatile over the last decade, so we don’t think it’s time to abandon growth stocks.

Fixed Income Takeaways:

The correlation between corporate bonds and stocks spiked to 0.6 this past spring and is currently around 0.5. On the other hand, the correlation between treasuries and equities plummeted to -0.8 during the onset of COVID-19. This structural shift suggests that corporate bonds may provide fewer diversification benefits than they have in the past, while treasuries continue to provide diversification despite low absolute yields.

We are finally beginning to see a summer slowdown in the investment-grade corporate credit markets. Last week saw $16bb of new issuance – this week we expect only about $5bb. We’re also seeing a bit of floating-rate issuance emerge – YTD, floating-rate issuance is down over 90%.

Despite continued heavy supply, spreads remain firm in both investment-grade and high-yield corporate credit. Yields on CCC-rated high-yield debt (the riskiest portion of the market) have been the best performers over the past several weeks.

Municipals bonds are set up for a strong week of new issuance. Over $11bb is expected to price. The market has seen 15 weeks of mutual fund inflows. Despite these fund flows, prices have been soft, with yields on municipals drifting higher for most of this month.

It is estimated that 40% of all COVID-19 deaths have occurred in senior living facilities. 23 / 52 of the municipal defaults we’ve seen in 2020 have been tied to senior living facility debt. Most of these defaults have occurred in debt backed by newer facilities that have not yet fully leased up.

Friday, 8/28/20

General Takeaways:

The Federal Reserve switched to "double-dovish" posture, or TINA on steroids this week. This switch in posture should be supportive for risky assets going forward. TINA stands for "There Is No Alternative" (to stocks) – the idea is that the Fed is forcing investors into risky assets by driving down yields on treasuries and other types of safer investments. See the fixed income comments for more detail.

COVID-19 around the world: the spread of the virus seems to be slowing. According to the YYG model, only 7 of 71 developed countries around the world have Rt values above 1.0. Japan is one of these countries where the Rt value is above 1.0, so we will be watching for a fall wave there.

Expanded testing capability continues in the United States. The US announced a deal for 150mm rapid tests. On the other side of the coin, many US citizens are showing hesitancy about initially using any newly created vaccine.

The Prime Minister of Japan, Shinzo Abe, is resigning due to health concerns. He is the longest-tenured Prime Minister in Japanese history. The Japanese stock market was down about 1.4% on the news (was down over 2% at one point). "Three arrows" of recent Japanese policy: monetary stimulus, government spending, market reforms. 1/3 of the population of Japan is over the age of 65, which remains a headwind to future growth.

Initial US unemployment claims fell 98k to about 1.01mm, in line with consensus. Continuing claims also ticked slightly lower but remain elevated at over 14.5mm. These numbers actually suggest strong employment gains when the August non-farm payroll numbers are released next week, as the data continues to get "less bad."

Equity Takeaways:

Major US indices opened slightly higher this morning. The S&P 500 rose about 0.2%, with small caps essentially flat. Developed international stock markets are up about 0.6% on aggregate.

The Federal Reserve’s dovish pivot was perhaps anticipated by market participants, as the S&P 500 closed only 0.2% higher yesterday. That said, recent performance has been strong, with the index up about 3% over the last five sessions. The S&P 500 is now up about 9% year-to-date.

With the virus seeming to crest in the US, at least in the short-term, US equities have resumed their leadership role vs. their Eurozone counterparts. European equities had shown some relative outperformance earlier in the summer due to greater success controlling COVID-19.

Despite a weak consumer confidence reading earlier this week, reported measures of personal income and personal spending came in higher than expectations yesterday. Other "real-time" data, such as gasoline sales, is also improving. We continue to watch for signs of increasing inflation, which would have broad implications for both stocks and bonds.

Implied volatility has crept a bit higher recently. Over the last few weeks, the VIX has moved from the low 20s up to its current level of about 25.5.

Fixed Income Takeaways:

The Federal Reserve will now target an average 2% inflation rate over a full economic cycle. Essentially, this new target implies that the Fed will allow inflation to overshoot 2% for an undetermined period. The Fed’s prior policy was to target 2% inflation. The new guidance prioritizes maximum employment vs. inflation targeting.

Market participants were a bit surprised on the timing of this forward guidance change. This move was anticipated by the market, but most people felt that the action would take place during the September Fed meeting.

The long end of the treasury curve sold off significantly yesterday, with yields on the 30yr treasury rising by over 10bps. The 30yr traded at 1.49% this morning. The 2yr treasury yield remains pinned around 0.14%. The Federal Reserve controls the short-end of the curve – the long-end is driven more by economic and inflation expectations.

Credit stress seems to be moderating. 13% of potential fallen angels are on negative outlook by credit ratings agencies. Recently, this number was as high as 27%. A fallen angel is a credit that has been downgraded from investment-grade (BBB- or higher) to high-yield (BB+ or lower).

Due to the low yield differentials between commercial paper and government obligations, several large money managers are exiting the prime money market fund space to focus solely on government-backed money market funds.

Muni yields are higher across the curve this week. 5yr yields are 3bps higher, 10yr yields are 6bps higher, and 30yr yields are 9bps higher on the week. Since the middle of August, yields have been drifting higher, especially in longer-dated paper.

Despite these rising yields, municipal bond fund flows were strongly positive again last week. The asset class has seen 15 consecutive weeks of inflows. We continue to see a similar story in the investment-grade corporate bond market – strong new issuance levels and fund flows.

Wednesday, 8/26/20

General Takeaways:

COVID-19 cases are at a two-month low in the United States. The YYG model (the most accurate fatality prediction model according to the CDC) recently lowered their estimate for fatalities by about 10%. This model is estimating that the Rt value will remain below 1.0 through at least October, which would be a positive for the back-to-school season. Rt is a measure of virus transmission – an Rt value of 1.0 means that each new carrier transmits the virus to 1 additional person.

Optimism around the release of a vaccine for COVID-19 continues to increase. According to a group of "superforecasters," late 2020 to early 2021 is now the likeliest timeframe for the mass distribution of a vaccine.

The dollar value of both existing and new home sales is approaching the highest levels seen back in the mid-2000s. On the other hand, consumer confidence remains shaken and has not recovered to pre-COVID levels.

Three reasons to think tax increases may be less negative for the economy than feared in a Biden victory:

Under Biden’s plan, government spending will likely be much larger than tax hikes, which is a net positive for the economy. It’s also hard to envision any president raising taxes significantly in a pandemic. Finally, monetary policy is likely to remain ultra-accommodative for the foreseeable future, which is supportive of all asset prices.

Bottom line: markets tend to power forward under both Democratic and Republican regimes – the key is to maintain a diversified portfolio and a long-term time horizon.

Equity Takeaways:

Questions on our strategists’ minds:

Are we in a bubble?

We don’t believe we’re in a bubble, however, there are pockets of froth for sure. We continue to recommend a neutral position to risk overall with an up-in-quality bias. Please see this week’s "Key Question" for more details.

What are equity prices forecasting, if anything, in terms of economic growth?

Corporate earnings are strongly correlated with GDP. Corporate earnings estimates are expected to recover to 2019 levels by 2021. Strong earnings growth is expected to persist into 2022. The stock market’s multiple is about 25-26x on 2020 depressed earnings, but 19x on 2022 earnings. Markets are clearly expecting significant improvement in future earnings.

In addition, stock markets have become more reactive to policy during the recent cycle. In 2020, equity markets react to fiscal and monetary policy, rather than projecting the future business climate.

Along these lines, this week’s Federal Reserve meeting at Jackson Hole could be important for the near-term direction of the stock market, in that there are high expectations for further Fed policy action (Yield Curve Control, etc). If the Fed does not deliver additional accommodation, markets could be disappointed.

Fixed Income Takeaways:

What can we infer about the economy and markets from the current low interest rates?

At the start of the year, the 2yr treasury yield was 1.51%, with the 10yr yield at 1.92%. Current levels are 0.15% and 0.71% respectively, mainly due to the recent actions of the Fed. We can infer that market participants believe in the Fed’s ability to control the curve, are still fearful about the current economic situation, and are not worried about future inflation. For rates to move up, we will need to see increased optimism on future economic growth / inflation.

Given the challenges to city and state budgets, do we have concerns about municipal bonds?

There are a large variety of municipal issuers. Within investment-grade paper, airports and hospitals have been the hardest hit sectors, but have both significantly recovered over the last few months.

In the high-yield municipal bond space, nursing home bonds are vulnerable to another spike in COVID-19 cases. In addition, student housing projects are also often financed with high-yield municipal bonds and will face stress if they cannot reach 90%+ occupancy levels. Plans for virtual learning put these types of projects at risk.

How much would rising tax rates, if implemented, affect municipal demand, prices and yields?

Biden has suggested raising the highest tax bracket from its current level of 37% to 39.6%. We don’t think this change would greatly affect the marginal demand for municipals. If corporate tax rates were to rise, municipals could become more slightly more attractive to insurance companies.

Monday, 8/24/20

General Takeaways:

With about 70 days until the election, the field is narrowing. According to a recent RealClearPolitics Poll, Biden still has about an 11-12% percentage point lead in the betting odds to win the election, but the gap has been closing. That said, Trump has lost further ground with independents and is falling farther behind with women. Trump won the independent vote in 2016 by about 4% but is now trailing in the polling of independents by 12%.

The Senate race is also narrowing. The Democrats are still favored to take control of both houses of Congress, but the polling spread continues to close in several key states.

For long-term investors, the outcome of US presidential elections hasn’t mattered as much as staying invested and maintaining a diversified portfolio. In 18 of the last 19 elections, a hypothetical $10k invested in the S&P 500 at the beginning of each election would have gained value ten years later. Further, in 15 of those periods, a $10,000 investment would have more than doubled.

US economic momentum is expanding according to Purchasing Manager Index (PMI) surveys. Both the services and manufacturing PMIs are back in expansion territory. Housing also remains a strong buttress to economic growth. US mortgage interest payments are at an all-time low as a percentage of the economy, bolstering the sector, and other compelling demographics exist as well.

Equity Takeaways:

US stocks opened higher across the board on Monday. Technology stocks continue to lead, with the Nasdaq 100 up another 1.1%. The broader S&P 500 opened about 0.75% higher, with small caps up about 0.5%.

The stock market is still trying to follow through to avoid a "double top" formation with the previous February highs. Even though we are opening at another all-time high this morning, the market will need to confirm its recent strength in the coming months.

Last week completed a four-week winning streak in the S&P 500 for the first time in 2020. That said, only 30% of the constituents of the S&P 500 were higher last week – another sign that breadth continues to be relatively soft compared to the size of the recent rally. Broader participation by lagging sectors will be critical to future strength.

Hedge funds have crowded into growth stocks this year. Gross and net stock exposure at hedge funds are at high levels relative to history, and short interest on the S&P 500 is at its lowest level since 2004. These data points indicate bullish sentiment.

Fixed Income Takeaways:

Typically, the last two weeks of August are slow in the credit markets, but not this year.

Absolute yields are very low – issuers are keen to take advantage of these levels. Execution continues to be solid, with investor demand seemingly insatiable. We’ve seen 19 consecutive weeks of positive mutual fund flows into investment-grade (IG) corporate credit, supporting the asset class.

Environmentally and socially conscious (ESG) fixed income issuance has also been robust this year. These so-called "green" bonds have performed very well year-to-date relative to the broader index. This sector tends to avoid oil & gas issuance, a very weak sector throughout the year.

Last week’s Federal Reserve (Fed) statement indicated that the Yield Curve Control (YCC) is unlikely before year-end. The statement also downplayed the strength of the recent economic recovery. This week, the Fed will be meeting virtually – Chairman Jerome Powell will be releasing a statement Thursday-Friday. We expect Powell’s statement to be very dovish.

Last week, longer-dated municipals sold off 7-10 bps, underperforming the rally in similar-maturity treasuries. The front-end of the curve continues to hold in strong.

Rating agencies have begun to downgrade certain municipal credits due to COVID-19 budget issues. However, the total number of downgrades remains relatively small.

Friday, 8/21/20

General Takeaways:

Significantly more money has poured into bond funds than stock funds over the past several years, using fund flows as a sentiment indicator. Ex-buybacks, stocks have seen net outflows of over $300 billion since the beginning of 2018, while fixed income has seen inflows of over $600 billion during the same period. The investment-grade (IG) bond market has seen 19 consecutive weeks of inflows.

New applications for unemployment benefits rose last week – the reported number was 1.1 million vs. expectations of 925,000). Widespread economic weakness persists, and certain sectors will likely take years to fully recover.

COVID-19 update: 40% of the population lives in an area with declining caseloads – this number was only about 10% back in July, so the US is making progress. That said, forecasters are expecting a dramatic increase in caseloads once the flu season begins.

As testing/case counts increase, the expectation is for the overall fatality rate to decline as a percentage of total cases. It is also important to note that the actual case count is likely much higher than the reported case count – serology testing indicates that the virus is probably more widespread than reported case counts might indicate.

Ridership on New York City subways has ticked up slightly but remains at depressed levels. Public transport usage in Europe had been increasing over the summer. Still, as European case counts have begun to rise again, we have seen a corresponding drop in European public transportation usage over the last several weeks.

In the future, Key Private Bank will be releasing a new weekly client-approved chart pack called Key Charts This Week.

Equity Takeaways:

Large cap US equity indices opened mostly flat this morning, with small caps down about 0.25%. International stock markets are generally 0.50% – 1% lower. The US dollar is showing some strength this morning – precious metals are weak as a result.

Since the previous February 19th high in US stocks, the six largest stocks in the S&P 500 are up about 5%. The remaining 494 stocks are down by about 5%. As the S&P 500 is market-cap weighted, the six largest stocks have powered the index to all-time highs, while the equal-weight S&P 500 is still down over 5% year-to-date.

The stock market's current level is important for technical reasons, given that many market participants are curious if the market is setting up for a "double top" formation or if we can continue to power higher.

Fixed Income Takeaways:

Supply in the new issue investment grade (IG) corporate bond market continues to hum along. Activity for August has been much higher than expectations. Very high-quality issuers are seeing massive demand, as investors seek any type of incremental yield over treasuries.

High-yield spreads continue to compress, but still have room to run to reach the tightest levels seen earlier this decade.

Activity in the commercial paper (CP) market has declined this week. Limited spread pickup compared to T-bills has reduced demand for CP.

Municipal bonds sold off slightly on the long end of the curve again yesterday. On the week, 10+ year municipals have sold off by 10bps. The front-end of the curve continues to hold up well.

Even with a bit of weakness in longer-dated paper, mutual fund inflows into municipal bonds continued last week. Similar to their corporate bond brethren, municipals continue to see very strong investor demand.

Wednesday, 8/19/20

General Takeaways:

Momentum stocks led the S&P 500 to an all-time high yesterday. The tech-heavy Nasdaq 100 led the charge, up about 1%. Small caps declined by about 1.3%. The S&P 500 has now bounced about 50% from the March lows and is up about 6.2% year-to-date (YTD).

The Chinese and South Korean stock markets have also recently hit all-time highs. Markets in other parts of the world, such as Germany, Japan, and the UK, have lagged. US small caps (down 10.3% YTD) continue to lag large caps.

US GDP contracted 33% (annualized) in the second quarter, but economic growth stands to rebound sharply on a percentage basis in the 3rd quarter. Similar stories exist around the world. Real retail sales and manufacturing PMI data are both showing "V" recoveries. Industrial production and payroll employment have been slower to recover.

Housing is on fire. Spot lumber prices have exploded over the last several months to reach their highest level in at least ten years. Homebuilder confidence has also reached new highs, driven by low mortgage rates.

Further congressional dithering will likely impact August spending. The progression of COVID-19, both in the US and globally, will also continue to impact the global economy over the next several months. A second wave of the virus appears to have begun in Europe. At this point, the victims are skewing much younger than they did in the March-April period, which has helped limit the economic impact.

With the recent dollar weakness/strength in precious metals, we have received a few questions regarding gold exchange-traded funds (ETFs) vs. physical gold. Transaction and storage costs in physical gold are much higher than ETFs, which is one reason we generally prefer ETFs to physical metal. Gold ETFs generally do a good job of tracking the spot price of gold while providing much better liquidity, but selectivity is critical.

Equity Takeaways:

US stocks opened mostly flat this morning, with large and small caps up less than 0.25%. With the S&P 500 taking out all-time highs yesterday, the shortest bear market on record (1.1 months) concluded. The establishment of new highs technically means that a new bull market began at the March lows about five months ago.

Large technology companies have led the recent advance. The average stock in the S&P 500 index is 28% below its prior peak. There are 115 stocks in the index that are 50% or more below all-time highs, and almost 50% of stocks in the S&P 500 are below their 50-day moving averages. If these lagging stocks begin to participate in the rally, it could provide fuel for another leg higher.

Yesterday, while the market did squeak out a 0.25% rise, declining issues and volume outpaced advancing issues/volume. The summer tends to be quiet in terms of trading volume, which can lead to some unusual internals.

Historically, 6-24 months after a new high in the S&P 500, the market tends to outperform its historical averages after a 1 to 3-month digestion period.

Fixed Income Takeaways:

In the investment-grade (IG) corporate bond market, we saw another $27bb of new issuance over the last two days. More than $116 billion of new issuance has already priced in August (a record). More than $1.3 trillion of new issuance has priced in less than nine months, which is a calendar year record (surpassing 2017).

High-yield borrowers have issued more than $47 billion of debt in August – the second-highest monthly total on record. Both IG and high-yield deals have been very well received over the last several weeks, and spreads continue to grind tighter.

The commercial paper market has had a quiet few days. Levels remain tight to treasury bills. The average tier-1 corporate issuer can borrow for three months at 0.12%. Tier-1 banks are borrowing at about 0.16% for three months. Demand for federal agency paper also remains exceptionally robust.

The municipal bond market is off to a quiet start this week. The front-end of the curve is holding up well. Yields on longer-dated (10-30 year) paper have risen by about 3 basis points (bps) on the week.

A large transportation authority became the second municipality to access the Fed’s municipal liquidity facility. The Federal Reserve (Fed) facility proved to be the lowest funding cost for this borrower (about 85 bps cheaper than the primary market for 3-year short-term notes).

Monday, 8/17/20

General Takeaways:

Year to date, the S&P 500 has been up around 5.6% – but this quarter has seen some interesting divergence in leadership. Small caps for the quarter are up about 9%, and emerging markets are up around 10%. Fixed income is still outperforming equity year to date, returning around 7% YTD.

In political news, it is the week of the Democratic National Convention, which will look quite a bit different than it has in previous years. Betting odds show that while Biden is ahead, his lead has narrowed, and Wall Street is more concerned about who controls the Senate.

Nonetheless, some fear the impact higher taxes could have on the economy. But in our view, there are three reasons to think taxes might not be as much of an issue in this environment.

  1. Government spending could help offset losses from taxation
  2. Raising taxes in a pandemic will be difficult to support
  3. Federal reserve has shown a willingness to accommodate.

We can expect to see some volatility around the election but do not recommend taking outsized bets in portfolios. However, this may be a time to consider diversifiers, such as structured notes.

Equity Takeaways:

Equity futures are working their way higher this morning. In general, participation in the market has broadened across the capitalization spectrum. There has been a rotation into cyclicals such as industrials and materials, which signal that a market rally could be durable.

Fixed Income Takeaways:

New issuance last week was much higher than expected, coming in at $50 billion. This week, ten new issuers totaling $30 billion are looking to tap into the investment grade market. This would bring the year to date total to be about $10 billion shy of the $1.3 trillion record in 2017. It seems that while companies began issuing debt as a defensive cash grab strategy earlier this year, more companies are getting more on the offensive.

In commercial paper, flows were light last week as a typical summer slowdown continues. Most of the 3-month bank paper supply is trading in the 14 – 21 basis point (bps) range, the 6-month in the 17 – 27 bps range. The light supply and slow market dynamics are likely to continue for the season.

Municipal bonds traded slightly higher last week by around 5 – 9 bps. There were $11 billion in new deals, and this week is likely to see approximately $14 billion. The new issue market is seeing support from mutual funds, but all eyes continue to watch for fiscal stimulus toward state and local governments.

Friday, 8/14/20

General Takeaways:

Major US markets ended slightly in the red yesterday. This morning saw some positive news as initial jobless claims were lower than expected, although still at a level 4x higher than pre-pandemic levels. Continuing claims were around 15.5 million from 16.1 million the prior week. Senate Majority Leader Mitch McConnell announced the tabling of stimulus discussions until after Labor Day, with the Senate adjourning for its August recess.

There was a 30-year US Treasury option, which generally unimpressed the market. The 30-year yield closed yesterday around 1.44%, down 96 bps for the year.

COVID-19 data has seen the 7-day death rate flatten, as well as a decrease in hospitalizations.

Retail sales came out strong this morning and beat expectations. However, default rates in the lower-grade retail space will likely rise going forward as stressed retailers close their doors.

Equity Takeaways:

Overnight reports from retail sales in China and immigration restrictions in the UK weighed on US futures this morning.

In the US, industrial production and consumer sentiment reports will be out later this morning, and equity markets will be watching for any signs of deceleration.

3380 seems to be the high point this week for the S&P 500, near all-time highs. We’re likely to see some sideways trading ahead of the election in November.

Of interest this week was a report on company "death rates" (in this case, the probability of existing in 10 years), which gave an interesting perspective on the Growth versus Value thesis. The highest death rates were in smaller capitalization growth companies where margins are smaller. In summary, it seems that investors are more capable of discerning long-term valuation for larger companies versus smaller companies, perhaps underestimating some risks that smaller companies face.

Fixed Income Takeaways:

The taxable fixed income market continues to see new issuance with two senior unsecured offers with $6 billion of supply, bringing the total weekly supply to $48 billion, well above expectations. New issuance does not seem to be slowing with six new deals scheduled for Monday. Spreads widened 2 basis points (bps) for investment grade credit and 6 bps for high yield.

In commercial paper, spreads are still tight as the market is seeing little supply. Overall flows are lighter, and many names are trading right on top of T-Bills (15 – 21 bps range).

Benchmarks continue to be part of the conversation, now with Ameribor officially on the Bloomberg terminal, adding to the list, including LIBOR and SOFR.

In the municipal market, ratios moved to about 87%, a more normalized level. In terms of flows, $2.3 billion moved to open-end funds, compared to April’s $20 billion in outflows. However, the market volume is still relatively weak.

Eyes are on the congressional stimulus plan as the gap between Republicans and Democrats remains wide on aid to state and local government.

Wednesday, 8/12/20

General Takeaways:

Yesterday was a generally risk-off day with the S&P and Dow both dropping. However, under the hood, some bullish factors such as Growth and Momentum outperformed.

Some COVID trends are improving in the US with new hospitalizations and new deaths decreasing – but total infections are likely more substantial than the data shows. Mobility data has ticked up as well.

Fiscal stimulus is boosting profits, as companies generally beat expectations. One view of modern monetary theory (MMT) is that fiscal deficits tend to lead to higher profits/personal savings. Corporate profits as a percent of GNP continue to grow as a massive amount of stimulus has been injected into the market. For more on MMT, check out our August Key Investment Perspectives.

Equity Takeaways:

Kamala Harris seems to have been met with general acceptance from Wall Street. Relative to her party, she remains a relatively moderate figure. However, she has noted that she favors an increase to the minimum wage to $15/hr., and the increased scrutiny of Big Tech.

In market news, volatility (VIX) was down to around 22, near the levels we had come to expect pre-pandemic.

With earnings season winding down, aggregate earnings surprises were +22%, while average revenue surprises were around +1%.

In our view, there are three significant drivers of the equity market right now:

  1. Fiscal stimulus – debt at its highest level since WWII, and a new relief package soon to come.
  2. The Presidential election in November.
  3. Vaccine expectations – the US reached a $1.5 billion deal with Moderna.

Fixed Income Takeaways:

The investment grade (IG) market kicked off the week with 12 borrowers pricing new issues on Monday. Yesterday, we saw another active session in the primary market, with 13 borrowers priced at $19 billion.

Execution was firm, even with the slightly softer backdrop for risk assets. Order books were 3.8 times covered with spreads compressing an average of 26 basis points (bps) from initial to actual pricing. The expectation is for investor demand to remain strong with the Fed supporting the capital markets.

As we open this morning, we continue to see bond yields move lower and the 10-year treasury note yield at 68 bps, this is after data showed inflation has begun to creep back into the economy as the CPI rose. IG spreads were tighter by 2 bps, and high yield spreads were tighter by 8 bps.

In commercial paper, supply is still light and trading right on top of bills. There is a 10 bps spread from the 3-month to 1-year paper, which is expected to continue.

In the municipal market, the scale has been unchanged for the week; AAA munis ratios to treasuries continue to fall lower to levels we haven’t seen since February. Inside of 10 years, the ratios are below 100%.

The Federal Reserve lowered rates across the board for Municipal Liquidity Facility. The revised pricing the Fed announced Tuesday reduces the interest rate spread on tax-exempt notes for each credit rating category by 50 bps and reduces the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes.

Illinois is the only municipal issuer to use the program, borrowing $1.2 billion in June at 3.8% for 1-Year. The Fed is authorized to buy up to $500 billion of notes.

Monday, 8/10/20

General Takeaways:

The summer doldrums seem to be officially upon us on the trading volume side. However, it was still a busy weekend on the policy front in D.C. as President Trump issued a series of executive orders that aimed to extend unemployment benefits and temporary payroll tax deferrals. Additionally, another executive order extended eviction protection for student loan relief.

A little farther from home, relations with China continue to deteriorate. China announced sanctions on several notable individuals, including senators Marco Rubio and Ted Cruz, and Chief Executive Carrie Lam of Hong Kong. Hong Kong police arrested Jimmy Lai (a high profile, pro-democracy media magnate) due to a breach of the national security law placed by China earlier this year.

Equity Takeaways:

Last Friday closed another strong week as the S&P 500 was up every day – all 11 GICS sectors closed positive overall.

We have been watching the Growth/Value dynamic as well. There are some rotations into industrials and materials – sectors that benefit from a more optimistic recovery scenario. Perhaps if these cyclical factors show some leadership, it may provide credibility to the gradual rally that has been underway for some time.

Fixed Income Takeaways:

The summer volumes are down, but investors are still coming to the market. Investment grade markets are experiencing record new issuance, around $65B so far in August, and $1.3T in new issuance YTD. The estimates for this week are around $40B, and we will likely get there with nine new deals today alone.

In commercial paper, it was another slow start this morning. Some floating rate activity is occurring today, but most notably, home loans are back in the market. There hasn’t been much embrace for SOFR over LIBOR, likely due to legacy benchmarking issues and the brief history of SOFR. November will probably have more guidance from the UK parliament, but the pandemic has not slowed progress.

In the municipal market, the market experienced much lighter trade volumes, and rates drifted lower yet again (5 - 10 basis points). The elephant in the room continues to be stimulus negotiations in DC, namely in the form of aid to state and local governments.

Friday, 8/7/20

General Takeaways:

The market’s recent momentum seems to be stalling but is not in reverse quite yet. Unemployment was the morning's topic as jobless claims (reported on Thursday) were lower than expectations, coming in at about 1.2 million versus expectations of around 1.3 million. While this is the lowest since March, there are still approximately 14 million unemployed workers than there are job openings.

Similarly, this morning it was reported that 1.8 million jobs were added in July. This data was roughly in line with consensus forecasts. Further, suggesting the rising in COVID cases is causing the momentum experienced May-June is losing steam but not reversing either.

Tensions escalated with China as President Trump declared an executive order against two popular Chinese apps. Trade tensions will likely rise before they get better. On the political front, former Vice President Joe Biden’s lead has narrowed slightly in the polls, but as we’ve seen, these numbers will likely be very volatile leading up to November 3rd.

As touched upon earlier this week, the dollar is not in concerning territory just yet. Analysts think that we would need another 15 – 20% drop before it becomes a red flag.

On Monday, we asked: "With future investment returns projected to be materially lower than historical returns, what is the most preferred course of action?" Around 150 responded. The majority (two-thirds) of people decided that "try and structure a more productive portfolio" was the best option. We agree and will have more to say about this in the weeks and months ahead.

Equity Takeaways:

The labor report was driving the market this morning as the noise around government payrolls grew louder. While manufacturing missed estimates, hospitality pulled a somewhat surprising beat. However, hospitality workers will likely be making less now than before COVID.

Around 90% of the S&P 500 have reported earnings, with most companies beating (lowered) expectations. From the political arena, futures were red on the news of the executive order. Congress did not agree to the next stimulus package, but the market shrugged this information off.

Fixed Income Takeaways:

Spreads continue to tighten. Another four offerings came to market yesterday with $4.4 billion in supply, bringing this week’s total to around 38 billion. Projections for August were about $50 billion, but with this week’s strong supply, estimates were revised to approximately $75 billion in new offerings. Lipper showed fund flows of $7 billion to IG funds, bringing the total inflow of the year to $42 billion.

In commercial paper, yields continue to compress on the front end, coming in at about LIBOR + 4. This lack of supply isn’t too surprising given market conditions.

Municipal bond prices continue to grind higher, with airport and hospital bonds among the highly demanded.

The Federal Reserve released balance sheet data. The Main Street Lending Program, created to lend $600 billion in direct loans to small businesses, has only supplied $76.9 million, with $50 million of it going to one casino. This signals that there is not much demand for this program as credit conditions in the private sector have dramatically improved.

Wednesday, 8/5/20

General Takeaways:

The US dollar has weakened vs. a trade-weighted nominal currency index in 2020, but many factors depressing the dollar may be temporary. For instance, the US has underperformed the rest of the world with respect to managing the virus, while other areas, such as Europe, took more aggressive steps to lock down and are now recovering faster. Political uncertainty in the US, overall geopolitical security, and the Federal Reserve's recent actions are other reasons for recent dollar weakness.

Fiscal stimulus update: historically, Congress has acted when necessary to provide unemployment insurance to workers. We still expect a compromise to materialize in the coming days.

COVID-19 update: slow improvement continues – the percentage of the US population that lives in counties where cases are growing has declined. Perhaps reflecting this fact, real-time consumer activities, such as dine-in restaurant traffic and airline travel, are inching back to normal. Airline traffic is still only running at 30-35% of last year’s level.

Purchasing Manager Index (PMI) data: July ISM manufacturing PMI came in at 54.2 vs. expectations for 53.6. Recall that any reading above 50 indicates economic expansion. The new orders component of this index was a strong 61.6, while the employment component was 44.3. Inventories are at extremely low levels, which could provide a tailwind to activity in the third quarter (inventories will need to be replenished).

A recent Department of Labor ruling was negative concerning the use of environmental and social (ESG) factors within retirement/pension plans. There has been significant pushback from various market participants regarding this rule.

Equity Takeaways:

Yesterday was another strong day for major US indices. Large caps rose about 0.4%, with small caps up about 0.6%. Of the major sectors, 9 of 11 were higher, with only financials and health care showing small declines. Yesterday saw 102 companies set new 52-week highs, versus only seven new 52-week lows. The S&P 500 is now up about 3.5% year-to-date (YTD).

This morning, stocks opened higher once again. Large caps opened about 0.5% higher, with small caps up about 1%.

The US government has agreed with a large US pharmaceutical company to supply COVID-19 vaccines once available. In separate news, another potential vaccine supplier announced favorable early-state trial news. Stocks seem to be reacting favorably to this news.

As we get closer to another fiscal stimulus package, precious metal and mining stocks continue to react favorably. Inflation expectations have increased recently, partially due to the significant fiscal and monetary stimulus coming out of Washington DC. Rising inflations expectations, combined with meager nominal yields, are supporting precious metals.

Fixed Income Takeaways:

The investment-grade (IG) corporate bond market continues to show strength. Supply dipped a bit in July but increased over the past week and is being met with robust demand. A large, high-quality issuer was able to issue 10-year debt with a 1.10% coupon yesterday, an all-time low for a large 10-year corporate borrower.

In the commercial paper market, supply remains scarce, and any incremental yield is being snatched up by yield-hungry investors.

The last down day in the municipal bond market occurred in June. This week has been busy in terms of new issuance. Even certain airports are beginning to issue new debt, a sign that the market continues to thaw.

Monday, 8/3/20

General Takeaways:

The S&P 500 was up 5.6% in July, bringing year-to-date (YTD) returns into the green at 2.4%. Growth continues to outperform value. Growth stocks were up 7.7% in July and are now up 18.3% YTD. Value stocks were up 4% in July but are still down 13% YTD. Small cap and international stocks, while showing signs of life in July, also remain negative YTD.

Fixed income returns are also now positive across the board for YTD 2020. The Barclays aggregate index rose about 2% in July and is now up about 7% YTD. High-yield bond returns have also recovered from a sharp selloff and are now slightly positive YTD.

COVID-19: Daily new cases and hospitalization trends are slowly improving in the US, but fatalities are rising. Hot spots such as Arizona, California, Florida, and Texas are showing slowly improving trends. Cases in the Midwest do seem to be rising, however.

A second economic wave is mounting, focused in weakened sectors such as energy and retail, where bankruptcies are beginning to mount. Many of these companies were already struggling before COVID-19.

Not all economic news is negative: multiple significant M&A deal announcements came over the weekend. Several of these deals were all-cash deals, implying that certain corporate CEOs have a level of confidence in the future economy.

Friday’s employment report may highlight these divergences. In the future, stronger employment sectors will have to pick up the slack from declining sectors, such as traditional retail, hospitality, and air travel.

Demand is likely to remain depressed for quite some time in these troubled sectors.

Equity Takeaways:

Major US indices opened higher this morning, driven by M&A activity. Technology continues to lead the market, with the Nasdaq 100 opening about 1.5% higher this morning. The S&P 500 opened about 0.5% higher. Small caps were mostly flat.

Second-quarter earnings are coming in about 20-25% above lowered expectations. With approximately ¾ of companies reporting, about 80% have beat expectations. That said, the market’s reaction to earnings (whether good or bad) has been muted relative to history – companies are getting a free pass on earnings this quarter.

The month of August marks the beginning of the worst three-month seasonal period for the S&P 500. The transition from summer to fall tends to be a bit choppy.

Equity hedge funds have turned bullish and have been buying into the recent rally. Net exposure (long positions vs. short positions) is in the 93% percentile for the last three years. Hedge funds have also become slightly more positive on Europe over the past several months, although absolute sentiment remains low.

Fixed Income Takeaways:

Investment grade spreads were 15-20 basis points (bps) tighter in July, while high-yield spreads were 135-140 bps tighter. The high-yield index spread is now below 500 bps. Spreads are opening tighter once again this morning.

Less-than-expected supply in the corporate bond market has been a tailwind to spreads. Investors continue to pour money into corporate bonds.

August is opening to a busier than usual corporate issuance calendar for this time of the year.

We continue to see similar themes in the municipal bond market. Cash continues to flow into the sector; driving spreads tighter relative to treasuries. The ongoing stalemate in Washington DC has yet to weigh on the market, as an eventual compromise is expected.

Friday, 7/31/20

General Takeaways:

Stocks were mixed yesterday. The S&P 500 was down about 0.4%, while the Nasdaq 100 rose 0.5%. Small caps dropped about 0.7%. Cyclical sectors such as energy, materials, financials, and industrials led the decline and continue to lag the broader market. Energy shares are down about 38% YTD, compared to an 18% YTD gain for technology shares.

The Federal Reserve meeting on Wednesday struck a dovish tone, setting the scene for additional policy measures in September. Key line: "the path of the economy will depend significantly on the course of the virus." In the press conference, Fed Chairman Powell noted that the Fed has "lending power" but not "spending power." This line is nudging towards Congress for additional fiscal stimulus.

In the second quarter, US GDP contracted 32.9% on an annualized basis. This contraction was more than three times larger than the previous record quarterly contraction. On the bright side, the fiscal stimulus allowed for a strong consumer savings rate in the second quarter and expected third-quarter GDP projects to rebound sharply from these depressed levels.

The job market remains uneven and, according to some measures of employment, is no longer healing. Continuing jobless claims were reported at over 17 million yesterday, above expectations of 16.2 million.

President Trump does not have the authority to postpone the presidential election, but based on some recent comments, he’s creating a narrative that could call the results into question. We expect extra volatility in the coming months, but don’t believe the investors should make any dramatic shifts to portfolios due to the election. History shows that market uncertainty will likely subside once we reach the outcome, no matter who wins.

Equity Takeaways:

Yesterday evening, several prominent technology companies posted strong, above-consensus earnings. The Nasdaq 100 opened about 1% higher this morning, while the S&P 500 opened about 0.2% higher. Small caps opened about 0.5% lower.

Trading volume for options on single stocks has surpassed trading volume on the underlying individual shares for the first time. Within the options market, purchases of speculative call options have skyrocketed relative to purchases of protective puts – many investors are looking for upside participation.

Stocks with high trading activity outperformed stocks with lower trading activity during the second quarter. This type of outperformance is likely temporary, as trading activity does not provide a long-term edge, but does increase volatility.

Precious metals, including gold and silver, have had a strong run recently, bolstered by a weaker dollar and rising inflation expectations.

Fixed Income Takeaways:

Treasury yields continue to plumb new lows. Yesterday, the 10-year treasury yield hit 0.535%, an all-time low. 2-year treasury yields have also dropped and are now in the 0.10% to 0.12% range.

The pace of new issuance in the investment grade (IG) corporate bond market has slowed. Deals are still being very well received, but the summer doldrums are creeping into the market.

Investment grade inflows were $8 billion on the week, the 5th largest level on record to mark 16 consecutive weeks of inflows. High-yield funds also saw significant inflows. These dynamics continue to support spreads.

Municipal bonds are also seeing significant inflows. Over $2 billion flowed into the asset class last week, marking the 11th consecutive week of inflows. Prices continue to grind higher – July did not see a single day where the municipal bond scale declined in price.

Wednesday, 7/29/20

General Takeaways:

Yesterday was a weak session for US equities. Large caps were down about 0.7%, with small caps down about 0.75%. Of the major sectors, 8 of 11 were lower. Defensive sectors outperformed the major indices, while cyclicals such as energy and materials were the laggards.

The path to recovery from COVID-19 is still very uneven. Back-to-school plans are ever-evolving, with continually shifting rules. Around the world, clusters of infections continue to reappear, hampering a return to normalcy. On a positive note, nationwide net new hospitalizations due to COVID-19 have begun to decline in the United States after an interim peak in mid-July.

Fiscal stimulus update: the gap between the current Democratic and Republican proposals is wide. We still believe that a compromise will lead to a deadline deal within the next several weeks.

Federal Reserve (Fed) Chairman Jerome Powell will hold a press conference today at 2:30 pm to discuss this week’s Fed meeting. We don’t expect any significant changes concerning forward guidance – we expect any further major announcements will come at the September meeting. Yesterday, the Fed extended its emergency credit lending programs through the end of the year. These programs were set to expire at the end of September.

The CEOs of major technology companies will be appearing in front of a House antitrust committee today. New legislation does not appear imminent; nevertheless, market participants will be watching this meeting closely.

Measures of retail foot traffic trends continue to show improvement in most major categories. For example, home improvement stores have seen a significant increase in traffic due to the recent stay-at-home policies. Movie theater and restaurant traffic remain weak, however.

The US dollar has been falling over the past several weeks/months, while inflation expectations are rising – this is a possible trend shift that we will be monitoring closely.

Equity Takeaways:

Major US indices opened slightly higher this morning. The S&P 500 opened about 0.50% higher, with small caps up about 1.25%.

185 S&P 500 companies have reported second-quarter earnings. About 83% have beat estimates vs. the 65% historic average beat rate, but stocks that are beating estimates are essentially trading in-line with the market. This type of price action is a signal that market participants are essentially ignoring second-quarter earnings.

The market is rewarding companies that have been able to give/reiterate 2021 outlooks while punishing companies that have not been able to provide forward guidance.

Fixed Income Takeaways:

After widening significantly during the March selloff, credit spreads continue to moderate. High-yield spreads have returned to close to their historical averages, while investment-grade spreads are approaching historic lows.

Investment-grade corporate bond supply has picked up again this week, ahead of expectations. Deals continue to receive keen investor interest. Issuers typically avoid coming to market on Federal Reserve meeting days (to avoid headline risk), so we expect light supply today.

Municipal bond markets have seen muted activity this week. Yields are virtually unchanged on the week. Market participants are closely watching for clarity regarding the next fiscal stimulus package.

The existing Republican bill does not provide additional funding for state and local governments, while the Democratic bill contains about $1 trillion worth. The Republican bill does relax certain provisions regarding the use of funds from previous stimulus packages. Most policy analysts expect a compromise before the August 10th congressional recess.

Monday, 7/27/20

General Takeaways:

Major US indices were soft last Friday. Large caps declined about 0.6%, with small caps down about 1.7%. 10/11 major sectors were negative, with only the consumer discretionary sector notching a small gain.

A recent survey of CEOs throughout the United States indicated that more than 90% are bearish on the economy's current state. Hedge fund survey data also shows cautious positioning in equities, and mutual fund flows out of equities over the last several months has been consistent. These factors indicate that many investors remain cautious despite the recent rally.

COVID-19 case growth in several hotspots, such as Arizona, Florida, and Texas, seem to be plateauing/peaking. California has yet to turn the tide.

Fiscal stimulus update: wrangling continues within the Republican party regarding the amount and form of the next round of fiscal disbursements. It seems unlikely that a bill will be passed before August 1st.

The economic data reported last Friday was solid overall. The housing market remains strong, with both new home sales and prices continuing to increase. Purchasing Manager Index (PMI) data across the globe has also rebounded nicely, especially in Europe.

Nine things that could influence elections in the next 99 days:

  • COVID-19
  • Schools reopening
  • The economy
  • Biden’s VP pick
  • Conventions and debates
  • Fundraising
  • Candidates’ health
  • Geopolitical events
  • Wild card (October surprise).

Equity Takeaways:

US stocks opened mixed this morning. The Nasdaq 100 opened over 1% higher, while the S&P 500 opened about 0.25% higher. Small caps opened fractionally lower.

The coming week will be the busiest of the second-quarter earnings season. More than 180 companies within the S&P 500 will report this week. With about 25% of S&P 500 constituents already reporting, the average earnings beat has been 13.3%, with 80% of companies beating lowered expectations.

In the three days surrounding earnings, companies that are beating on revenue and EPS are outperforming the market by 1.1% versus the historical average of 1.6%. Companies that are missing on revenue and EPS are underperforming the market by 0.4% versus the historical average of 3.1%. In short, companies are essentially getting a free pass for earnings during this quarter.

Implied volatility (VIX) continues to hover in a range between 25-30, last trading around 26.

Fixed Income Takeaways:

Investment-grade (IG) corporate bond spreads were slightly wider last week, but trading has been very orderly. The issuance backdrop remains stable. New issuance tends to slow during earnings season.

Demand for investment-grade corporate debt remains robust from both domestic and foreign investors. Due to low front-end yields, we expect interest in longer-dated paper to increase. Many foreign investors are sitting on large stockpiles of cash that need constant reinvestment.

The Federal Reserve (Fed) will hold a press conference this coming Wednesday. We don’t expect much news from this meeting – we expect the Fed to provide more detail on forward guidance during their September meeting.

The municipal bond market was subdued last week. Despite very low absolute yield levels, another $2 billion of mutual fund flows moved into the asset class last week. Municipal bond fund flows have entirely reversed the significant outflows from March and just went positive for year-to-date (YTD) 2020.

The existing Republican fiscal package provides zero additional support for state and local governments. Even if aid is tacked on to the final bill, it seems likely that any further federal funding for state and local governments will come with significant strings attached.

Friday, 7/24/20

General Takeaways:

Major US indices were generally lower yesterday. The tech-heavy Nasdaq 100 led the decline, down about 2.7%. The S&P 500 was down 1.2%. Small caps were up about 0.6%. Of major sectors, 8 of 11 were lower, with defensives such as consumer staples and utilities fractionally higher. Value shares also caught a bid relative to their growth counterparts, with both financials and energy outperforming the major indices.

Tensions between the US and China continue to escalate. In retaliation for the recent closure of its Houston, TX consulate, China ordered the US to close its Chengdu consulate. Chengdu is close to the Tibet region, so the choice of this consulate holds symbolic importance.

The improvement in the labor market may be stalling. Initial jobless claims increased 109,000 last week to 1.42 million, the first w/w increase since the initial spike in late March. Other real-time indicators, such as gasoline sales and jet fuel demand, also fell last week.

As discussed in our most recent Key Question, the back-to-school experience this fall is likely to be very uneven for the seventy-seven million Americans currently enrolled in school. The education sector is a critical component of our economy, and lack of quality childcare is a significant concern for many parents. We are cautiously optimistic that most schools will reopen this fall, but the situation remains very uncertain.

The housing market remains a bright spot. Existing home sales have rebounded sharply over the last few months. Inventories remain low, which should continue to provide a tailwind to prices.

Data from multiple early-stage vaccine trials have been quite encouraging. There are four major candidates – if efficacy is confirmed in further clinical trials, large-scale production could be possible in late 2020 / early 2021 for several of these candidates.

Over the past several weeks, we have seen a rotation away from growth/momentum stocks into smaller cap/value stocks. These trends bear close watching, as they could indicate that the recent stock market rally is broadening out into other areas of the economy.

Equity Takeaways:

Major US equity markets opened lower this morning after yesterday’s weak session. The S&P 500 opened about 1% lower – small caps were also about 1% lower. The Nasdaq 100 opened 1-2% lower in volatile trading. Escalating US / China tensions are weighing on sentiment this morning.

The ratio of the Nasdaq 100 index to the S&P 500 index was about 3.3x before yesterday’s session – this is close to the peak level seen back in 2000. This ratio is typically a bit above 2x.

There are many differences between the current market environment and the tech bubble. Profitability in the technology sector is much higher than it was in the late 1990s / early 2000s. Overall market breadth (ratio of advancers to decliners) is also much stronger in today’s market.

In short, while there are some similarities between today’s environment and the late 1990s for technology stocks, there are also some significant differences – there are never any perfect analogies in the stock market.

Implied volatility (VIX) has begun to creep higher again, recently trading around 28.

Fixed Income Takeaways:

Supply in the investment-grade (IG) corporate bond market has been muted this week. That said, the year-to-date (YTD) supply is still running 84% higher compared to 2019.

Investors continue to pour money into IG corporate credit – that market has seen 15 consecutive weeks of inflows totaling over $90bb. The high-yield market is also seeing strong inflows. These fund flows continue to provide a strong tailwind to spreads.

On the other hand, leveraged loans (generally secured, floating-rate corporate debt), saw their 6th consecutive week of outflows.

Municipal bonds have seen ten consecutive weeks of positive fund flows, mirroring their corporate brethren. These strong technical flows are supporting yields, which have been declining steadily throughout July.

Initial variants of the fourth stimulus bill do not include significant aid for state and local governments. We expect some form of assistance to pass for municipalities as part of the final bill, but there is still much uncertainty around its form and size.

Wednesday, 7/22/20

General Takeaways:

Yesterday’s market action was mixed. Large caps rose about 0.2%, while small caps rose more than 2%. The tech-heavy Nasdaq 100 dropped nearly 1%. Value stocks outperformed growth, with energy shares up a stellar 6.2% on the session.

Tensions between China and the United States continue to escalate. Late last night, the US asked China to close its consulate in Houston, TX. The Chinese will likely retaliate in some fashion. A continued escalation would be a clear negative for global growth – we will be watching this situation very closely.

Congressional leaders continue to debate fiscal plan stage four. Republicans seem divided internally about what they would like to propose. It seems highly likely that a deal will get done over the next few weeks (even if it takes until early August). Without intervention from Congress, extended unemployment benefits will expire on July 31st.

Yesterday morning, the Europeans passed a landmark fiscal package, which essentially gives the European Commission the authority to raise Euros on behalf of all 27 member states. This passage is a critical step towards greater integration within the EU.

The European economy has improved nicely off the recent trough, with both PMI and high-frequency data improving significantly over the past several months. That said, US economic growth is still expected to outpace European growth over the next several years.

European companies tend to be less profitable than their US counterparts, but also carry less debt. The composition of European equity indices has also been changing over the past decade – banks are diminishing in importance, while healthcare and technology’s share of the Eurozone indices has been increasing.

Key Private Bank still recommends an overweight to US equities. However, we believe that weighting to international equities provides important diversification benefits.

Equity Takeaways:

Major US indices opened flat this morning. Technology shares rose slightly, up about 0.5%. For now, the market is shrugging off yesterday’s further escalation of US and Chinese tensions.

A Yelp report from this morning indicated that about half of COVID-19 related business closures might be permanent.

Commodities, including precious metals such as gold and silver, had a very strong rally yesterday. The US dollar has shown some weakness recently, which tends to support the metals. A weaker dollar is also a tailwind for international shares.

Implied volatility (VIX) has dropped back into the mid-20s, last trading around 25. The VIX has been trading under the critical 30 level for several weeks now.

Fixed Income Takeaways:

The municipal bond market has had a quiet week. Yields have dropped another 2 basis points (bps) over the last several days. Strong new issuance levels are being met with robust demand from investors.

Municipal bond dealer inventories remain at historically low levels. Before the March selloff, inventories were at about $15 billion. The current level is about $7 billion. This lack of secondary supply is another tailwind for new issuance demand.

The investment grade (IG) corporate bond market has quieted down this week. Monday and Tuesday were both slow days – the market seems to be taking a necessary breather.

Corporate credit spreads have continued to grind tighter even as new issuance has slowed. IG spreads were another 3 bps tighter yesterday, with high-yield spreads tighter by 20+ bps.

Money-market instruments continue to trade at very low yields. Demand for safe, short-duration securities remains extremely strong.

Monday, 7/20/20

General Takeaways:

On Friday, major US indices were mostly flat. Large caps were up 0.3% while small caps were unchanged. The strongest sectors were utilities and real estate; the laggards were energy and financials.

Over the last several weeks, large value stocks' performance has improved relative to large growth stocks. Last week, large value stocks were up about 3.4% vs. mostly flat performance for large growth stocks. International shares have also shown signs of life recently, outperforming their US counterparts over the last several weeks.

Technology is not just driving stock prices – technology is driving the economy. E-commerce is becoming an increasingly large portion of total retail sales, and investment in software is outpacing other forms of capital investment. Tech-related employment also continues to increase as a percentage of total employment.

COVID-19 update: current R0 value in the US is estimated at 1.07, implying that each new carrier of the virus spreads it to 1.07 new people. Any R0 number above 1.0 means that the outbreak is still spreading. About 90% of the population lives in a state with rising COVID-19 cases. Approximately 60% of the population lives in an area where COVID-19 fatalities are increasing.

Even though the infection numbers are still increasing, mobility data from the most impacted hotspots seems to be leveling off. Consumer activity has stopped decreasing in those areas, suggesting that any slowdown in the economy may be relatively shallow.

This week, European leaders gather at the European Union Summit to discuss a large stimulus package to fight COVID-19. This summit could be an important step towards a more unified Europe.

Extra unemployment benefits of $600 per month will expire at the end of July if Congress does not extend it. Negotiations will likely continue throughout the week on a new stimulus package. We expect a compromise to be reached by the end of the month or soon after that (Congress usually acts when it needs to).

Equity Takeaways:

Major US indices opened essentially flat this morning. The Nasdaq 100 opened about 0.2% higher, while the S&P 500 opened mostly flat. Small caps opened fractionally lower.

The next several weeks will be very busy in terms of earnings reports. The economic data calendar is light this week.

Mutual fund and ETF flow of funds data continues to indicate that investors are pulling money out of equity funds while adding to bond funds. Sentiment on equities remains cautious.

Stock market participants will be carefully watching Capitol Hill negotiations – volatility could elevate this week, depending on headlines. Still, as noted above, we ultimately expect that a deal will be reached.

Fixed Income Takeaways:

We are expecting another busy week of new issuance in the investment-grade (IG) corporate bond markets. Spreads in both IG and high-yield bonds continue to grind tighter. The yield on a widely followed corporate bond index is at an all-time low of 1.98%.

The weakest high-yield borrowers (CCC-rated companies) are having a challenging time raising capital. Investors, fearing increased defaults/bankruptcies, are shunning the weakest credits.

We spoke with a sizeable fixed-income money manager last week – they are not expecting a V-shaped recovery in the economy. This money manager does not believe that the current level of Federal Reserve support for the economy will continue indefinitely. Thus, they avoid companies that will suffer in a drawn-out recovery scenario, including retail/hospitality credits.

The municipal bond market was virtually unchanged on Friday after a busy week of new issuance.

Friday, 7/17/20

General Takeaways:

US stocks were moderately lower yesterday. Large caps finished about 0.3% lower, with small caps down about 0.7%. That said, small caps have had a strong week overall, up 6% over the previous 5 trading sessions vs. 2% for the S&P 500 over the same timeframe.

Initial jobless claims have been showing gradual improvement (1.3mm vs. 1.31mm last week) but remain at elevated levels. Continuing claims decreased by 422k from 17.76mm to a seasonally adjusted 17.4mm. Extended unemployment benefits are set to expire on July 31st barring additional action from Congress.

On the positive front, retail sales jumped 7.5% last month vs. expectations of 5%. The housing market also continues to show strength. With limited inventory and mortgage rates below 3% (an all-time low), we expect the housing market to remain strong over the near-term.

Another fiscal stimulus package is expected over the next few weeks, but its form and size are still yet to be determined. The White House is pushing for a payroll tax cut, which the Democrats oppose. There is also debate over the size of continued unemployment insurance and additional support to state and local governments.

COVID-19 update: infections continue to spike higher in certain states, while the fatality rate has also begun to inflect higher although at a slower rate than the increase in cases. The effect of this sobering news on the market has been somewhat offset by recent encouraging data from early-stage vaccine trials.

High-frequency economic data, such as restaurant traffic and hotel occupancy, continues a slow grind higher, although restaurant traffic has been quite choppy since the mid-June resurgence in COVID-19 cases.

Equity Takeaways:

Major US indices opened mixed this morning. The S&P 500 opened fractionally higher, while the Nasdaq 100 opened fractionally lower. Small caps also opened essentially flat, up 0.2%.

Equity markets continue to balance negative news on the spread of COVID-19 with positive news on the vaccine front and the potential for additional fiscal stimulus.

The technology sector comprises about 30% of the S&P 500, which is approaching levels not seen since the tech bubble of the late 1990s. That said, profitability within the tech sector is much higher today. Increased regulation is a threat to the future profitability of the largest tech companies but does not seem to be a near-term risk.

Value stocks have had a strong week relative to growth stocks. We think it’s a bit too early to call for a secular shift towards value stocks, however, this metric bears close watching.

Fixed Income Takeaways:

Municipal bond prices have staged a nice rally this week. Yields are 5-8 basis points lower across the curve this week. Mutual fund inflows continued again this week, providing a tailwind to spreads.

Airport and hospital bonds saw improved liquidity this week. One airport was able to take advantage of the strong new deal market to issue new debt.

Municipal market participants will be closely watching fiscal stimulus negotiations over the next several weeks. Many state and local government budgets have been strained due to COVID-19 and are hoping for aid to help bridge the gap over the next 12 months.

The corporate bond market had a light week for new issuance, however, deals are still getting done at extremely attractive terms for borrowers. A large bank was able to borrow at 1.375% for 10 years, a record low yield.

Inflows continue into corporate credit mutual funds and ETFs. Spreads in both investment-grade (IG) and high-yield corporate bonds remain firm.

Wednesday, 7/15/20

General Takeaways:

US stocks had a strong day yesterday. The S&P 500 was up about 1.4%, with small caps about 1.7% higher. All 11 major sectors were higher. Cyclicals such as energy, materials, and industrials led the advance.

Headline Consumer Price Inflation (CPI) rose 0.6% in June, in line with expectations. The YoY headline gain is about 0.71%, indicating that inflationary pressures within the economy remain modest.

COVID-19 cases and hospitalizations continue to increase sharply in the US. Fatalities have also inflected higher over the last several days. A widely followed model is projecting US cases to peak in about three weeks, so the next month remains extremely important.

Despite the recent resurgence in US COVID-19 cases, several corporate confidence measures have rebounded sharply over the last several months.

The five largest stocks in the S&P 500 represent nearly 25% of the index, a record. A high level of concentration also exists within certain sectors, especially technology, communication services, and consumer discretionary.

The historically high premium of growth stocks over value stocks is not just a US phenomenon; it persists globally. Sentiment plays a large part in this divergence, as growth stocks have outperformed value stocks for the better part of a decade.

Equity Takeaways:

Major US equity indices opened higher this morning on positive vaccine news. The S&P 500 opened about 1% higher. Small caps opened about 2.5% higher. Continuing yesterday’s strength, economically sensitive sectors such as energy and industrials are outperforming the broader indices this morning.

"Reopening" stocks such as airlines, banks, and energy companies jumped disproportionately higher on this morning’s positive vaccine news. These companies have been most affected by the COVID-19 induced recession and may benefit the most if a vaccine permits a broad restart of the economy.

The highly cyclical small cap value index is still down about 25% year-to-date (YTD). Large cap technology companies have continued to lead the market higher, coming out of March’s trough in the broader markets.

Implied volatility (VIX) continues to hover around 30 – this morning, it opened slightly lower at 28.50.

Fixed Income Takeaways:

After a non-eventful June for municipal bond rates, yields began dropping last week and have continued to drop this week. The municipal bond market has seen eight consecutive weeks of fund inflows, averaging about $1 billion a week, providing a tailwind to prices.

The municipal new issue market continues to hum along. After about $8 billion of issuance last week, we expect a very strong $14 billion of new issuance this week. The average weekly issuance has been between $5-$6bb in 2020. It is a good time to issue bonds if you are a state or local government.

Conversely, supply in the corporate credit market has been relatively light this week. Issuance has been concentrated in REITs this week, and we are expecting banks to tap the markets after the earnings season.

There is a "risk on" tone in the fixed income market this morning in sympathy with higher equities. Energy credits are leading spreads tighter.

Federal tax payments are due today, putting a bit of pressure on money-market instruments due to redemptions (to pay tax bills).

Monday, 7/13/20

General Takeaways:

Last week was a big week for global equities. US growth stocks rose by 3.5% on the week, while the broader S&P 500 was up 1.8%. Growth stocks are up 15.7% year-to-date (YTD), with value stocks down 15.8%. Small caps are down about 14% YTD.

Chinese stocks (Shanghai) continued their strong rally last week, up 7.7% on the week – now up over 12%.

COVID-19 update: New York City released a milestone, with zero new deaths reported late last week. On the other hand, Florida reported a record number of new cases at over 15,000 in a single day. Hospitalizations also continue to increase in certain states.

COVID-19 is also becoming a political issue, with an increasingly large portion of the country becoming more concerned about its spread. This concern is leading to cautious activity. As an example, restaurant diner traffic continued to falter over the weekend.

Congress will be back in session on July 20th and will have about two weeks to hammer out a new fiscal stimulus package (session runs until July 31st). Extended unemployment benefits will expire on July 31st.

The performance divergence between companies with more stable earnings (tech, communications, health care, staples, discretionary, utilities, REITs), and cyclical companies (financials, industrials, materials, energy) continues to widen. Technology shares continue to lead the market higher.

Equity Takeaways:

The S&P 500 opened about 0.9% higher this morning, with the Nasdaq 100 up about 1.5%. Small caps also opened higher, up 1%.

Increased liquidity via monetary support and continued fiscal stimulus, continue to provide a strong tailwind for equities.

Mergers and acquisitions (M&A) are picking up again, with several large deals announced this morning. Such activity signifies that corporate executives feel emboldened to take risks and part with some of their excess cash.

Partial restrictions on state economies don’t seem to be having a significant impact on economic growth, and market participants continue to look past increasing COVID-19 cases/hospitalizations.

In the second quarter of 2020, S&P 500 earnings are expected to decline by 44% vs. Q2 2019. Earnings for value stocks are expected to decrease by more than 60% on aggregate. Growth stock earnings are expected to hold up somewhat better, yet projections anticipate a drop of about 30% vs. Q2 2019.

At -44%, forecasting indicates the second quarter of 2020 should be the trough for earnings in this cycle. Q3 2020 earnings are expected to drop 25% vs. Q3 2019, and Q4 2020 earnings are expected to drop 18% vs. Q4 2019.

Fixed Income Takeaways:

Corporate credit spreads have flattened out in the United States. The pace of new corporate issuance has moderated somewhat over the last few weeks. Investors are showing a bit of fatigue and have begun demanding more attractive terms from issuers.

Despite slightly waning demand for corporates, spreads are tightening in other areas of the fixed income markets. Mortgage spreads are compressing. The 30-year mortgage rate in the US recently dropped below 3% for the first time in history. Emerging market bond spreads have also continued to tighten, reflecting a more "risk-on" tone over the past few weeks.

Municipal bond prices staged a strong rally last week, with yields on longer-dated paper dropping by 10 basis points (bps). Driving this rally was the strong performance of recent new municipal deals. Inflows into municipal bond mutual funds are also providing a nice tailwind to the sector.

Certain hospital and transportation municipal issuers have remained under pressure due to the continued COVID-19 outbreak.

Friday, 7/10/20

General Takeaways:

Yesterday, large cap US stocks were down about 0.50%, with small caps down about 2.3%. The tech-heavy Nasdaq 100 rallied about 0.80%. Continuing a trend that has persisted for most of 2020, cyclical sectors underperformed the broader indices. Energy stocks dropped 4.9%, while industrials and financials both fell about 2.1%. Conversely, the consumer discretionary and technology sectors both rose slightly.

COVID-19 hospitalizations in the US are rising at a slower rate than cases, but in certain states such as Arizona, Texas, South Carolina, and Nevada, ICU bed capacity continues to decrease. Capacity has not yet reached a critical level in any of these states, but these metrics bear close watching.

High-frequency data: restaurant diner data continues to inflect lower from an interim peak in mid-June. The increase in COVID-19 cases appears to be weighing on restaurant foot traffic.

China’s stock market has rallied significantly over the past few months, with Chinese large caps approaching 2015 highs. Chinese officials appear to be monitoring the situation for signs of a bubble.

Both initial and continuing unemployment claim data have improved slightly over the past few weeks. That said, the absolute numbers are still extremely high, and we are continuing to see increased layoffs/bankruptcies in affected sectors.

Commercial real estate investments can provide steady cash flow in a market environment where it is challenging to generate yield. Despite possible future headwinds for office properties, areas such as medical office buildings, properties tailored towards digital developers, and industrial buildings/warehouses are seeing secular tailwinds.

Equity Takeaways:

S&P 500 futures were down as much as 0.60% overnight but rallied slightly in the morning. The S&P 500 opened mostly flat, with the Nasdaq opening about 0.50% lower. Small caps opened about 0.50% higher.

For the last six weeks, the S&P 500 has traded between 3,000 and 3,200 – the current level is about 3150. A sustained break above 3,200 or below 3,000 would be a notable development.

The Nasdaq 100 closed at an all-time high yesterday, but breadth within the technology sector was weak. The implication is that the number of stocks driving the Nasdaq higher continues to narrow.

Market participants seem increasingly worried about increasing COVID-19 hospitalizations. It may be tough to get a sustained move higher in stocks until we see improvement in this data.

The 50 largest stocks in the S&P 500 have a median year-to-date (YTD) return of about 2.5%. The 50 smallest stocks in the S&P 500 have a median YTD return of about -40%.

Fixed Income Takeaways:

Treasury yields are dropping this morning on COVID-19 fears. The 10-year treasury yield is currently about 0.59% - the last time 10-year rates were this low was April.

Corporate borrowers continue to tap the credit markets to take advantage of historically low interest rates. With so much recent new issuance, we expect investors to become choosier by demanding more attractive terms from issuers.

Reflecting slightly more cautious sentiment, investment-grade (IG) corporate bond spreads were about 1 basis point (bps) wider yesterday, with high-yield spreads wider by 8 bps.

Investment-grade (IG) corporate bonds continue to outperform high-yield bonds. In the last week, another $7 billion flowed into IG credit, the 13th consecutive week of inflows.

On Thursday, municipal bond yields were about 2-4 bps lower in longer-dated paper. Despite meager absolute yields, investors continue to add to their municipal bond positions.

Due to recent budget shortfalls caused by COVID-19, state and local taxes may increase going forward. We also expect to see continued heavy new issue municipal bond supply, partially due to funding gaps caused by the aforementioned budget shortfalls.

Wednesday, 7/8/20

General Takeaways:

Large cap US stocks fell about 1% yesterday, with small caps down about 2%. Cyclicals such as energy and financials led the decline, down about 3% and 2% respectively. Of the major US sectors, 10 of 11 were lower, with only the defensive consumer staples sector higher, up about 1%.

Year-to-date (YTD) significant performance divergences continue in the equity markets. For example, the Russell 1000 Growth Index is up 13.3% YTD, while the Russell 1000 Value Index is down 16.3% YTD (energy/financials driving the weakness). Emerging markets are showing signs of life, with China’s Shanghai index up about 11% YTD on the back of strong recent performance.

Another divergence: equity prices seem to be decoupling from negative COVID-19 news & economic weakness. Some possible reasons for the strong recent performance of equities include the potential for new fiscal stimulus (expected by the end of July), as well as "less bad" economic numbers in the USA and a strengthening recovery elsewhere in the world.

COVID-19 cases continue to accelerate in the USA - hospitalizations have inflected higher as well. The R0 value has risen to 1.10 nationally, implying that each new carrier infects 1.1 new people. Newer cases seem concentrated in younger people, which could translate to a lower fatality rate going forward.

ISM Purchasing Manager Index (PMI) data: Services sector PMI for June came in at 57.1 vs. expectations of 50.1. Recall that any number above 50 indicates economic expansion. The New Orders component was a strong 61.6, while the Employment component was still relatively weak at 43.1.

High-frequency economic data: Restaurant dining has inflected lower again and is down 70% YoY (was down about 40% YoY in mid-June). Hotel occupancy and air travel continue to slowly improve from depressed levels, although hotel occupancy is normalizing at a faster rate.

Equity Takeaways:

Major US indices opened higher this morning. The S&P 500 rose about 0.7% in early trading, with the tech-heavy Nasdaq 100 up about 1%. Small caps rose about 0.5%. Chinese stocks continued a recent rally, up over 2%.

Growth continues to outperform value. Financials represent the most significant component of the value sector and have shown persistent weakness throughout the year.

Second-quarter earnings for the financials will be pressured by credit losses, but companies with exposure to the capital markets should fare better due to high trading volumes. Investors will be watching for details on how recent forbearance programs have affected bank loan credit quality/loss provisions.

Implied volatility (VIX) drifted higher during yesterday’s trading but opened slightly lower this morning, recently trading at 28.3.

Fixed Income Takeaways:

Typically, at this point in the summer, the fixed income markets are in the "summer doldrums." Monday bucked the trend with 16 new issues pricing ($12 billion total size). Yesterday was a bit quieter, with only three deals pricing.

At some point, continued heavy supply could put some pressure on corporate bond spreads, but we haven’t reached that point yet. High-yield spreads have tightened for five consecutive days after showing some weakness in mid-late June (investors bought the dip).

After two weeks of very stable yields in the municipal bond market, longer-dated yields dropped a few basis points yesterday. We expect a large amount of new municipal bond supply to come to the market on Wednesday.

Municipal market participants will continue to monitor the situation surrounding COVID-19 closely. If hospitals must cut elective surgeries due to patient overflow, profitability will suffer. Also, airline demand remains very weak, which is a negative for transportation credits.

Mitch McConnell noted that he is open to a certain amount of state and local aid in the next fiscal stimulus bill (likely a smaller amount than the recent bill that passed the House and failed in the Senate).

Monday, 7/6/20

General Takeaways:

Last Thursday, large cap US stocks closed about 0.50% higher, with small caps also about 0.50% higher. The materials and energy sectors led the way, each up between 1-2%, while real estate was the laggard, down 0.35%.

Both economic and market environments remain unprecedented. In just the last six months, we’ve seen a Presidential impeachment, a global pandemic, oil prices below $0, and historic volatility in global stock markets.

US long-term interest rates have never been lower, while stock prices have never been higher (even when adjusted for inflation). Government debt/GDP is approaching all-time highs not seen since the end of World War II.

COVID-19 update: infections continue to rise sharply nationwide. However, fatalities have not yet begun to move higher. We will continue to monitor this data closely in the coming weeks.

Realtime hotel occupancy, restaurant dining, and air travel numbers remain extremely weak on a year-over-year basis. Restaurant dining numbers have taken a leg lower over the past few weeks after a bounce in early May.

June’s employment report was a mixed bag. The headline number was substantial; however, some of the underlying components (initial and continuing claims) remained weak. Also, most of the data were collected on June 12th, which corresponds with an interim national low in COVID-19 cases (infections have risen sharply since this data was collected).

Leisure and hospitality jobs showed a strong bounce-back but are still over 28% below peak employment levels. Overall, total employment is down about 10% from the recent peak.

Over the weekend, the Beijing police arrested one of the more outspoken critics of President Xi. Two US aircraft carriers have been dispatched to the South China Sea. Tensions between the US and China are likely to continue increasing over the next several months.

Equity Takeaways:

Major US indices opened higher this morning and seemed to be shaking off any form of negative news (including the developments in China over the weekend). Large caps opened about 1.5% higher, with small caps up 1.75%.

Over the last two quarters, the S&P 500 was down over 20% in one quarter and up over 20% the next quarter. This type of price action has never occurred before.

Stocks have been trading in a range since early June. It will be a bullish signal if the market can close above the recent range top of approximately 3200 on the S&P 500.

Implied volatility (VIX) declined sharply last week and is now trading under the key 30 level once again. This morning, the index opened at 27.75.

Fixed Income Takeaways:

Several new corporate bond deals were announced this morning. The tone is strong. The yield on the investment-grade corporate bond index is at an all-time low, producing a favorable environment for borrowers.

Investors pulled over $5 billion from high-yield bond funds last week. This is the largest weekly high-yield outflow in over three years. At the same time, investors added over $7 billion to investment-grade bond funds.

Municipal bond yields have remained unchanged for the last five sessions. New issuance remains at elevated levels. In June, over $46 billion of new issuance priced, the strongest June since 2015. In the first half of the year, total municipal bond issuance was up 23% vs. the same period in 2019.

Thursday, 7/2/20

General Takeaways:

Large cap US stocks were up about 0.50% yesterday, with small caps down about 1.5%. Sector performance was also mixed. Real estate, utilities, and communications services were up over 2%, while financials dropped 1%, and energy fell over 2%.

US non-farm payrolls rebounded another 4.8 million in June vs. expectations for a rise of 3 million. The unemployment rate dropped to 11.1% from 12.3% last month. Leisure, hospitality, retail, and healthcare jobs all saw good bounce back numbers as businesses reopen.

Despite the stronger-than-expected headline number, persistently high readings for both initial and continuing jobless claims are cause for concern. Initial jobless claims were 1.43 million vs. expectations of 1.35 million, and continuing claims were 19.29 million vs. expectations of 19 million. The initial jobless claims data is improving at a much slower rate than the headline payroll report.

The Federal Reserve (Fed) released minutes from their June 9-10 meeting earlier this week. Uncertainty and risk were the main themes. The Fed believes that a vast range of outcomes is possible over the coming months. The Fed also noted that additional monetary and fiscal stimulus will likely be needed.

US Purchasing Manager’s Index (PMI) data: June ISM Manufacturing PMI was 52.6 vs. expectations for 49.5. May’s reading was 43.1. Recall that any reading above 50 indicates economic expansion. A V-shaped recovery is underway within the manufacturing sector, but questions about its duration remain.

According to Google Trends, searches for terms such as "barbeque, boat and RV" are at all-time highs. Searches for more traditional vacation types are down, reflecting a pronounced shift in consumer behavior.

We attended a virtual Opportunity Zone conference – notes follow. Approved real estate construction projects are being completed, but are taking longer than expected (labor issues, etc.). Material supply issues have not been a problem. Regulators have also been surprisingly flexible with work schedules.

There are very few loans being done on the real estate financing side in either the retail or hospitality space. Multi-family / apartment deals can still get financing. Concerning office buildings, the expectation is that square footage per employee is going to increase going forward.

Equity Takeaways:

Major US indices opened higher this morning as the non-farm payroll data was received favorably by the market. Large caps opened about 1.5% higher, with small caps up about 2%.

Over the last few weeks, the volume on the Nasdaq exchange has continued to outpace volume on the NYSE – this is a sign of increased speculative activity.

The first week of July tends to be a seasonally strong period for US equities.

Implied volatility (VIX) has dropped significantly this week. After Thursday’s strong opening, the VIX has fallen to about 26.5.

Fixed Income Takeaways:

Interest rates rose slightly this morning in response to the strong non-farm payroll data, with the 10yr treasury trading around 0.71%. The bond markets close at 2 pm ET today due to tomorrow’s market holiday.

Investment-grade (IG) corporate credit opened strong once again this morning. We expect a quiet trading session due to the early bond market close. Borrowers continue to take advantage of attractive funding costs to bolster their balance sheets.

Despite the relatively strong IG credit performance, high-yield funds are expected to have seen significant outflows in the past week. High-yield investors have become jittery as COVID-19 continues to spread.

Commercial paper market activity was surprisingly strong this week – typically, market participants will wind down going into quarter-end, but recent activity has been robust.

The municipal bond market has remained quiet this week, with yields trading in a very tight range.

Wednesday, 7/1/20

General Takeaways:

Yesterday, the S&P 500 was up about 1.5%. Small caps also rose about 1.5%. The Nasdaq 100 continued its strong relative performance, up almost 2%. All 11 major sectors were positive. Energy and technology led, each up about 2% while industrials and utilities lagged, each up about 0.5%

Large caps are down about 3% year-to-date (YTD) but were up about 20% for the second quarter. Small caps are still down 13% YTD after shooting up by about 25% higher in the second quarter. Smaller companies tend to be more cyclical than larger companies and tend to perform worse going into recessions, but outperform in the initial phases of a recovery.

Sector divergences remain pronounced. Technology shares continue to lead – up about 30% for the second quarter and 15% YTD. In general, growth continues to outperform value. For example, energy shares are still down 34% YTD despite a substantial 30%+ bounce in the second quarter.

Concerning fixed income performance, the Barclays Aggregate index was up 6.1% in the second quarter, with total return now clocking in at 8.7% YTD. High-yield bonds rallied about 10% in the second quarter but are still down 3.8% YTD. Municipal bonds rallied 2.7% in the quarter and are now showing a 2% total return for the year.

COVID-19 update: the estimated R0 value is 1.04 in the United States, indicating that each new carrier is passing the virus on to 1.04 people. Younger people are increasingly spreading the virus, but fatalities are still predominantly concentrated in older people.

Congress will be on summer recess until mid-July. The timeline is essential as many significant benefits are set to expire at the end of July.

Equity Takeaways:

This morning, futures had been in the red, but some positive news regarding a possible treatment for COVID-19 pushed stocks higher. The S&P 500 opened about 0.5% to the good. Small caps also opened about 0.5% higher.

The second quarter of 2020 was the best quarter of stock market performance since the fourth quarter of 1998. Most of the gains occurred in April-May. In June, the S&P traded in a range of 3000 to 3200.

The number of analysts revising their earnings estimates higher topped 50% recently after troughing at about 8% in April. These rising estimates indicate that analysts expect the second quarter of 2020 to be the trough for earnings during this cycle.

Fund flows into European equities increased last month. European economic data came in better than expected for June, supporting stocks. After a long period of relative underperformance, European shares have outperformed US stocks over the past six weeks. This week's edition of Key Questions discusses Europe in more detail.

Fixed Income Takeaways:

Both investment-grade (IG) corporate and high-yield spreads have recovered significantly since the start of the crisis but are still wider YTD. IG spreads were 122 basis points (bps) tighter in the second quarter. High-yield spreads were tighter by over 250 bps.

This spread tightening led to strong Q2 price performance. Credit racked up its biggest quarterly return since 2009. IG corporate bonds were up about 9% during the quarter, with high-yield up over 10%.

New corporate bond issuance set a record during the second quarter. Supply has already passed the full-year level for 2018, and 2020 is likely to set an all-time record for new issue supply.

The minutes from the June 9-10 Federal Reserve meeting will be released today. Market participants will be parsing the text for any information on plans for Yield Curve Control, or further details on forward interest rate guidance.

The secondary municipal bond market was quiet again yesterday. Rates were unchanged. The new issue market remains busy as issuers attempt to price new deals before the Friday holiday.

Tuesday, 6/30/20

General Takeaways:

Yesterday, the S&P 500 was up about 1.5%. The Nasdaq 100 was up 1.1%. Small caps fared very well, up 4%. All 11 major S&P sectors were in the green. Industrials led the market, up 3.2%, with health care the weakest sector, up 0.9%.

Chinese President Xi signed another national security law targeted at the unrest in Hong Kong. In response, the United States has begun eliminating Hong Kong’s special status under US law, which will likely start to crimp trade further between the two nations.

COVID-19 update: a full lockdown was re-implemented in Victoria, the second largest state in Australia. Global stock markets have been able to digest regional/targeted lockdowns, but full broad-scale lockdowns would likely increase volatility once again.

Purchasing Manager Index (PMI) data: Chinese economic data continues to strengthen, with the official PMI coming in at 50.9. Recall that any reading above 50 indicates expansion.

The US Department of Labor (DoL) proposed a rule that will make it harder for environmentally and socially responsible (ESG) funds to gain inclusion into 401k plans. We expect much debate between the DoL and industry participants regarding the merits of ESG funds.

Equity Takeaways:

Major US indices opened flat to slightly lower this morning. The bright spot was the tech-heavy Nasdaq 100, which opened about 0.7% higher after underperforming the broader markets yesterday.

Yesterday was an accumulation day with a "risk on" tone. Advancers outnumbered decliners by about 3:1, and advancing volume outnumbered declining volume by a factor of almost 5:1.

Implied volatility (VIX index) has stayed above 25 for all but one trading session over the last four months. The last time the VIX stayed this high for such an extended period was 2011.

Since the market experienced a breakaway momentum breadth thrust in early June, prices have chopped sideways. Typically, after a strong breadth of trust, the market experiences another quick impulse higher.

The Russell indices had their annual rebalancing last Friday – this rebalancing resulted in significant changes to both the Russell value and Russell growth indices.

As second-quarter earnings season progresses (which is expected to be very weak on an absolute basis), we will be closely watching how market participants react to earnings news. In a healthy market, companies that exceed earnings expectations should see their stock prices respond favorably. Conversely, negative news is often ignored or discounted in a healthy stock market.

Fixed Income Takeaways:

Even with the stock market up yesterday, the tone in the fixed income markets was weak. Although issuers are still able to borrow at very attractive rates, new deal demand seems to be waning a bit.

Asset flows into fixed income remain strong, providing technical support for the market. Over $8 billion flowed into investment-grade (IG) bond funds in the past week.

There is a tug of war in the bond market between Federal Reserve purchases supporting spreads vs. negative news on the COVID-19 front pressuring spreads.

Commercial paper markets will likely remain very quiet this week, as the combination of quarter-end and the July 4th holiday has put a damper on activity.

We expect heavy new issuance in both the taxable and municipal fixed income markets today. Later this week, volume is expected to slow notably (markets are closed on Friday for the holiday).

High-yield municipals have staged a strong rally in May-June, recovering much of their losses from earlier in the year.

Monday, 6/29/20

General Takeaways:

On Friday, both large cap and small cap US stocks were down about 2.5%. All 11 sectors finished lower on the session. The defensive utility and health care sectors fared the best, each down about 1%. Conversely, financials and communication services were both down over 4%.

Prediction markets now ascribe a 60%+ chance to a Biden win in November’s presidential election. Important swing states such as Michigan, Wisconsin, Florida, and Pennsylvania, which helped propel Trump to victory in 2016, now show Biden ahead in the polls by 6-8%. We’d acknowledge, however, that there’s a long way until Election Day and a lot could change between now and then.

New daily COVID-19 cases are at an all-time high nationwide. However, the fatality rate has not yet inflected higher – this metric obviously bears close watching. Masks appear to be effective in controlling the spread of the virus. In states where masks are mandatory, trailing week-over-week growth in cases is notably lower compared to states that do not require masks.

This week will be a busy one in terms of economic data for a holiday-shortened week. On Thursday, we will receive monthly non-farm payroll numbers, which will update the unemployment rate for June.

The National Association of Real Estate Investment Trusts (NAREIT) released monthly rent collection data. Most real estate sectors showed improved rent collection in June vs. May. For example, retail shopping centers collected about 49% of rent in May – this number improved to over 60% in June.

For context, industrial tenants have consistently paid 98-100% of rent throughout the crisis. Industrial warehouses have benefitted from the secular shift towards increased online ordering – this trend was in place before the crisis and has only continued to strengthen.

Equity Takeaways:

Sunday’s overnight session was mixed. Early in the overnight session, equities gapped lower but recovered to open mixed this morning. The S&P 500 opened about 0.50% higher, with the tech-heavy Nasdaq 100 trading about 0.75% lower. Small caps opened flat to slightly higher.

Friday qualified as another distribution day in the stock market. Decliners outnumbered advancers by a factor of 4.5:1. Declining volume outnumbered advancing volume by about 6:1. One caveat: Friday was the annual rebalancing day in the Russell market indices, which elevated volatility at the close.

Implied volatility remains elevated and is currently trading around 35. The long-term average for this metric is 19-20.

Fixed Income Takeaways:

Treasury yields were lower on Friday as a "risk off" tone pervaded. The 10-year treasury note currently yields about 0.64%.

On Friday, spreads were slightly wider in investment-grade (IG) paper and about 11 basis points (bps) wider in high-yield paper. Even with choppiness in the market last week, over $20 billion in IG new issuance was able to price.

The high-yield market had a record month for new issuance, pricing over $55 billion for June.

The Federal Reserve (Fed) announced the results of their initial corporate bond purchases from June 16th. The Fed bought just over $200 million across various sectors. Their custom index includes about 800 issuers that are eligible for potential purchase.

The municipal bond market continues to see steady rates and increasing new issue supply. Last week, more than $9 billion of the bond supply priced, which was about 1.3 times the expected amount. This week, we expect over $7 billion in new deals, which is between a multiple of two or three times what you would typically see during a holiday-shortened week.

Friday, 6/26/20

General Takeaways:

US markets were buoyed yesterday afternoon by the results of the Federal Reserve's (Fed) bank stress tests. Large caps were up 1.1%, with small caps up 1.7%. Of the major sectors, 10 of 11 were higher, led by financials and energy. The only sector in the red was the utilities sector, down 1%.

Bank stress test recap: existing regulations were modified to allow for large banks to return to the venture capital business (among other things). Bank stocks reacted favorably to this news.

We've seen progress in reducing unemployment claims, but the absolute level of claims is still extremely high. At some point, the data will need to be good (not just "better") for the stock market to continue to rally.

Elective surgeries were halted in Texas hospitals yesterday due to concerns about ICU bed capacity. On a national level, bed capacity seems adequate in most places, but the trends in certain states are worsening.

Aggregate spending data indicates that the pace of consumer expenditures has rebounded sharply for lower-wage earners. Still, higher earners have remained cautious about increasing spending back to pre-virus levels. Concerning restaurants, OpenTable dine-in data showed a sharp drop in seatings last week as consumers increased social distancing once again.

The Federal Reserve continues to purchase mortgages quickly; however, spreads on mortgages relative to treasuries remain wide on a historical basis. This spread does not appear to be liquidity or credit-driven. Rather, investors may simply be directing funds towards investments with more attractive yields.

Equity Takeaways:

US major indices opened about 0.5% lower this morning, with small caps down about 0.75%. After leading the market higher yesterday, financials opened lower this morning as investors continue to digest the results of yesterday's bank stress tests.

Breadth was solid yesterday, with advancers outnumbering decliners by a factor of about 2:1. Implied volatility (VIX) fell back into the low 30s once again.

After regulators released their results yesterday, it does not appear that many banks will be forced to cut their dividends. The banks will go through another round of stress tests in 45-60 days.

The two fundamental market drivers right now remain COVID-19 and stimulus. The stock market cares more about the economic reaction to COVID-19, rather than the actual caseload.

After this pandemic concludes, we expect the overall savings rate to increase – we expect consumers to remain cautious coming out of the crisis.

Fixed Income Takeaways:

Only one investment-grade (IG) corporate new issue was priced yesterday. The pace of new supply has moderated this week. That said, higher-quality borrowers can still access credit at very attractive levels. For example, yesterday, an A3/A- rated technology issuer could borrow for ten years at 1.65%.

IG spreads were stable yesterday, while high-yield spreads were about 10bps wider. The tone in the high-yield market has weakened. Mutual fund flows indicate that investors pulled money out of high-yield funds last week for the first time in about three months.

The bank stress tests were somewhat anti-climactic for the credit markets. Banks will still be required to carry a large amount of liquid assets on their balance sheets, which is positive for bank credit.

Yesterday was another stable day in the municipal bond market. Over the last seven days, yields have moved very little. Municipal bond mutual funds saw about $1.5 billion of net inflows last week, a solid number.

Hospital revenue generally rebounded in May. Elective surgeries are important revenue streams for hospitals. Most hospitals are structured as non-profit organizations, funded with municipal debt. If COVID-19 forces hospitals to postpone elective surgeries once again, it would be a negative for the sector.

Thursday, 6/25/20

General Takeaways:

Large cap US stocks were down about 2.5% yesterday, with small caps down 3.5%. Cyclicals fared the worst, with energy down over 5% and financials/industrials each down about 3.5%. All 11 major sectors were lower. Defensives, such as utilities and consumer staples, fell the least. Utilities were down about 1%, with staples down about 1.5%.

Much of yesterday’s weakness stemmed from news that COVID-19 cases continue to rise throughout much of the US quickly. Cases are now rising in 27 states.

The tri-state area of New York, New Jersey, and Connecticut announced a 14-day quarantine on visitors from certain states with worsening COVID-19 metrics. Some Western states have postponed their reopening processes, highlighting the fact that this crisis may cause significant regional disruptions during the upcoming months.

The recent expansion of the outbreak is causing considerable uncertainty for businesses. For example, the planned reopening of Disneyland in California has been further delayed.

Economic data: Initial jobless claims came in a bit higher than expected while continuing claims were slightly lower than expected. Both remain at extremely high levels on an absolute basis. Durable goods orders rebounded 15.8% in May after an 18% drop in April.

Results from recent stress tests on large US banks will be released today. It remains to be seen whether bank dividends will be impacted.

Representatives from our Investment Center recently attended a virtual conference on sustainable investing. The meeting was very well attended, indicating a high level of interest in this theme.

Equity Takeaways:

Large cap US equities opened about 0.5% lower this morning. Small caps opened down about 1%. Market participants have a variable and inconsistent view about how COVID-19 will impact the economy going forward, which is causing rapid shifts in sentiment.

Yesterday was a distribution day in the US equity market. Declining issues/volume outpaced advancing issues/volume by a factor of over 9:1.

The Nasdaq index had record volume again yesterday. Very high Nasdaq volume is often a harbinger of increased speculative activity.

The NYSE TICK index printed – 1828 intraday, which is the 12th worst reading in its history. The TICK index measures buying/selling pressure, with negative readings indicating selling pressure.

Implied volatility (VIX) has moved higher once again and is now back into the mid-30s.

Fixed Income Takeaways:

Even with yesterday’s equity market weakness, over $7 billion in new issue investment-grade (IG) corporate bonds came to market. Demand was relatively muted for these deals with the "risk off" tone in the broader marketplace.

Spreads widened yesterday across the board, with high-yield debt underperforming investment-grade paper.

We see increased levels of environmentally and socially conscious (ESG) issuance in the fixed income markets. We expect this trend to continue.

The commercial paper markets remain quiet. We did not see any volatility spillover into this market during yesterday’s equity selloff.

After five days of unchanged municipal bond prices, municipal bonds underperformed treasuries yesterday, widening by 2 basis points (bps).

Municipal secondary trading activity is running at a lower-than-average rate due to investor apathy about the meager yields available in the market.

Wednesday, 6/24/20

General Takeaways:

US equities were slightly higher yesterday. Large and small cap stocks were both up about 0.40%. Consumer discretionary stocks led the rally, up 1%, with utilities the worst performer, down 1%. Of the major sectors, 8 of 11 were positive.

Year-to-date (YTD), the S&P 500 is down about 2%. The tech-heavy Nasdaq 100 is up about 17% YTD. Small cap stocks, despite a recent rally, are still down about 18% YTD.

Both the President and Treasury Secretary Mnuchin have recently discussed the need for additional fiscal stimulus. Mnuchin believes the current recession will be over by the end of 2020. He also noted that further nationwide lockdowns are unlikely, even in the event of a second wave of COVID-19.

Markit US Purchasing Manager Index (PMI) data: US manufacturing PMI jumped to 49.6 from 39.8 in May. The Markit US services PMI jumped to 46.7 from 37.5 in May. Both readings were slightly better than expected. Recall that any number below 50 indicates economic contraction.

Higher-than-expected new home sales were reported.

Recent COVID-19 trends in the United States are becoming concerning, especially in the South and West. The national trend in daily new fatalities is still decreasing, but other metrics are on the rise.

The IFO Institute, a German business climate index, came in much better than expected – this could be one reason that European stocks have outperformed the S&P 500 over the last 3+ weeks. Germany is the largest economy in Europe.

40% of European equity holders are domiciled outside of Europe, while only 15% of US equity holders are outside of the United States.

The composition of European equity indexes is changing – weightings to financials and energy are shrinking, while areas such as health care are growing in importance. Europe is also the global leader in renewable energy.

Equity Takeaways:

US stocks opened slightly lower this morning. The S&P 500 opened about 0.75% lower, with small caps down about 1.25%.

Market participants seem focused on worsening COVID-19 trends around the globe. Both European and Asian equities were weak overnight for a similar reason.

Also contributing to negative sentiment this morning - the United States is weighing increased tariffs with various trading partners. Certain exports from Britain, France, Spain, and Germany may be subject to increased duties.

Bullish sentiment in the widely watched AAII survey continues to increase, while bearishness continues to decrease. The bull/bear spread is at its highest level since January but is not yet at an extreme level. Extreme bullish sentiment can be a contrary indicator.

Fixed Income Takeaways:

After a slow Monday, activity picked up yesterday in the new issue corporate bond market. Deals remain 3-4 times oversubscribed, and pricing levels are aggressive (favorable for borrowers).

Spreads were unchanged yesterday and are opening wider this morning in sympathy with softer equity prices. These wider spreads have caused a few borrowers to postpone deals originally scheduled to price today.

Commercial paper market participants continue to prepare for the month-end. Housing agencies such as FHLB and Fannie Mae have been active borrowers recently.

Yesterday saw about $2 billion of new municipal bond issuance. Bond prices absorbed this supply without a problem – prices ended unchanged on the day

During June, front-end high-quality municipal bond rates have slowly risen. The slope of the municipal curve has flattened as yields on longer paper have remained unchanged.

Tuesday, 6/23/20

General Takeaways:

Large cap US stocks were up 0.65% yesterday, with small caps up 0.75%. Technology shares led the charge, up almost 2%. Health care and financials were the weakest sectors, each down about 0.4%. Of all sectors, 7 of 11 were positive.

Yesterday was a mixed bag concerning housing-related data. Existing home sales fell to 3.91 million vs. expectations of 4.12 million. For context, in May 2019, existing home sales were 5.33mm. Also, house prices fell while inventories rose in May, but some of the decrease in prices could be explained by a change in the mix of homes sold.

Housing forbearance levels fell last week from 8.55% to 8.46% - this is the first drop in forbearance since the beginning of the crisis. Forbearance is a temporary postponement of mortgage payments by a lender (a form of mortgage relief). A decline in forbearance indicates that borrowers are becoming more confident about making their future payments.

Conflicting signals are emerging from the White House regarding trade with China. Trade advisor Peter Navarro seemed to indicate that the Phase I trade deal was off, but President Trump quickly walked back those comments via Twitter. The implication is that the President still wants to maintain a constructive relationship with China (on at least some level).

This morning, the President signed an order banning certain types of immigration into the United States (including H-1B visas for workers in specialty occupations). In the view of most economists, if such restrictions persist for a prolonged period, economic growth may be challenged.

European Purchasing Manager Index data: April PMI: 31.9; May: 47.5. Recall that numbers above 50 indicate economic expansion, with numbers below 50 indicating contraction. May’s reading was expected to come in at 42.4. The Euro Zone region is showing significant month-over-month increases in new orders.

Equity Takeaways:

Major US indices opened higher this morning. Large caps opened about 1% higher, with small caps up about 1.25%.

The overnight session was extremely volatile due to Peter Navarro’s comments on trade. At one point, S&P futures were down about 2% during the session. President Trump subsequently tweeted a refutation of Navarro’s comments, and the market has rallied in response.

The Nasdaq composite has closed higher seven days in a row, the longest streak since an 11-day streak in late 2019.

Ever since it spiked above 40 during the sharp June 11th selloff, implied volatility (VIX) has drifted lower and is now trading around 31.

Fixed Income Takeaways:

Yesterday was a quiet day in the new issue investment-grade (IG) corporate bond market. Only three new deals priced, totaling about $3 billion.

Credit spreads were essentially unchanged yesterday. This morning, the tone is positive – spreads are tightening, led by the energy sector.

Commercial paper volume will likely continue to slow as we near quarter-end. Demand for high-quality paper with any kind of spread remains extremely strong.

Yesterday was a quiet day in the municipal bond market. The new issue calendar continues to ramp up, with a mix of taxable and tax-free issues expected to price this week.

Monday, 6/22/20

General Takeaways:

Stocks were weak on Friday. After opening higher in the morning, large caps finished about 0.50% lower, with small caps down a similar amount. 10/11 of the major sectors were lower, with only health care posting gains. Utilities and energy were the two weakest sectors, down about 3% and 1.5% respectively.

According to prediction markets, Joe Biden’s chances of winning the Presidency hit an all-time high over the weekend. It is worth noting that Donald Trump’s numbers in prediction markets were at similar levels in June 2016.

COVID-19 update: the rate of increase in nationwide US cases has inflected higher, but the death rate has not, indicating increased efficacy of treatment and perhaps a lower overall mortality rate than initially feared.

New York City enters phase II of their reopening plan today – hair salons and other types of service industries will begin reopening.

Real estate is a "micro" market – it is hard to make national generalizations about the asset class. That said, real estate sectors that were already facing pressure before COVID-19, such as regional malls, will likely see those trends exacerbated due to the recent crisis.

Equity Takeaways:

US stocks opened fractionally lower this morning. Large caps were down by about 0.25%, with small caps down about 0.75%.

As noted above, stocks ended last week on a down note, with decliners outnumbering advancers by a factor of about 2:1. Implied volatility (VIX) remains elevated and is currently trading around 35.

The second quarter has seen a significant bounce back in equity prices. Large caps are up 20% quarter-to-date (QTD) but are still down about 3% year-to-date (YTD). Small caps have bounced over 23% QTD but are still down 14% YTD.

At current levels, stocks seem to be entirely discounting continued liquidity as well as an improvement in the economy / COVID-19. In some ways, the current market environment resembles a tug of war between the Federal Reserve and COVID-19.

Growth and momentum are the two equity factors that are positive YTD. Despite some recent outperformance, value stocks are still significantly lagging on a YTD basis.

On Friday, Apple announced the closing of 11 stores across Florida, Arizona, North Carolina, and South Carolina, leading to some weakness in the overall stock market. Apple will be hosting a widely watched developer’s conference this week.

Hedge funds on the aggregate are about flat YTD, with a wide dispersion of returns among various strategies. In general, hedge funds are doing a good job of providing uncorrelated returns / protecting investor capital YTD.

Fixed Income Takeaways:

Fixed income products are outperforming equities YTD. The Barclays aggregate bond index (an industry bellwether), is up about 5.5% year-to-date and over 2% quarter-to-date.

June 2020 has already hit a record for new corporate bond issuance in a single month. Volatility increased slightly last week, but deals are still getting done at attractive levels for issuers.

Money continues to flow into both investment-grade (IG) and high-yield corporate bond mutual funds and ETFs. This money flow continues to support high levels of new issuance.

We expect light flows in commercial paper this week as issuers get their balance sheets ready for June quarter-end.

Municipal bond rates were mostly unchanged last week. Absolute yield levels are approaching all-time lows, leading to some investor fatigue.

As noted last week, many expect several existing municipal bond deals to either mature or refund (refinance) over the summer, which should lead to high levels of new issuance.

Friday, 6/19/20

General Takeaways:

Yesterday was a mixed session for equities. The S&P 500 was mostly flat (up 0.06%). Small caps were down about 0.35%. Of the major sectors, 4 of 11 were higher, with energy leading and real estate lagging the broader indices.

We continue to believe that the markets will be choppy over the next several months as investors balance signs of hope (economic improvement at the margin, etc.) with signs of concern (possible second wave of COVID-19, geopolitical discord, etc.). During the recent rebound, the stock market has been focused on data that is "better, not worse," not "good or bad."

Driven by low interest rates, the housing market is undergoing a "V" shaped recovery. Housing activity has been brisk overall and should provide a tailwind to the economy over the next several months.

Fiscal stimulus has been a critical stabilizer. The pace of fiscal stimulus is set to slow, however, with extended unemployed benefits set to expire on July 31st. The expectation is that Congress will act, but the form is unknown, and the path to approval could be messy.

Equity Takeaways:

Global equity markets are rising this morning as China has agreed to expand purchases of US farm products (as agreed upon on last year’s phase I trade deal). The S&P 500 and Nasdaq 100 both opened about 1% higher. Small caps also opened nearly 1% to the good.

Both advancers and decliners were roughly equal, with decliners slightly outnumbering advancers—reflecting a mixed session yesterday.

Forward Price/Earnings multiples are elevated relative to history. Our sense is that both valuation and sentiment remain a bit stretched after the recent strong rally. Neither is flashing "red" at this point, but both suggest a cautious stance may be warranted.

Today is quadruple witching day (options and futures expiration) – expect higher-than-normal volatility, especially towards the close.

Fixed Income Takeaways:

Only two deals were priced yesterday in the investment-grade (IG) corporate bond market. Several borrowers decided to postpone deals until next week, as the market felt a little choppy even through spreads were essentially flat.

About a month ago, new deals were immediately trading tighter in the secondary market. That dynamic has changed recently. With most deals priced to perfection, spreads have generally been flat after initial pricing.

The credit quality of recent new issuance has begun to decline slightly. Investors need to remain diligent with security selection.

Commercial paper investors are getting their balance sheets ready for quarter-end, so activity is beginning to slow down slightly.

Municipal bonds were unchanged across the curve yesterday. It was a strong week for new issuance, with about $14.5 billion in supply.

June has the most pending municipal redemptions/maturities out of any month of the year. This fact implies that we should see heavy municipal new issuance over the next several months.

Thursday, 6/18/20

General Takeaways:

Large cap US stocks were down slightly yesterday, while the tech-heavy Nasdaq 100 notched a small gain. Growth outperformed value. The weakest sectors were energy and financials.

Initial Jobless claims (1.508mm vs. 1.29mm expectation) and continuing claims (20.54mm vs. 19.85mm expectation) were both weaker than projected. Market participants are closely monitoring the continuing claims number to help judge the efficacy of the Paycheck Protection Program.

The regional Philadelphia Fed Index was much better than expected. Expectations were for -23.5, but the reported number was 27.5. With this indicator, readings above zero indicate economic growth, while readings below zero indicate contraction.

On the geopolitical front, the market does not seem concerned with either the recent flare-up between China / India or President Trump’s comments on former National Security Advisor John Bolton’s pending book release.

The Trump administration seems likely to propose a $1 trillion infrastructure stimulus plan soon. Democrats have also recently released their version of an infrastructure plan.

Equity Takeaways:

Major US stock indices opened lower this morning. The S&P 500 was down about 0.50%, with small caps down about 0.75%. The Nasdaq opened flat.

During the session yesterday, breadth was weak and was masked by strength in some large companies. Intraday performance weakened throughout the session. Decliners outpaced advancers by a factor of about 2:1.

Implied volatility (VIX) remains at elevated levels relative to history. The VIX last traded around 34 and has been oscillating in the mid-30s for most of the week.

Fixed Income Takeaways:

Corporate credit remains on fire. New issuance continues to exceed all expectations. The Federal Reserve’s (Fed) decision to begin purchasing individual corporate bonds continues to provide a strong tailwind.

Spreads widened slightly yesterday in both investment-grade (IG) and high-yield credit. The sentiment is a bit uneasy this morning, with the stock market opening lower.

Overseas investors continue to add to their positions in US corporate credit. US dollar hedging costs are the cheapest they have been in the last five years. Also, yields in many overseas markets have gone negative due to central bank actions – yields in the US are very attractive on a relative basis.

The Fed plans to continuously monitor the health of the credit markets by purchasing a diverse set of bonds with maturities of no more than five years. The Fed will likely step up their purchases should markets weaken.

Commercial paper spreads are beginning to widen. Government-guaranteed 3-month T-bills are yielding about 0.17%, so commercial paper issuers have been forced to offer higher yields to compete.

Municipal bond yields were slightly higher on the front-end of the curve yesterday. The focus remains on the new issue market, which is seeing healthy activity, with several large deals set to price today.

Secondary market trading in municipal bonds remains muted. Dealer inventories are incredibly light compared with normal levels.

Wednesday, 6/17/20

General Takeaways:

Large cap US stocks were up just under 2% yesterday. Small caps rose about 2.5%. All 11 major sectors were positive. Incrementally positive economic data and news on a new potential treatment for COVID-19 buoyed prices.

Yesterday, Federal Reserve (Fed) Chairman Jerome Powell testified in front of Congress (virtually) and once again presented a sobering outlook on the economy. On the stimulus front, the Trump administration is discussing a potential $1 trillion plan that would focus on the improvement of roads, bridges, 5G infrastructure, and rural broadband.

COVID-19 update: a study found that a widely available, inexpensive steroid could be effective at treating patients with severe cases of the disease. In China, cases are beginning to reappear - Beijing has again closed schools, but factories remain open, and railroad travel is still allowed.

May retail sales were stronger than expected. Gasoline, furniture, sporting goods, leisure goods, and clothing sales rose from deficient levels in April. Even though May was an improvement from April on a sequential basis, year-over-year numbers are still showing significant declines. Another example of improvement: Apple announced that they would be re-opening ten stores in New York and expect that roughly 200 of their 270 stores overall will be re-opened by the end of this week, but for appointment only visit.

Housing data continues to impress. The purchase of a new home usually leads to other forms of discretionary spending, so if the housing market remains strong, retail sales should have a tailwind.

Large technology and social media companies are facing increased government scrutiny. The Justice Department is expected to make an announcement on this front later today.

Yesterday, the US reduced restrictions on the Chinese company Huawei. This action could be significant because it implies that the US might be willing to participate in a global 5G standard (Huawei is a major player in 5G).

Equity Takeaways:

US stock markets opened slightly higher this morning. The tech-heavy Nasdaq 100 opened about 0.75% higher, with most other major indices opening about 0.25% higher.

After last Thursday’s steep selloff, the past three sessions have seen the market cumulatively rise over 4%, the most substantial three-day run since mid-May.

Even though the stock market ended about 2% higher yesterday, intraday volatility was very high, with the TICK index trading in an extremely wide range. The TICK index measures stocks trading on upticks minus stocks trading on downticks.

Implied volatility (VIX) has fallen back into the low 30s (from over 40 last Thursday).

Fixed Income Takeaways:

Treasury yields have risen slightly over the past few sessions, with the 10-year yield last trading around 0.74%.

After zero issuance on Monday, yesterday was a very busy session for the new issue investment-grade (IG) corporate bond market. Year-to-date (YTD) issuance has topped $1.1 trillion and is fast approaching 2019 full-year numbers.

Along with this strong new supply dynamic, IG and HY spreads tightened. The expansion of the Fed’s secondary credit facility has reinvigorated the market.

Government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac have recently become active issuers in the commercial paper market. This issuance is being met with robust demand.

A new infrastructure deal would likely be favorable for the municipal bond market, but with so little time until the election, the passage of a large deal seems like a longshot.

It has become hard to find block size in the taxable municipal bond market as demand has outstripped supply.

Tuesday, 6/16/20

General Takeaways:

Large cap US stocks were down over 2% yesterday morning but reversed higher in the afternoon to close about 1% higher. Small caps ended the day up over 2%. All 11 major sectors were in the green, with financials and real estate leading the market.

The proximate cause of yesterday’s rally was the Federal Reserve’s (Fed) announcement that they are activating the individual bond component of their previously announced Secondary Market Corporate Credit Facility (SMCCF). The Fed has already begun purchasing corporate bond ETFs using this facility.

The Fed will be making individual corporate bond purchase decisions based "on an array of conditions, including market functioning." Essentially, the Fed will be managing the corporate bond market.

The Federal Reserve’s Main Street Lending program is also set to come online soon. This $600 billion program will provide loans to a wide variety of small and midsized businesses.

Economic data: Empire manufacturing and retail sales data were both "less bad" than expected. Many of the current data points are pre-Memorial day, so it will be interesting to see how the recent increase in COVID-19 cases affects these numbers going forward.

The Trump administration has once again expressed the desire to pass an infrastructure bill, but it seems unlikely that anything will happen on that front in 2020.

The House Judiciary Committee is proceeding with an antitrust investigation into the competitive practices of several large technology companies.

Equity Takeaways:

The stock market has been resilient in the face of the intense selling pressure that began late last week. Last Thursday was a 98% down day in terms of volume. Yesterday, after a weak opening, stocks moved to the upside in the afternoon and opened higher again this morning.

From yesterday’s pre-market quote in the stock futures market to this morning’s opening, we saw a rally of over 7%.

Major US indices opened 2-3% higher this morning. Small caps opened more than 3% to the good. International stocks are also up 2-3% on the day. This morning’s rally is broad-based and is being led by cyclical sectors such as energy and industrials.

Implied volatility (VIX) fell sharply yesterday. After trading above 40 in the morning, the VIX is now trading around 32.50.

Fixed Income Takeaways:

The activation of the Fed’s Secondary Market Corporate Credit Facility for individual corporate bonds should be a significant positive for credit spreads. As part of the announcement, the Fed created a custom index to help them manage their exposure.

If liquidity starts to dry up, the Fed will purchase more bonds and vice versa. Both the investment-grade (IG) and high-yield markets stand to benefit.

Before the Fed announcement yesterday, the corporate new issue calendar was sparse for this week, and spreads had been widening for several days. After the announcement, spreads snapped tighter, and many issuers are now lining up to price this week.

The municipal market remains quiet compared to the corporate bond market. That said, signs of healing continue, with four hospital deals scheduled to price this week. Hospital credits have been under pressure for the past several months, so it is a good sign that several borrowers in that space are attempting to tap the market.

Monday, 6/15/20

General Takeaways:

On Friday, large caps were up about 1.3%, with small caps up 2.6%. Value stocks rose about 3.5%, while growth stocks were up about 1.5%. Nine of the eleven major sectors were higher. The defensive consumer staples and utility sectors were both fractionally lower.

After a strong rally off the March bottom, stock market participants must now balance worrying news and signs of hope. During the rally, many adverse events (second COVID-19 waves, economic weakness, civil unrest, etc.) were mostly ignored. We’ve reached the point where even as economic data begins to recover on the margin; the market seems to be paying attention to both good and bad news.

New COVID-19 cases are once again appearing in China. Even though the reported caseload is small, this news is concerning and is affecting sentiment this morning.

COVID-19 best guess outlook in the United States: "suppress and lift" policies enacted as needed around the country. The economic environment will likely remain choppy as a result.

As more data comes in, US policy responses to COVID-19 will likely become more nuanced to protect the most vulnerable patient populations (nursing home residents, etc.).

The Department of Labor is moving forward with a plan that could eventually allow for certain types of private equity to be included within 401k plans.

Equity Takeaways:

Stocks opened lower on Monday. Large caps were down about 2%, with small caps down about 2.5%. An increase in COVID-19 cases in China and some parts of the United States has put a damper on sentiment.

Implied volatility (VIX) has risen above 40 after falling under 30 in late May – June. Volatility has increased significantly since last Thursday’s sharp drop in the stock market.

With casinos closed and sports closed, retail investors could be having a more substantial impact on stock market prices than usual. That said, it is hard to find data to either support or disprove this theory.

The put/call ratio (a measure of protective put options purchased relative to bullish calls) indicated extreme complacency in the stock market as recently as last Thursday.

The market seems to be once again paying attention to COVID-19 news around the globe.

Fixed Income Takeaways:

The 10-year treasury yield was 4 basis points (bps) higher on Friday after a sharp drop on Thursday. Yields are dropping again this morning, with the 10-year treasury note last trading at 0.68%.

Even with stocks higher on Friday, high-yield spreads were wider by 45 bps. Typically, high-yield spreads will tighten as stocks rise.

Increased corporate credit volatility has limited new issuance in both the investment-grade (IG) and high-yield markets over the past several trading sessions. For example, at least seven new deals that were slated to price today (Monday) will be postponed.

Late Thursday, the Federal Reserve announced a change to one of their overnight funding facilities. Short-term funding rates were raised slightly (5-10 bps). It remains to be seen how this change will affect the commercial paper markets.

Municipal bonds underperformed treasuries last week. Treasury yields were 5-25 bps lower across the curve, but municipal yields were essentially unchanged.

Demand for municipals remains strong, and we expect that trend to continue over the next several weeks/months. Fund flows turned strongly positive several weeks ago.

In several northeastern states, local tax revenue took a severe hit of approximately 30% during May.

Friday, 6/12/20

General Takeaways:

Yesterday, stocks declined significantly. Large caps (S&P 500) fell by about 6%. Small caps (S&P 600) also fell by about 8%. All 11 major sectors declined by at least 3%. Defensive sectors such as consumer staples and utilities, fared the best falling less. Cyclical sectors such as materials, financials, and energy each fell on the order of 8%+.

The Federal Reserve’s gloomy economic outlook, released Wednesday afternoon, seems to have been one of the primary triggers for the selloff. Extended bullish sentiment on stocks, as evidenced by an extremely low put/call ratio, may also have been a contributing factor, and concerns of a resurgence of the coronavirus in some parts of the US also stoked investors’ fears

The stock market has been looking past a variety of potential headwinds recently; instead, it chose to focus on the positive fact that states are reopening / economic data is improving. Yesterday’s price action is a reminder that the next few months could be very choppy as we deal with possible second waves of the virus (and ensuing economic weakness).

Fiscal support is slowing – the peak of Federal spending hit in April-May and is now leveling off.

Federal policy remains uncertain, especially with election season fast approaching and the Democrats gaining momentum in national polling.

COVID-19 update: The estimated "R" number (a statistic that measures the rate at which the virus is reproducing) has increased to 1.03 nationwide. The trend in hospitalizations is increasing—rising in areas that opened relatively early (Arizona, California Texas and Florida are examples).

Equity Takeaways:

Large cap US stocks opened higher this morning by about 2%. Small caps opened about 3.5% higher. Markets are bouncing after yesterday’s sharp selloff.

Recall that as early as Monday, we had seen strong breadth thrusts on two consecutive days. This type of intense buying pressure has historically correlated with long-term positive returns in the stock market. That said, short-term volatility seems likely to continue as we approach election season.

Implied volatility (VIX) rose sharply above 40 yesterday. Spot volatility is now trading at a premium to 3-month volatility, another sign of short-term uncertainty.

The recent stock market rally had taken many individual stocks up near important overhead technical resistance levels. Many stocks failed to punch through these levels and are now pulling back.

Fixed Income Takeaways:

After briefly rising towards 1%, the 10-year Treasury note yield has reversed lower once again as a "risk off" mentality took hold yesterday. The 10yr yield is currently trading around 0.70%.

Credit spreads widened significantly yesterday. Investment-grade (IG) spreads widened 10bps, which is the sharpest widening since March. High-yield spreads widened 46bps, the worst-one day performance since early April.

The tone in the fixed income market is better this morning. However, any new issuance will likely be pushed into next week.

For the week ending June 10th, combined credit fund inflows were extremely strong, continuing a trend that has persisted since April.

Commercial paper yields were stable yesterday – it is a positive sign that the weakness in the stock markets did not spill over into short-term funding markets.

Municipal bond prices rallied on the long end of the curve yesterday, but short-dated municipals were slightly weaker (curve flattened).

Thursday, 6/11/20

General Takeaways:

Equities were mixed yesterday. The tech-heavy Nasdaq 100 closed higher by about 1.25% and is now up about 16% year-to-date (YTD). The S&P 500 was down about 0.5%. Small caps fared worse, dropping about 3.5%. Value underperformed growth by a significant margin, with financials and energy the two worst sectors.

Yesterday, the Federal Reserve (Fed) committed to continue its current level of treasury and mortgage bond purchases. They also noted that the Fed Funds rate would likely stay at 0% well into 2022.

The Fed also released updated projections for the economy and inflation. Fed governors see a wide range of possible economic outcomes in the 2020-2022 period, indicating high uncertainty. The Fed expects inflation to undershoot its 2% target for most of the 2020-2022 period.

Federal Reserve Chairman Jerome Powell: "… we’re not thinking about raising rates."

The Trump administration is considering another round of stimulus to provide more direct fiscal support to consumers.

Continuing unemployment claims remain extremely elevated at over 21mm. Initial jobless claims topped 1.5mm – this number was close to expectations but still indicates severe economic weakness.

COVID-19 update: cases and hospitalizations continue to rise sharply in states such as Arizona, Texas, and Florida. Accordingly, fears of a second wave are growing.

Equity Takeaways:

Stock markets opened significantly lower this morning. Negative news around the spread of COVID-19 and a gloomy outlook from the Fed have dampened sentiment. The S&P 500 opened about 2.5% lower, with small caps opening about 4.5% lower. All 11 major sectors are down.

Implied volatility (VIX) jumped this morning and is back above the critical 30 level, recently trading at 31.50, up from about 27.50 yesterday.

A large amount of cash remains parked in money market funds. According to fund flow data, cash is finding its way into the fixed income market, but not much has returned to the equities market.

Fixed Income Takeaways:

Yield Curve Control (YCC): Fed Chairman Powell did comment on YCC, noting that the Fed is still studying it. We think if YCC is eventually implemented, it will first focus on shorter-term treasuries. We don’t believe YCC is imminent due to the current very low rates on treasuries across the curve.

Typically, new corporate bond issuance slows on days of Federal Reserve press conferences. Yesterday did not fit this pattern, as new issuance remained robust, and demand was strong.

Yesterday, corporate bond spreads widened for the second consecutive day in both investment-grade (IG) and high-yield. Spreads are widening again this morning in conjunction with weaker equity prices.

Municipal bond rates were unchanged again yesterday. Dealer inventories are at very low levels, and demand for fixed income remains high. This setup has produced a favorable environment for new deals.

About 1/3 of the new issuance this week in the municipal bond market has been in the form of taxable municipals.

Even areas of the fixed income market that have not received direct Federal Reserve support, such as leveraged loans and high-yield municipal bonds, have recovered significantly over the past several months.

Wednesday, 6/10/20

General Takeaways:

Yesterday was generally a "risk off" day in the stock market. The S&P 500 was down about 0.5%, but the tech-heavy Nasdaq 100 rose about 0.7% to an all-time-high closing level. Growth/quality stocks outperformed the broader index, while cyclicals and high-beta stocks dropped sharply after a strong recent run.

The Organization for Economic Cooperation and Development (OECD) revised its global economic forecast. The organization assigns 50/50 chance to the emergence of a second COVID-19 wave. They also discuss how COVID-19 is causing a reversal of globalization into a "great fragmentation."

Federal Reserve Chairman Jerome Powell will hold a press conference this afternoon after the conclusion of the Fed's two-day meeting. It is possible that Powell could discuss "Yield Curve Control," or the targeting of specific yield levels for certain portions of the treasury curve.

COVID-19 cases continue to increase. Certain states, such as Arizona and Texas, are dealing with a quickening outbreak. Hospital capacity in Arizona, for example, was nearing 100% on Monday. The stock market does not currently seem worried about these worsening numbers, but the situation bears watching.

Weak pricing data out of China suggests that the Chinese economy is experiencing a sluggish recovery.

Equity Takeaways:

US stocks opened mostly flat after a mixed session overnight. The Nasdaq-100 rose by about 0.75% in early trading, while most other major indices were essentially flat on the open.

After two 90% upside breadth days in a row (last Friday and Monday), yesterday was an 89% down day in terms of breadth. It is unusual for big down days to occur right after significant upside moves.

Implied volatility (VIX) has begun to creep higher once again and is now around 27.50. We continue to monitor this indicator as an essential barometer of risk appetite.

International vs. domestic US equity fund flows: since the March bottom, money has been flowing into US domestic equity funds, but similar flows have not yet been seen for international funds.

Many retail day traders have been focusing on stocks with asymmetrical payoff profiles (essentially lottery tickets). Even bankrupt companies are seeing increased speculative fervor.

Fixed Income Takeaways:

All eyes will be on the Federal Reserve today. Fixed income market participants will be carefully parsing Chairman Powell's language during his afternoon press conference.

Supply in the corporate bond market moderated yesterday, with the "risk off" tone in the equity market dampening sentiment (at least temporarily).

Investment-grade corporate bond spreads widened by about 4 basis points (bps) yesterday. After tightening relentlessly for several weeks, high-yield bond spreads widened by 23 bps, their worst one-day move in about four weeks.

Cash continues to pour into high-yield bond funds as investors search for yield.

The spread between T-bills and commercial paper remains very tight. Risk-averse investors are opting to give up a small amount of yield to stay in government-issued paper's safety.

Municipal bond prices were flat yesterday. Yield ratios to treasuries are still at attractive historical levels, but absolute yields are meager, putting a damper on sentiment.

Congress continues to debate the merits of additional fiscal stimulus. We believe they are likely to pass another bill, but its form and size are yet to be determined.

Tuesday, 6/9/20

General Takeaways:

US stock markets had another strong day yesterday. Small caps were up about 2%, with large caps up about 1%. All eleven sectors were higher. The high-beta and value sectors once again led the advance, with defensive sectors such as consumer staples and health care lagging.

After 120 months of expansion (the longest since the compilation of the data began in 1854), the National Bureau of Economic Research (NBER) announced that an economic recession began in February 2020.

Bullish open call option positions are at their highest levels on record. Over 35mm option contracts were purchased to open last week. Many of these contracts were purchased by small retail traders, indicating that sentiment among small traders is very bullish.

The Federal Reserve will meet today and tomorrow to discuss the current economic outlook. Fed Chairman Jerome Powell will hold a press conference tomorrow afternoon.

Equity Takeaways:

Major US indices opened lower this morning. Large caps opened down about 1%, with small caps down about 2%.

Comments on "this time is different." The fundamentals of the economy are always different. Long-term technical trends generally follow defined patterns, but these patterns can take years to work themselves out. Short-term technical trading action can vary wildly.

In the past two trading sessions, advancing issues outnumbered declining issues by a factor of 10:1. Advancing volume also outnumbered declining volume by a factor of 10:1. These readings indicate extreme buying pressure.

It is very unusual to see this strong breadth when the market has already rallied 40%+ off the March bottom. This type of price action usually occurs closer to interim lows.

We see increased speculation activity in pockets of the market. Certain companies have seen their equity prices rally AFTER filing for bankruptcy.

Implied volatility (VIX) has declined recently into the 25-26 range but is still above its long-term average of about 19. Options are priced using implied volatility – it is thus still relatively expensive to purchase portfolio insurance in the form of protective puts.

Fixed Income Takeaways:

The insatiable demand for corporate bonds continues. Spreads have recovered about 60% of their widening from late-February levels. With treasury yields much lower in the meantime, absolute borrowing costs for corporations are approaching all-time lows.

High-yield bond spreads narrowed significantly again yesterday, continuing a strong run.

Commercial paper supply continues to increase. 3-month T-bill yields are creeping higher, currently trading around 16 basis points (bps, 0.16%). 3-month commercial paper is generally trading in the 20-25bps area.

Municipal bond prices were flat yesterday. Market participants are expecting heavy new issuance this week.

Monday, 6/8/20

General Takeaways:

Equities rallied sharply on Friday after a dramatically better-than-expected, but still historically weak non-farm payrolls report. US large caps were up 2.5%, with small caps up 4.5%. On a year-to-date (YTD) basis, large caps are now mostly flat, with small caps still down 11% YTD.

Defensive sectors such as utilities and consumer staples lagged the rally on Friday but were each still up over 1%. Energy was the best performing sector, rising 7%. Financials and industrials each rose between 3-4%.

Further fiscal stimulus measures from the federal government still seem likely. However, the timing and magnitude are uncertain.

Global COVID-19 cases remain at high levels, but the outbreak has seemingly plateaued in most areas of the United States. That said, cases are increasing in Arizona, California, and Florida at an increasing rate. New York City is reopening (phase I) today.

"High frequency" economic data continues to improve at the margin. Air travel and restaurant sales are both continuing to rebound off extremely low levels.

The market will be watching for any updated commentary from the Federal Reserve this week. The Fed meets Tuesday and Wednesday – Chairman Powell will hold a press conference Wednesday afternoon.

Equity Takeaways:

Major US indices opened mixed after Friday’s strong rally. Small caps opened 1.5% higher, once again leading the charge. The S&P 500 opened about 0.50% higher, with the tech-heavy Nasdaq 100 opening about 0.50% lower.

High-beta, rate-sensitive, and value stocks all rallied sharply on Friday. Investors are rotating into cyclical sectors (the worst performing sectors YTD). Airlines were up 35% last week alone.

Year-to-date performance update: technology shares are up 11% YTD; consumer discretionary: up 6%; telecom: up 2%; health care: up 2%. Energy remains the worst sector YTD, down 24%, but has rallied sharply off the bottom.

International stocks put in a very strong week, rising about 7%. Developed international and emerging market stocks are down about 7.5% and 10% YTD, respectively.

Breadth remains strong. Advancers outnumbered decliners by a ratio of 5:1 on Friday. Advancing volume was 10-times higher than declining volume. Roughly 2/3 of stocks in the S&P 500 are at 3-month highs.

Fixed Income Takeaways:

Treasury yields continued to rise on Friday. The 10-year yield rose about 0.90%, about 30 basis points (bps) higher in yield over the past several weeks.

We expect that the longer end of the yield curve will continue to steepen relative to the front-end. The 2-year /30-year treasury curve has steepened by 60+ bps since the start of the year. The front-end of the curve will likely remain anchored at low levels due to the Fed’s 0% interest rate policy.

Corporate credit spreads continue to heal, supported by strong investor demand for both investment-grade (IG) and high-yield debt.

With the recent rally in high-yield bonds, the yield on the high-yield benchmark index is now approaching its 10yr average.

We see increased commercial paper supply. However, the spread between T-bills and commercial paper remains very tight.

Municipal bond yields were about 5bps higher on Friday with treasuries selling off. Last week was a quiet week overall, with a sense of normalcy returning to the market.

New municipal bond issuance has returned to healthy levels and is being easily absorbed due to strong investor demand.

Friday, 6/5/20

General Takeaways:

Major US indices were mixed yesterday. Large caps were down about 0.3%, with small caps up 1.5%. Financials and industrials led the market. Utilities and real estate were the laggards.

Non-farm payrolls rose 2.5mm in May. The unemployment rate fell from 14.7% to 13.3%. Expectations were for a decline in non-farm payrolls of 7.5mm and an increase in the unemployment rate to over 19%. This morning’s report was dramatically better than expectations. Still, an unemployment rate of 13+% is still ~3% higher than the peak of the global financial crisis from 2008-09.Still, an unemployment rate of 13+% is still ~3% higher than the peak of the global financial crisis from 2008-09.

Many of the job gains were due to the return of workers who were temporarily laid off. The retail, leisure and construction sectors re-added a significant amount of jobs that were lost in March – April.

Economic indicators, such as gasoline demand, continue to rise from depressed levels. Gasoline demand is back to mid-March levels.

Applications to start new businesses have also begun to tick higher, indicating increased confidence in the economic environment.

Active manager update: stock correlations are coming down, which could be a tailwind for active manager performance. Credit spreads are tightening, which is generally a positive sign for credit manager outperformance.

Private credit strategies can still have a role in generating higher income within the context of a diversified portfolio.

Equity Takeaways:

Major US indices opened 1.5% to 2.5% higher this morning in response to the unexpectedly strong non-farm payrolls report. Small caps are up over 4% this morning in early trading, continuing their recent outperformance.

Value stocks outperformed growth stocks once again in yesterday’s session, a theme that has persisted throughout the past several weeks. Growth has still dramatically outperformed value over the past 10 years, but the recent price action bears watching.

Technology stocks, traditionally viewed as a "risk on" sector, have begun trading more like a defensive area of the market. In many cases, business models within the technology sector have evolved to become less cyclical.

Implied volatility (VIX) continues to fall and is now under 25.

Major airline stocks were all up 15%+ yesterday and opened much higher again this morning.

Fixed Income Takeaways:

Treasury yields continue to rise. Yesterday, the 10yr yield hit 81bps (0.81%). After this morning’s job number, treasury yields have risen to 0.92%. These levels were last seen in March.

Investment-grade (IG) corporate bond issuance continues at a strong pace. Appetite from investors remains strong. Issuance could decline in the second half of 2020, which would be a tailwind for secondary market prices.

Investors are rotating funds away from treasury-based mutual funds into corporate credit funds. This rotation is providing support to both IG and high-yield bonds. IG spreads tightened yesterday for the 8th straight day – high-yield spreads were significantly tighter as well.

The spread between 3-month treasury bills and 3-month commercial paper is very narrow. For this reason, we have begun to see yields on commercial paper rise slightly, as T-bills have similar yields with no credit risk.

The municipal bond market moved sideways again yesterday. Trading is active – prices are stable.

Municipal bond inflows were over $2 billion last week. This was the third consecutive week of inflows into the space – these flows are supporting prices.

A recent modification of the Federal Reserve’s municipal lending facility will allow certain mass transportation issuers to borrow from the Fed directly.

Thursday, 6/4/20

General Takeaways:

US stocks had another strong rally yesterday. Small caps were up 3.5%, with large caps up about 1.5%. The cyclical industrial and financial sectors led the rally, each up about 4%, with the defensive health care and consumer staples sectors essentially flat on the day.

Institute for Supply Management (ISM) Data: Non-Manufacturing ISM for May came in at 45.4, up from 41.8 in April. Recall that any number below 50 indicates economic contraction. Yesterday’s data indicates improving sentiment in the services sector of the US economy amidst a tough economic environment.

Private payrolls (ADP) dropped 2.9 million for May. Expectations were for about 9 million. This data was received favorably.

Americans have already received about $250 billion in transfer payments during the crisis. These transfer payments are supporting consumer spending. Auto sales rebounded sharply in May, and the housing market continues to show strength.

Yesterday the US Department of Transportation announced that it would be cutting the number of direct flights to China per week from 7 to 0 – the tension between the US and China continues.

Continuing unemployment claims rose to about 21.5 million from 20.8 million. The peak of this number was 25 million. Tomorrow, we will get additional unemployment data in the form of monthly non-farm payrolls. The reported unemployment rate will likely approach 20% once tomorrow’s data is released.

The European Central Bank (ECB) announced $600 billion of additional asset purchases this morning. This stimulus will be on top of the $500 billion EU-wide fiscal plan currently being negotiated among EU members.

Equity Takeaways:

Major US indices opened fractionally lower this morning. Small caps were down about 0.50%, with large caps about 0.25% lower. The tech-heavy Nasdaq 100 opened fractionally higher.

Breadth thrust: the percentage of the S&P 500 trading at new 50-day highs has hit very strong levels (current level has only been seen about 27 times since the 1950s). This signal is traditionally a long-term bullish indicator.

Rotation from growth & momentum to value continues: we have seen financials and industrials outperform the broader indices over the past several weeks.

The put/call ratio continues to trade at deficient levels (recently around 0.47), indicating continued short-term complacency in the market.

Implied volatility (VIX) continues to decline and is now approximately 25.5.

Fixed Income Takeaways:

Treasury yields moved higher yesterday (a significant move on a percentage basis). 2-year treasury yields rose 3 basis points (bps), to 0.19%, with 10-year yields rising 7 bps to 0.75%.

The investment-grade (IG) corporate bond market continues to hum along. New deals were eight times oversubscribed on average yesterday, indicating robust demand.

Even with waves of new supply hitting the market, credit spreads continue to tighten. IG spreads have tightened for seven consecutive days. High-yield spreads tightened by 42 bps yesterday along, their best day in eight weeks.

3-4 month commercial paper is trading in the 20-25 bps range. T-bills maturing in 3-4 months are offered at around 0.17%, so many investors have been favoring government-backed paper due to the limited yield pickup for non-guaranteed paper.

The municipal bond market was unchanged yesterday. Market participants are continuing to digest May’s sharp rally in prices.

The Federal Reserve’s municipal liquidity facility expanded again recently. To this point, only one issuer (the state of Illinois) has tapped this facility.

Wednesday, 6/3/20

General Takeaways:

Yesterday, small cap stocks (S&P 600) were up 1+%, with large caps (S&P 500) up 0.80%. The tech-heavy Nasdaq 100 is up 11% year-to-date (YTD). The cyclical energy and materials sectors were outperformers once again, while growth stocks lagged the broader markets. Nevertheless, all 11 major sectors were positive yesterday.

European stocks are also beginning to improve. In the last five days, major European markets are up 5-6% vs. about 3% for the United States. News of possible greater integration within Europe is supporting shares.

Last night, Germany announced additional fiscal stimulus, and the European Central Bank (ECB) is expected to announce further easing measures soon.

Purchasing Manager Index (PMI) data: Chinese service sector PMI came in at 55 vs. expectations of 47. Recall that any reading above 50 indicates economic expansion.

ADP private payrolls fell about 2.8 million last month – expectations were for a drop of 9 million, so this was a positive surprise of considerable magnitude and might reflect that PPP is encouraging employers to retain workers.

Equity Takeaways:

Major US indices opened higher once again this morning. Small caps opened about 1.5% higher, with the S&P 500 up about 0.7%. Positive sentiment around reopening the economy continues to support the market.

Yesterday was the 5th time since the March 23rd low that the S&P 500 has logged a 3-day winning streak. Yesterday was the fourth straight session, where the S&P 500 moved less than 1%.

These smaller intraday moves lead to lower volatility readings. Implied volatility (VIX) continues to fall and is now approximately 26. Lower volatility has likely been helping the market move higher over the short term.

The US dollar index has been notably weak over the past five sessions – this weaker dollar is helping support US stocks.

The bullish sentiment continues to increase – a widely-followed survey is reporting 55% bullish sentiment vs. 29% bearish sentiment – typically a bull/bear spread over 30% is a significant contrary indicator.

Fixed Income Takeaways:

The May 2021 fed funds future contract shows a slightly negative interest rate. An academic paper was released yesterday that suggested the Federal Reserve (Fed) should look at using negative rates as a policy tool. Fed Chairman Jerome Powell is generally against negative interest rates in the US.

Investment-grade (IG) corporate bond issuance continues to hum along. IG spreads tightened for the 11th time in 12 sessions. High-yield spreads also tightened significantly.

YTD IG corporate bond issuance is now well over $1 trillion, double last year’s level for this time of the year.

3-month commercial paper rates remain in the 20-30bps range, reflecting a calm market.

Yesterday, the AAA municipal bond curve was steady. Supply is picking up fast. For municipal borrowers, issuing bonds is a good time due to the strong investor demand for high-quality paper.

Yesterday, the state of Illinois used the Fed’s new municipal liquidity facility. They are the first municipal issuer to use this facility.

Tuesday, 6/2/20

General Takeaways:

Large caps (S&P 500) were up about 0.40% yesterday, with small caps (S&P 600) up about 1%. Value/cyclical sectors outperformed growth. Real estate, energy, and financials led the market, while health care and technology lagged.

Optimism around the reopening of the economy continues to support sentiment.

The Congressional Budget Office (CBO) released its long-term outlook yesterday. The CBO’s 10-year aggregate GDP forecast was reduced by about $8 trillion (3% of GDP over that period) due to projected lingering effects from COVID-19.

Institute for Supply Management (ISM) data: 43.1 for May; an improvement from March/April. Recall that any reading below 50 indicates contraction in the economy. Only 6 of the 18 underlying components reported growth. ISM New Orders: Low-30s, from a mid-20s trough.

World ISM data also showed improvement. China’s ISM rose above the critical 50 level for the first time since the start of the COVID-19 crisis. Malaysia / Vietnam also showed significant improvement. Japan and Australia still report economic contraction, however.

The trade-weighted US dollar is down about 5% from its highest levels in March. The dollar is typically viewed as a haven during turbulent markets. This recent pullback in the dollar is a good sign for global markets, as it indicates increased risk appetite and a move away from the "risk off" mentality of March.

Equity Takeaways:

Major US indices opened mixed once again this morning. Continuing a recent trend, small caps were slight outperformers, up about 0.5%, with large caps up about 0.25%. The tech-heavy Nasdaq 100 opened fractionally lower.

The stock market continues to focus on unprecedented liquidity and stimulus versus unemployment and social unrest.

Breadth was strong yesterday. Advancers outnumbered decliners by a factor of 3:1; advancing volume outpaced declining volume 4.5:1.

Beaten up areas of the market (financials, real estate, etc.) have been outperforming over the last week as investors look for bargains.

The second half of the year is setting up well for consumer spending. Broad-based state reopenings (with furloughed employees hopefully returning to work), combined with stimulus, could support a strong bounce back in consumer spending. Low inflation and surprisingly strong consumer confidence are two other factors that could support consumer spending in the second half of 2020.

The performance of sustainable investing strategies has been strong compared to the broader indices throughout 2020. Trends supporting the adoption of these strategies could be accelerated by the COVID-19 crisis.

Fixed Income Takeaways:

Treasury yields have remained remarkably stable (at very low rates) over the past several weeks. Recently, longer-dated Treasury yields have drifted a bit higher but remain at historically low levels.

Yesterday was a quiet day in the municipal bond market. Front-end municipal yields increased about 5 basis points (bps) on the day – this was the first real weakness in municipal bond prices since the start of May.

Spreads between commercial paper and treasury bills have narrowed significantly over the past several months. Some accounts are now opting to stick with government-issued paper due to the small difference in yields.

Investment-grade (IG) corporate bond spreads were slightly wider yesterday, while high-yield spreads were tighter by 5-6 bps.

Despite continued heavy supply in the IG market, funding costs continue to decline for borrowers, and new deals are being met with seemingly insatiable demand.

A large amount of BBB-rated debt is at risk of being downgraded to "fallen angel" status. The energy, gaming, lodging, travel, and tobacco sectors seem to be the most at risk.

Monday, 6/1/20

General Takeaways:

After opening lower last Friday morning, US stocks rallied in the afternoon after President Trump’s comments on China were not quite as hawkish as expected. Large caps were higher by 0.50%, with small caps down about 1%.

Growth outperformed value. Health care and technology were the two best sectors, with financials lagging.

US large cap stocks are down about 5% year-to-date (YTD). Small caps are still down over 15% YTD, even after a May in which they rallied over 6%. International stocks are also down over 15% YTD (both developed and emerging markets).

Technology has been the most substantial sector throughout the year and is up over 7% YTD. Energy and financials are the worst sectors YTD, down about 33% and 23%, respectively.

COVID-19 cases and deaths in the United States have stabilized but are still increasing.

"High frequency" data, including air travel and restaurant sales, has begun to inflect higher off extremely low levels, reflecting the reopening of the economy in many places. Movie ticket sales have yet to rebound.

Transfer payments are up 90% month-over-month (April to May), hopefully helping to build an income bridge for temporarily unemployed workers.

Last week, China voted to sanction and increase security measures in Hong Kong. The Chinese government has also halted certain US farm imports (soybeans, etc.). We expect tensions between China and the United States to continue to rise.

Equity Takeaways:

US major indices opened mixed on news that China will be reducing imports of certain US farm goods.

The S&P 500 opened fractionally lower, while small caps opened fractionally higher.

On Friday, President Trump did not say that the US will be pulling out of the phase I trade agreement with China, which gave stocks a boost in the afternoon.

Implied volatility (VIX) has risen slightly this morning and is once again above the critical 30 level.

The S&P is currently valued at about 18 times 2021 estimated earnings on a Price/Earnings basis. 2021 earnings are expected to rebound towards 2019 levels. 2021 estimates do not contemplate any changes to the tax code.

Some large retail businesses have announced temporary store closures due to the recent rioting in many cities.

Hedge fund positioning has become more bullish after the dramatic March selloff in equities, during which many hedge funds quickly reduced their long positions.

Fixed Income Takeaways:

Municipal bond yields, while still attractive compared to treasuries, have reached low absolute levels, which has caused a pause in the recent price rally. Many retail investors are now on the sidelines, waiting for better yields.

Dealer inventories of municipal bonds are at very low levels, as dealers are having trouble hedging their long books due to the disconnect between municipal and treasury yields.

Corporate credit markets continue to hold up even in the face of uncertainty. We expect continued substantial issuance this week, both in the investment-grade (IG) and high-yield markets.

We expect a busier commercial paper market this week with the start of a new month. The supply of commercial paper has declined on a year-over-year basis due to increased issuance in other areas of the credit markets.

Friday, 5/29/20

General Takeaways:

Stocks dropped yesterday, with much of the weakness occurring late in the session. Large caps were fractionally lower, while small caps were down over 2% (albeit after a very strong rally earlier this week). Defensive sectors outperformed, led by utilities and health care. Energy and financials lagged.

Yesterday, unemployment claims fell to 2.1mm vs. the 4-week average of about 2.5mm. Durable goods orders fell 17%, which was a bit better than expected.

Slight 1Q GDP revision: GDP declined 5% in the first quarter and is expected to worsen much further once second-quarter numbers are released.

Personal Spending declined 13%, the most significant decline since the numbers have been collected (1959).

Personal Income rose 10%, in large part due to increased transfer payments from the recent stimulus packages.

The "R" number, indicating how quickly COVID-19 is spreading per person, is estimated to have risen to just above 1.0 in the United States. Last week it had been in the 0.95 range.

Escalating tensions between China and the United States continue. President Trump has hinted about several policy changes targeting China.

Federal Reserve (Fed) Chairman Powell is holding a press conference today. Powell will likely reassert the Fed’s stance to keep interest rates very low for an extended period.

Equity Takeaways:

This morning, major US indices opened mixed. The S&P 500 was down fractionally, with the tech-heavy Nasdaq 100 opening slightly higher. Small caps opened between 1-2% lower.

Growth and momentum stocks outperformed value stocks yesterday. Recall that value (financials, energy) had very strong relative performance earlier this week.

The put/call ratio (a measure of put options traded relative to call options) continues to trade at a low level, indicating complacency in the market. The reading was 0.51 yesterday.

It remains to be seen how President Trump’s recent actions regarding social media companies will affect their business models. If social media companies are labeled "publishers" instead of "platform companies," it could negatively affect their long-term profitability.

The S&P 500 index’s underlying components are incredibly concentrated. The largest five companies are as large as the next 365 components. This is a historically high level.

Fixed Income Takeaways:

Municipal bond prices traded sideways yesterday – a pause in the consistent rally we’ve seen throughout May.

Both airport and hospital bonds have been tough to trade throughout the recent crisis. Airport bonds are starting to see a bit of improved liquidity recently.

Yesterday, investment-grade (IG) corporate bond new issuance passed $1 trillion year-to-date (YTD).

Last year, it took until mid-October to pass $1 trillion of issuance.

The high-yield corporate bond market also continues to trade well – demand for yield is strong and spreads continue to tighten.

Mutual fund flows into both IG, and high-yield paper has been extremely strong. Inflows into IG and high-yield funds were about $14 billion over the past week, the highest number on record.

Usage of the Fed’s commercial paper funding facility was unchanged this week, indicating that the commercial paper market remains healthy.

Thursday, 5/28/20

General Takeaways:

Stocks continued a strong rally yesterday. Large caps were up 1.5%, with small caps up another 4%. Small caps have rallied about 12% over the last three sessions but are still down 17% for the year. Large caps (S&P 500) are down about 5% for the year.

The rally was broad-based, with all 11 sectors in the green. Cyclical sectors, such as financials and industrials, were leaders for a second consecutive day.

The economy continues to re-open. Opentable restaurant data indicates that restaurant sales are down 40% year-over-year (YoY), which is a good improvement over the near 100% declines of a few weeks ago.

Home purchase activity is showing resilience (not just refinancing activity). House prices have held up well, with the Case-Shiller index recently up over 5% YoY.

The Federal Reserve's (Fed) Beige Book report was released yesterday, covering the period from mid-April to mid-May. While anecdotal, none of the reporting regions described a robust economic environment.

The European Union (EU) released details of a $2 trillion COVID-19 response plan. The headline size of the program is greater than expected; however, the underlying mechanics of disbursement haven't been finalized. The plan must be agreed upon by all 27 EU member states.

Hostile rhetoric between China and the United States continues to increase. Yesterday, the US State Department declared that Hong Kong is no longer an autonomous region. This symbolic action allows the US to impose additional sanctions on China.

Continuing unemployment claims dropped from over 24 million to about 21 million, indicating that people are beginning to return to work.

Equity Takeaways:

Major US indices opened fractionally higher this morning, with small caps once again showing relative strength.

President Trump issued an executive order which will add additional scrutiny (and likely result in additional costs) to social media companies. This news is weighing on the tech-heavy Nasdaq 100, which is underperforming the broader market this morning.

More than 90% of S&P 500 stocks are trading above their 50-day moving averages. This trend is another bullish momentum signal for long-term returns but could indicate a short-term overbought condition.

Implied volatility (VIX) remains under the critical 30 level, continuing to hover around 28 this morning.

Fixed Income Takeaways:

Strong demand for investment-grade (IG) corporate bond issuance continues. We are starting to see overseas demand pick up as well, which could push spreads even tighter. Overseas demand was strong throughout 2018 and 2019 but waned a bit earlier this year.

Investment-grade spreads both tightened again yesterday. IG spreads are still about 2x wider today compared to the beginning of the year, so the relative value to treasuries still looks attractive.

High-yield spreads tightened sharply again yesterday and are now trading at their tightest levels in the past 11 weeks.

The commercial paper market is "steady as she goes." Supply is scarce, and demand for the highest-quality issuers is very strong.

Municipal bond yields were unchanged yesterday, breaking a 17-day streak of increasing prices. The tone remains firm.

Some non-traditional municipal bond buyers have returned to the market recently, helping drive prices higher. Municipal bond mutual funds are seeing inflows once again, providing another layer of support for the asset class.

Wednesday, 5/27/20

General Takeaways:

Yesterday was another "risk on" day—optimism around businesses reopening buoyed stocks. Large cap US equities were up about 1.2%, while small caps were up another 4%. The tech-heavy Nasdaq 100 was down slightly.

Financials led the rally, up about 5%. Industrials were up 4%. Defensive sectors such as health care underperformed the broader indices.

Financials and industrials are both examples of cyclical sectors that tend to perform best during an economic recovery. Also, small caps tend to be more cyclical than large caps. Recent price action indicates that market participants are beginning to price in a stronger-than-expected economic recovery.

Data on home prices (Case-Schiller Index) and new home sales were both better than expected. Consumer confidence is also improving.

Discussions on further stimulus measures continue in Congress. The extended unemployed insurance benefit provision of the CARES Act expires in July – it is unclear whether this benefit will be extended. Recall that this provision added an extra $600 / week to unemployment checks.

A European "shock and awe" plan was announced yesterday. The European Commission released a $750 billion program to fight COVID-19, including $500 billion of grants and $250 billion of loans. Germany and France announced a similar ($500 billion) plan last week. Momentum is increasing for greater European unity.

The fact that the European Commission’s plan includes outright grants is significant, indicating greater willingness to cooperate and perhaps a move away from populism.

Equity Takeaways:

Major US indices opened higher by about 1% this morning. The Nasdaq 100, which had been leading the rally until yesterday, opened down fractionally.

Breadth was strong yesterday – it was a day of "accumulation." Advancers outnumbered decliners by a factor of over 5:1.

Yesterday’s cash session (9:30 am – 4 pm) saw the market decline during the day. This price action matches a recent pattern whereby most of the daily gains are occurring during the overnight session.

Implied volatility (VIX) has declined below the critical 30 level once again and is currently at about 28.

Value stocks, which have been lagging the broader indices, showed very strong relative performance yesterday. Value indices tend to be overweight cyclical sectors (financials, industrials, energy, etc.).

Fixed Income Takeaways:

New corporate bond issuance continues at a torrid pace. Funding costs remain low, and investor demand is high, with order books remaining well oversubscribed.

Companies are looking to bolster their balance sheets in the face of weakening revenues. Many borrowers have tapped the market on multiple occasions this year. Issuance from very large banks has been particularly substantial.

Both investment-grade (IG) and high-yield spreads tightened yesterday. This morning, spreads are opening tighter once again, led by the energy sector.

Commercial paper yields remain stable, and the market is healthy.

Municipal bond prices kept their streak going, rising in price for the 17th consecutive day. The new issue calendar looks very busy for the next several days.

Tuesday, 5/26/20

General Takeaways:

Last week, the S&P 500 finished higher by about 3.3%. Small caps were even stronger, finishing about 9% higher last week. Despite a massive rally off the March bottom, the S&P 500 is down about 7.7% year-to-date (YTD), with small caps down over 22% YTD.

An important metric to watch going forward is "R,"; a measure of the rate of infection spread of COVID-19. A sustained "R" value below 1.0 would be significant – "R" is currently estimated at 0.99 in the United States.

Survey data indicates that many Americans are still hesitant about performing simple public activities, such as going to the grocery store for fear of health risks.

Last week, both Germany and France showed strong support for greater fiscal integration within the European Union (EU) to help fight COVID-19. If the EU parliament ultimately ratifies the plan, it would be a significant step toward intra-EU cooperation.

China continues to clamp down on democratic freedom within Hong Kong. Protests within Hong Kong are increasing once again – this issue has increased the tension between China and the United States. As part of this increased tension, recent polling data indicates that anti-China sentiment continues to grow in the US.

The long-term implications of these developments (in both the EU and Hong Kong) are profound. They both represent potentially tectonic shifts in geopolitics that could create higher volatility in the years ahead.

Housing data has rebounded off the March lows. Online home searches on Zillow have rebounded to show year-over-year growth. Pending home sales have also rebounded but are still below February levels.

Equity Takeaways:

Major US indices opened 1-2% higher this morning, with the S&P 500 opening above the 3,000 level.

Asian markets were strong yesterday – the momentum is carrying over into today’s US session. Positive news on another possible vaccine candidate is also supporting stocks at today’s opening.

The US dollar has shown some relative weakness, indicating that a capital flight to US dollars' safety has begun to abate.

The S&P financial index continues to lag the broader S&P 500 significantly. We don’t believe the financials need to lead the market higher. However, it would be a healthy sign if the financials stopped weakening on a relative basis.

Fixed Income Takeaways:

Fixed income spreads continued to tighten across the board on Friday, but in general, spreads are still wider year-to-date (YTD).

Thirty-five different corporate borrowers priced new deals last week. YTD, about $969 billion of investment-grade (IG) corporate issuance, has priced. Order books remain well covered, and most transactions are being well received.

Longer duration, lower-quality bonds outperformed the broader indices last week. There was a "risk on" tone in the market.

Commercial paper flows are expected to remain muted this week due to month-end.

Municipal bond yields fell another 5 basis points (bps) across the curve on Friday. Municipal bond prices have rallied every single calendar trading day in May.

Friday, 5/22/20

General Takeaways:

Major US stock indices were mixed yesterday. Large caps fell about 1% yesterday, with small caps flat to slightly higher.

Purchasing Manager Index (PMI) data: Markit’s composite index rebounded to 36.4 in May from 27.0 in April. Recall that any reading below 50 indicates contraction. Manufacturing is faring a bit better than the service sector.

China withdrew its annual economic forecast for the first time in at least 25 years. The Chinese did re-commit to their portion of the phase 1 trade deal with the United States. They also passed another stimulus package, but the amount of stimulus was less than expected.

China is effectively bypassing Hong Kong’s existing government to enforce greater national security. In response, the Hong Kong stock market dropped by over 5%. The Hong Kong / China conflict will likely become a political issue in the United States, as Secretary of State Pompeo has denounced China’s recent actions.

Individual small traders are becoming more involved in the market. Such activity could increase short-term volatility in certain popular stocks.

Equity Takeaways:

Major US stock indices opened slightly lower this morning. Small caps opened somewhat higher, continuing a recent streak of relative outperformance.

Yesterday, value stocks outperformed the broader market. Industrials notched a small gain and were the strongest sector, while the weakest sectors were energy, consumer staples, and technology.

Implied volatility (VIX) rose slightly yesterday and continues to chop around near the critical 30 level.

The put/call ratio (a measure of protective puts traded compared to call options) is currently at a low level. A low put/call ratio tends to indicate complacency in the market but is generally not a useful market timing tool.

Fixed Income Takeaways:

Corporate bond spreads remained firm yesterday. High-yield spreads were another 10 basis points (bps) tighter, continuing a strong week of performance. Investment-grade (IG) spreads were also tighter.

Next week we will likely pass the $1 trillion mark for new corporate bond issuance in 2020. In 2019, it took until October for new issuance to pass the $1 trillion mark.

Money continues to pour into corporate bond mutual funds, both IG and high-yield. These inflows are supporting spreads.

The bond market closes early on Friday, so we expect a muted trading session.

Commercial paper issuance has slowed over the past few months. Typically, about $1.5 trillion of commercial paper is outstanding, but that number has dropped to about $1 trillion today as corporations utilize other avenues of funding.

Municipal bond prices rallied again yesterday for the 15th consecutive session. Spreads were about 5 bps tighter across the curve.

Mutual fund inflows have returned to the municipal bond market after several months of outflows. These inflows should provide a tailwind to the market, all else equal.

We continue to keep one eye on the rhetoric surrounding this year’s presidential election and its possible impact on markets.

Thursday, 5/21/20

General Takeaways:

Major US indices were 1-2% higher yesterday, with small caps up about 3%. Energy led the way, up 4%, with defensive sectors lagging but still positive.

Federal Reserve (Fed) minutes from the April 28-29 meeting indicate the possibility of additional future easing measures – some investors were hoping for even more aggressive language. The minutes indicate much uncertainty about the outlook for the economy.

The US and China continue to trade verbal barbs with respect to trade. Trump sent a letter to the World Health Organization (WHO) expressing his frustration with their handling of the COVID-19 outbreak and China’s involvement in the organization.

The politicization of stock indexing may gain steam. Talk has resurfaced of excluding certain Chinese companies from US exchanges/indices.

Retail stock trading volumes have surged to 3-4x normal levels over the past few weeks. "Fear of missing out" (FOMO) can drive retail sentiment when stocks are rising. With commissions cut to $0 and no sports betting available, speculators/gamblers may be turning to the stock market.

COVID-19 cases, while still growing on a global basis, seem to have plateaued in certain areas.

Equity Takeaways:

Major US indices opened flat to slightly higher this morning. Small caps are once again outperforming slightly, rising by about 0.5% in early trading.

Yesterday was an accumulation day in the stock market. Advancers outnumbered decliners by a factor of 4:1.

The recent move in stocks has taken us above the top of the trading range that began in April. Typically, once we break out of a range, you will see some near-term backing and filling as the market digests the recent gains.

During the recent rise, most of the increase in stock prices (about 90%) has occurred during the overnight sessions. In a traditional bull market, prices rise during the daily cash session as well as the overnight session, so the recent move higher has been unusual in that respect.

According to the Options Clearing Corporation (OCC), options trading volume by small traders has skyrocketed recently. Options trading volume by small traders has risen 3x above the all-time peak levels we saw during the late 1990s boom.

Fixed Income Takeaways:

Investment grade (IG) corporate bond spreads were about 7 basis points (bps) tighter yesterday. The Fed has purchased shares of a large IG corporate bond ETF seven days in a row, which has supported sentiment.

The pace of new issue IG supply remains solid, and deals continue to be well received. Order books were 4x covered yesterday (a substantial number).

The first US auction of a 20-year US treasury bond in 34 years was met with strong demand yesterday.

This issuance is part of the US Treasury’s plan to extend the duration of its outstanding debt due to the current low rates available.

Commercial paper market activity is expected to slow as we get closer to the holiday weekend. The market is stable.

Municipal bond rates fell for the 14th consecutive day. Municipal yield ratios compared to treasuries are still high on a historical basis (municipals look relatively cheap to treasuries), but absolute yields are meager. They are starting to create some sticker shock.

After the recent strong move, we expect the pace of tightening of municipal bond spreads to slow due to low absolute yields.

Over the past three months, municipal bond yields are 85 bps lower on the front-end and 30 bps lower on the long-end, even after all the recent volatility we have seen.

Wednesday, 5/20/20

General Takeaways:

Stocks were down on the day yesterday. Large caps declined about 1%, with small caps down 2%. Energy and financials were the main laggards, with technology shares holding up the best (but still negative by 0.40%).

According to updated forecasts from the Congressional Budget Office (CBO), interest rates will remain low until 2027, with inflation remaining low throughout that time. The CBO predicts a sharp drop in 2020 GDP of about 5-5.5%, but a snapback of about 4% growth in 2021. This forecast would suggest a more "U" shaped recovery versus the oft-quoted "V-shape" recovery.

Federal Reserve Chairman Powell has continued to place pressure on Congress and the Administration to provide additional fiscal stimulus.

Apartment rents are being paid on time for the most part (late payments have declined over the past few weeks).

Domestic travel is increasing – car travel is slowly returning to normal levels; hotel bookings are beginning to improve, but still well below prior year trends.

A new proposed $500 billion fiscal stimulus package in the European Union (EU), co-sponsored by Germany and France, could be a critical step towards greater integration within the EU to fight COVID-19.

China’s economy continues to recover (industrial economy recovering quicker than the consumer economy) – additional stimulus measures are expected to be announced on Friday.

Equity Takeaways:

Major US indices opened 1-2% higher today. Small caps fared even better, rising a little over 2% on the open.

While stocks were lower yesterday, breadth wasn’t terrible. There were declining issues that outnumbered advancing issues by a factor of 1.5/1, so it did not qualify as a day of distribution.

Implied volatility (VIX) has been chopping around on either side of the critical 30 level. This morning, the VIX has dropped to about 28.

We continue to monitor "risk on" sectors, such as financials and industrial metal companies, for signs of cyclical participation in the recent rally. These sectors are both still lagging the broad market. As an example of this trend, growth stocks outperformed value yesterday by about 150 basis points (bps).

Fixed Income Takeaways:

Investment-grade (IG) corporate bond new issuance continues at a frantic pace. Investor demand continues to meet the supply.

Spreads are bolstered by this strong investor demand, as well as Federal Reserve support. IG spreads were about 5 bps tighter yesterday, with high-yield spreads much tighter, in by about 40 bps.

High-yield issuance in May is also strong: this has already been the busiest May for high-yield new issuance in the past four years.

Municipal bonds were stronger yesterday across the curve. The front-end continues to outperform the long-end on a spread basis. Yesterday was the 13th consecutive day of tightening in munis.

The Fed gave additional guidance on its new municipal liquidity facility. The Fed is positioning itself as a lender of last resort for the municipal bond market.

Fed comments have provided a tailwind to the new issue market for municipals. Issuance levels are increasing by the week, and demand is also growing.

Tuesday, 5/19/20

General Takeaways:

Major US equity indices gained more than 3% yesterday. Small caps fared even better, rising over 5%. High beta stocks did even better than that, increasing more than 9%. Defensive factors underperformed the broad indices, but generally still rose over 2%.

Much of yesterday’s rally was driven by Chairman Powell’s comments on 60-minutes from Sunday evening, where he stated that there is "no limit" to the support that the Fed can provide to the economy/markets.

Positive data from an early stage vaccine trial also supported sentiment.

Equity Takeaways:

Stocks opened slightly lower this morning – a day of consolidation after yesterday’s furious rally would likely be viewed positively by market participants.

During yesterday’s rally, the average stock, as measured by the Valueline Geometric Index, was up over 6%.

On the opening tick of the market yesterday, over 2000 NYSE stocks opened higher, which is the highest reading on record.

The equity put/call ratio closed at 0.47 yesterday. We’ve never seen the S&P 500 close over 3% higher on a day with such a low put/call ratio. Usually, when you see big rallies in the market, the put/call ratio is over 1.0. A low put/call ratio (below 0.50) usually signals complacency.

Private commercial real estate pricing for April is becoming available. One major index was down about 9% for the month / 10% year-to-date (YTD). Regional malls were among the weaker property types, with some properties marked down 20%+.

Fixed Income Takeaways:

Heavy supply continues in the investment-grade (IG) corporate bond market. Order books were strong once again yesterday, and pricing levels were firm.

Many non-financial companies have come to market multiple times over the past few months. This is unusual behavior. Companies are attempting to shore up their balance sheets by raising cash and extending maturities wherever possible.

IG corporate spreads were "on fire" yesterday, closing at their tightest level relative to treasuries since March 11th.

The treasury yield curve did steepen slightly yesterday, but absolute rates (10-year yield 0.74% at the time of this writing) remain at very low levels on a historical basis.

Commercial paper flows increased slightly yesterday. Certain bank issuers have begun to return to the market, which has increased supply. Even lower-quality energy names have tightened significantly over the past several weeks.

Municipal bonds continued to rally yesterday. We’re on a 10+ day streak of at least some portion of the muni curve tightening relative to treasuries.

Supply in the municipal new issue market has returned to normal levels. New deals are being marketed at attractive levels, but demand for bonds is strong, and spreads are tightening from initial price talk.

Monday, 5/18/20

General Takeaways:

On Friday, large cap US equities were up about 0.40%, with small caps up about 1.4%. Defensive sectors such as utilities lagged, with lower quality companies outperforming the major indices.

In April, industrial production posted its biggest decline ever at -11.2% MoM / -15.8% YoY.

Capacity utilization plummeted below 65%. Retail sales fell 16% month-over-month (MoM) and 21% year-over-year (YoY).

A silver lining to the current very weak economic numbers is that we are likely near the trough in this data. As the economy reopens, comparisons should begin to improve.

A very large microchip manufacturer is planning on building a large factory in Arizona, a sign that onshoring initiatives are beginning to take shape.

A series of mini "fiscal cliffs" is on the horizon. In early June, the first 8-week Paycheck Protection Program (PPP) will expire. June 30th is the deadline for PPP borrowers to rehire workers (a prerequisite for loan forgiveness). On July 31st, extended unemployment benefits expire.

Equity Takeaways:

Major US indices opened 2-3% higher on Monday on positive news surrounding vaccine trials, as well as Federal Reserve (Fed) Chairman Powell’s comments on 60 Minutes from Sunday. Powell stated that the Fed is "not out of ammunition" concerning its ability to support the economy.

Implied volatility (VIX) declined on Friday and is once again trading below the key 30 level this morning.

Signs of normalization: large mall operators are beginning to reopen stores, credit card spending data is improving, and hotel occupancy is beginning to slowly improve (albeit very slowly).

We continue to believe that the current uncertain environment will favor quality companies with predictable earnings streams.

Fixed Income Takeaways:

On Friday, investment-grade (IG) corporate bond spreads were slightly tighter, while high-yield spreads widened for the third consecutive day. We expect another very busy week of new issuance.

We are beginning to see a bifurcation between IG / high-yield bond performance. The IG market continues to hum along, while high-yield performance has been choppy. In general, the front-end of the curve (shorter duration) is outperforming the long-end.

Taxable bond funds attracted substantial inflows in April, partially due to investors rotating away from equities.

In commercial paper, flows remain extremely light. While liquidity has improved dramatically in the past six weeks or so, many market participants remain cautious.

High-quality municipal bonds continue to perform well. Last week, spreads tightened by about 15 basis points (bps). Yields continue to grind lower vs. treasuries.

New issuance in the municipal bond market has returned to historical levels after being muted for two months. To this point, the increased supply has been well received.

VRDOs (money-market municipal instruments) continue to reset lower in yield – liquidity has improved dramatically in that sector.

Congress continues to negotiate on additional fiscal stimulus. We will continue to monitor the situation for any possible impact on municipal credits.

Friday, 5/15/20

General Takeaways:

Stocks rallied yesterday afternoon after a weak opening. Large caps closed higher by about 1.25%, with small caps up about 0.3%. Financials led the way, up 2.5% – consumer discretionary names also performed well on a relative basis.

Rhetoric between China and the United States continues to worsen – recent comments from President Trump are weighing on sentiment this morning.

According to the Financial Times, oil supply is expected to fall to a 9-year low. Prices continue to creep higher after bottoming out in late April. Gasoline demand has begun to recover and has retraced about half of the drop from the mid-March nadir.

Lumber production is holding up well (about flat year-over-year). The residential housing market remains relatively healthy compared to other sectors of the economy.

More than 36 million Americans have filed unemployment claims since the start of the crisis – a grim total. 40% of American households reporting under $40k of annual income lost a job in March.

Retail sales plunged 16.4% in April, about twice as much as the previous month. Estimates were for an 8-10% drop, so this number was much weaker than expected.

Michigan's state government was shut down yesterday due to protests. Georgia’s reopening three weeks ago has not yet resulted in a case spike, yet many scientists continue to warn of the dangers of normalizing too quickly.

Equity Takeaways:

This morning, trade tensions between China and the US are weighing on global stock markets. US indices opened about 1% lower across the board.

Equities rallied strongly into the close yesterday after a weak opening. "Risk on" sectors, such as financials and materials, outperformed defensive sectors.

After dipping below the key 30 level for a few days, implied volatility (VIX) has moved higher once again and is now trading around 35.

For many industries, work-from-home initiatives could increase labor mobility, possibly resulting in migration away from large cities, as well as pressure on wages.

For these reasons, commercial real estate is a sector that is likely to undergo some major structural shifts over the coming years.

Fixed Income Takeaways:

Investment-grade (IG) spreads were unchanged yesterday, but high-yield spreads widened about 19 basis points (bps).

Supply is flooding the IG market and continues to be well-received. IG and high-yield bond funds are still seeing strong inflows (7 straight weeks of inflows for high-yield funds).

One large financial firm priced a "COVID-19" corporate bond yesterday – all the proceeds will be used for efforts to combat the virus (community support, etc). This is the first such issue in the United States.

The leveraged loan market has held up better than the high-yield bond market (lower default rate).

That said, most high-yield issuers are eligible for some sort of Federal Reserve (Fed) support, while most leveraged loans are ineligible for the Fed purchase programs.

Municipal bonds have rallied for 10 days in a row. It has been a steady grind higher in price. VRDOs (municipal money market instruments) also continue to reprice to lower yields.

The House may pass its version of a stimulus bill today. The current version is highly unlikely to pass the Senate, but passage would provide a starting point for negotiations.

Thursday, 5/14/20

General Takeaways:

Yesterday, US large caps were down about 1.7%, with small caps down 3.5%. Financials and energy underperformed the broader markets, with defensives such as consumer staples and utilities outperforming (but still negative).

Federal Reserve Chairman Jerome Powell presented a sobering economic outlook yesterday, calling the path forward "highly uncertain." He called for increased financial support from Congress. He specifically mentioned the small business sector as facing possible permanent scarring.

Powell also signaled that interest rates will likely need to stay close to their current level of 0% for several years.

Democrats in the House released their version of the next stimulus package. Their wish list contains significant state and local aid support, a six-month extension of unemployment insurance (which is opposed in the Senate), and a revision of the Paycheck Protection Program (PPP).

A second wave of economic weakness is building, with increased layoffs across sectors. Initial unemployment claims came in at 3 million this morning, with continuing claims over 22 million, indicating that the PPP may need some revision to continue putting people back to work.

The Wisconsin Supreme Court overruled some of the COVID-19 containment measures previously put forth by state officials, another example of the political discord around a path forward.

Equity Takeaways:

Stocks continued their mid-week swoon this morning. US large caps opened 1-2% lower, with small caps 3-4% lower on the open.

Yesterday, decliners outnumbered advancers by over 8:1 on the New York Stock Exchange (NYSE) – breadth continues to be weak.

The divergence between the "generals" and the "soldiers": the strongest, largest stocks are outperforming the average stocks by a wide margin. For example, the Nasdaq 100 was down about 1.2% yesterday, but the average stock was down over 3%.

Growth stocks have outperformed value stocks by 15-20% YTD, both in the US as well as international markets.

Much of the outperformance has been driven by relative price/earnings multiple expansion.

Fixed Income Takeaways:

Despite the weakness in equities and the rally in the treasury market, investment-grade (IG) corporate bond spreads held up well yesterday, closing unchanged. High-yield spreads were wider in sympathy with stock prices.

The new issue credit market continues to hum along. The demand for high-quality corporate bonds remains extremely high.

The commercial paper market saw an active day of new issuance yesterday. 30-day and 90-day rates continue to drop due to investor demand. Commercial paper markets are currently stable and liquid.

Municipal bond prices rallied again yesterday. Front-ends spreads are about 20bps tighter on the week.

Liquidity is improving. Weaker municipal bond borrowers have seen improved access to the credit markets this week.

Municipal bond mutual funds saw slight inflows over the previous week – fund flows continue their slow improvement from March’s wave of outflows.

All eyes remain on Congress – the form of aid provided to state and local governments will be very important.

Wednesday, 5/13/20

General Takeaways:

Major US indices were down about 2% yesterday. Small caps were down 3.5%. Real estate and industrials (value sectors) were down 4.25% and 3% respectively.

Defensive sectors, such as consumer staples, outperformed but all sectors finished in the red.

Treasury bond prices rallied, while West Texas Intermediate (WTI) crude for June delivery rose about 6% to over $25 / barrel.

Federal Reserve (Fed) Chairman Jerome Powell will be giving an important speech today – perhaps discussing the Fed’s long-term outlook. Powell may also discuss recent market signals regarding possible future negative interest rates.

Same-store sales (an important retail metric) declined 9% for the first week of May. Department store sales were down more than 30% but had been down over 40% in prior weeks – the rate of decline is slowing.

The residential housing market seems to be holding up reasonably well – falling mortgage rates are supporting purchase/refinancing activity.

Equity Takeaways:

After yesterday’s sharp selloff, US equities opened mixed this morning, with the tech-heavy Nasdaq slightly higher and the broader S&P 500 slightly lower.

Yesterday, almost 14% of S&P 500 constituents closed on the low of the day – this is an elevated level and could portend future weakness. Breadth, as measured by advancers/decliners, was once again weak.

The S&P 500 has rallied about 28% off the March 23rd bottom. Most of the rally occurred in the two weeks immediately after the bottom. In the 3-4 weeks since the stock market has entered a trading range.

Implied volatility (VIX) rose back above 30 in yesterday’s choppy session.

Fixed Income Takeaways:

Municipal bond spreads tightened again yesterday. The 1-2-year portion of the curve remains the strongest, which has resulted in a steeper curve.

Even after recent strong performance, municipal bond yields are still very attractive relative to treasuries, at a ratio of more than 200% across the curve. Before the crisis, the ratio was about 65% on the front-end of the muni curve.

The $3 trillion House stimulus proposal (released yesterday) included $1 trillion in aid for state and local governments. This bill is not likely to pass in its current form.

On Monday night, the Fed announced that it will officially start its corporate bond ETF purchase program as early as Tuesday (5/12). The credit market reacted favorably.

Investment-grade (IG) spreads were slightly tighter yesterday. High-yield spreads were also tighter yesterday, even in the face of weaker equities. Spreads are opening slightly tighter again this morning, continuing recent strength.

That said, we are seeing pockets of weakness in the credit markets – spreads in both the consumer discretionary and industrial sectors have softened recently.

Commercial paper market participants are looking a bit farther out the curve (6-12 month area) to pick up some extra yield.

Tuesday, 5/12/20

General Takeaways:

Stocks were mixed yesterday.

The S&P 500 was essentially flat, the technology-heavy Nasdaq gained about 0.75%, and small caps declined about 0.5%. Defensive sectors outperformed, while cyclical sectors such as materials and energy underperformed.

A few days ago, the futures market was pricing in a negative Fed Funds interest rate – rate expectations have risen somewhat since then but are still extremely low by historic standards.

One reason for continued low rate expectations: excluding food and energy, the monthly Consumer Price Index (CPI) showed deflation in April, plunging by -0.4% (the largest monthly decline since 1957).

Federal Reserve Chairman (Fed) Jerome Powell will be speaking tomorrow (Wednesday) – market participants will parse his speech closely for any clues on future Fed policy.

A recurrence of COVID-19 cases in China / South Korea has sparked fears of a second wave in certain areas. Sweden is also re-evaluating its strategy around the containment of the virus.

COVID-19 "us vs. them" sentiment is on the rise. Fault lines in society (rich vs. poor, employed vs. unemployed) are being exposed. Opinions on re-opening the economy are beginning to segment on political lines as well which will be on full display today as CDC Director Dr. Anthony Fauci addresses Congress.

Equity Takeaways:

Major US indices opened slightly higher this morning. Treasury bond prices are flat.

Yesterday, the Nasdaq was up about 0.75%, while at the same time over 70% of the volume on the NYSE flowed into declining securities. This type of price action has only occurred twice since 2000 – once in 2001 and again in 2007.

The rally off the March lows has failed to broaden out and is being led by large technology stocks – we have yet to see a "breadth thrust" to expand the leadership into other sectors.

As an example, only about 17% of NYSE-listed securities are above their 200-day moving averages.

Implied volatility (VIX) has traded below 30 for several days now, a positive sign. The VIX is down over 60% in the last month. This magnitude of decline has only happened 15 other times since 1990; further volatility is expected in the weeks ahead.

Analyst estimates are likely too high going into the second quarter – this fact could put pressure on stocks as we go into the summer.

Fixed Income Takeaways:

Last night, the Fed announced that it will begin its purchases of corporate bonds / ETFs in the secondary market today (Tuesday). Fixed income market participants have been anticipating this move – demand for corporate bond ETFs has soared over the past month. Recall that the Fed announced this credit facility in late March.

Yesterday was another very busy day in the investment-grade (IG) corporate bond market. The Fed’s announcement last night has bolstered sentiment even further.

Spreads are opening tighter this morning in both IG and high-yield paper.

Commercial paper activity picked up yesterday after a long weekend. Fund flows have been consistently positive over the last several weeks.

Municipal bonds have rallied seven days in a row. The new issue market was active yesterday, with several attractive deals pricing.

The Fed has come out with some specific rate levels on its new Municipal Liquidity Facility. The financing levels are not competitive compared to the current market levels for AAA/AA paper but could help support weaker credits.

Monday, 5/11/20

General Takeaways:

Despite more than 20 million US jobs being shed in April, stocks rallied on Friday. Large caps were up 1.7%, with small caps up over 4%. The cyclical energy and industrial sectors led the rally, with defensive sectors underperforming.

We have seen several different forecasts for the pace of job gains coming out of the current recession.

Some forecasters are projecting unemployment to quickly drop from its current level of 14%+, while others see high levels of unemployment persisting well into 2021.

As noted on Friday, the leisure and hospitality sectors have been the hardest hit. 7.5 million leisure / hospitality jobs have been lost, amounting to more than 50% of sector employment.

Nearly 6 in 10 laid-off or furloughed workers say it is "very likely" that they will get their old job back. Overall, 77% of laid-off or furloughed workers expect to be rehired by their previous employer.

The COVID-19 outbreak appears to be stabilizing. Cases in New York are declining, however, states that are reopening are seeing an uptick in cases.

China’s extensive COVID-19 monitoring system, while intrusive to personal privacy, may help the Chinese economy recover.

The long-term impacts of COVID-19 on real estate demand are unclear, but it seems likely that physical retailers will remain under pressure. The trend towards less office space per worker will also likely continue.

Equity Takeaways:

US equity markets opened about 1% lower this morning, taking a breather after last week’s strong performance.

Last Friday, breadth was strong: advancing issues outpaced declining issues 5:1, with advancing volume 8:1 over declining volume.

Last week, the S&P 500 gained about 3.5%, while the tech-heavy Nasdaq was up almost 6%. Energy shares rallied for the 7th consecutive week.

Markets care about "better vs. worse"; not "good vs. bad." Economic data, although still weak, has been improving on the margin – this fact is supporting stock prices.

Implied volatility (VIX) closed under the key 30 level on Friday but has risen slightly above 30 this morning.

Fixed Income Takeaways:

Credit markets have thawed recently, but spreads in both the investment-grade (IG) and high-yield corporate bond markets remain above their long-term averages. Absolute rates remain low due to low treasury yields.

Last week was one of the top-5 new issue volume weeks on record in the IG corporate bond market.

Supply is running about 90% higher than last year’s pace.

IG spreads were wider last week, led by a weaker capital goods sector. High-yield spreads tightened last week, led by B-rated borrowers.

Municipal bonds rallied again last week. Municipal bond ratios relative to treasuries remain at extremely wide levels – these wide spreads are bringing non-traditional buyers into the sector.

All eyes remain on the next fiscal stimulus deal – the devil is in the details, but it seems likely that state and local governments will receive substantial support in the upcoming package.

Friday, 5/8/20

General Takeaways:

Major US stock indices were up 1-2% yesterday. Small caps outperformed large caps. Cyclicals such as energy and financials outperformed, while defensive sectors underperformed.

For the first time, futures markets are pricing in a negative US Fed Funds rate for later in 2020.

The 2-year treasury yield hit an all-time low this morning of about 10 basis points (bps), or 0.10%.

While equity markets have performed well recently, money market funds are still seeing significant inflows, indicating that many investors are still cautious.

The headline measure of the unemployment rate (U-3) spiked to 14.7%. Over 20 million jobs were lost in April. According to economist projections, we should begin to see the unemployment rate drop going forward (although there is a wide dispersion among estimates).

The labor force also dropped significantly, with over 6 million workers leaving the labor force in the last month. The broadest measure of unemployment (U-6), which includes these discouraged workers as well as workers whose hours have been cut from full-time to part-time, came in at over 22%.

Preliminary discussions around another fiscal stimulus program are underway – the initial amount being floated around is $500 billion - $1 trillion.

Equity Takeaways:

Major US indices opened about 1% higher this morning. Equity markets continue to focus on efforts to reopen the economy, as well as some positive news around trade talks with China and progress on treatments for COVID-19.

After yesterday’s move higher, the broad Nasdaq index is positive for the year. The Nasdaq 100 (an index of the largest tech companies) is up over 5% year-to-date.

Value, beta, and rate-sensitive sectors outperformed the broader market yesterday. Energy stocks decoupled from crude, rising even as crude oil prices fell.

Advancing issues outpaced declining issues by over 3:1; advancing volume also outpaced declining volume by over 3:1.

Implied volatility (VIX) declined again yesterday and is now hovering around 30. A sustained break below 30 would be a notable positive in our view.

Fixed Income Takeaways:

Municipal bond market participants are hopeful that the next round of fiscal stimulus will help states and localities plug holes in budgets (replace lost tax revenue). Previous rounds of federal support have been limited to COVID-19 mitigation.

The 1-3-year portion of the municipal bond curve has seen a strong rally over the past few weeks.

Municipal bonds have now rallied five days in a row.

Certain high quality, liquid municipal credits are seeing very strong demand.

Municipal bond funds saw small outflows last week, but the pace of outflows has slowed and investor demand seems to be firming up.

The investment-grade (IG) corporate bond new issue market continues to hum along. $85 billion in new issuance has priced in just the last four days.

Pricing levels have been extremely strong, with high levels of oversubscription.

Corporate bond funds saw strong inflows again last week. The IG corporate market saw the largest single-week inflows since January, at over $6 billion. High-yield bond funds also saw strong inflows.

The commercial paper market has been quiet for the last few days, but pricing remains firm.

Thursday, 5/7/20

General Takeaways:

Yesterday, the S&P 500 was down about 0.7%, while small caps were down about 1.25%. Growth stocks outperformed value stocks once again. Financials, energy, and utilities lagged.

Longer-dated treasuries sold off yesterday on news that the US Treasury will be auctioning 20-year securities (a bit longer in tenor than the market expected).

Oil prices are firmer after Saudi Arabia raised its June official selling price (OSP) in various markets. These oil price hikes could be a sign that the Saudis believe demand is beginning to return.

Equity and credit volatility have both decreased since the Federal Reserve (Fed) announced its credit purchase facility in early April. Purchases of corporate bonds under that credit facility will begin in several days.

Unemployment claims data: weekly unemployment claims were 3.2 million, with continuing claims at another record high of about 22 million. Continuing claims will be important to watch going forward – hopefully the Paycheck Protection Program (PPP) will allow for the rehiring of some workers.

Treatments and vaccine data will be very important to the markets over the coming months. Absent a viable treatment for COVID-19, volatile markets will continue, buffeted by a weak economy on one side and supported by the federal stimulus on the other.

Equity Takeaways:

Equity markets opened between 1-2% higher today. Sentiment has been bolstered by news that trade talks between China and the USA are scheduled for next week, as well as rising oil prices.

Yesterday, the stock markets showed weak internals once again, but it was not a day of internal distribution. The generals continue to lead the market, with the Nasdaq / technology names outperforming once again.

The stock market has been in a trading range since April 16th. We are currently near the upper end of that range (about 2900 on the S&P 500).

Stock markets have recently been performing very well in the overnight futures-driven sessions.

During the daily cash session (traditional 9:30 am – 4:00 pm hours), performance has been a bit more muted, indicating some profit-taking during the day.

ESG (environmentally and socially conscious) strategies have performed well during the recent downturn due to stock selection. By nature, these types of strategies are underweight financials and energy, two of the weakest sectors recently.

Fixed Income Takeaways:

In the new issue investment-grade (IG) corporate bond market, supply continues at a frantic pace.

In the first three days this week, we saw $63 billion in new issuance. New issuance is 97% higher year-to-date compared to 2019.

IG spreads were a bit softer yesterday, mainly due to heavy supply. With oil prices higher today, both IG and high-yield spreads are tighter this morning.

Both IG and high-yield option-adjusted spreads (OAS) have been driven much tighter by the recent Fed actions. Some models put the Fed’s impact at as much as 200-250 basis points.

Commercial paper spreads continue to tighten. Longer paper (6-12 month) is now seeing more demand due to its slightly-higher yield.

The municipal bond market was relatively quiet yesterday. Municipals tightened relative to treasuries by about 2 basis points (bps).

Higher-quality new municipal issuance has been met with strong interest, while certain weaker credits have not been able to price.

Ridership in the New York City metro system has declined 95% due to COVID-19.

Wednesday, 5/6/20

General Takeaways:

Major US indices closed higher by 0.5% - 1% yesterday. Growth, quality, and minimum volatility factors outperformed the broader indices. Healthcare and technology stocks outperformed, while cyclical sectors such as financials and energy underperformed.

ISM data: Services (non-manufacturing) headline reading fell from 52.5 to 41.8. Recall that any number below 50 indicates economic contraction. Some of the internal activity sub-components, such as new orders, were even weaker (reading went from 53 to 33 on new orders).

ADP employment data: Private employment fell by 20.2 million jobs last month. Services-sector jobs shrunk by about 16mm, while the manufacturing sector lost 4.25mm jobs.

Congress does seem inclined to provide further fiscal stimulus, likely sometime later this month, but the form and amount are yet to be determined.

Private equity and hedge fund strategies can both be important diversifiers within the context of an investment portfolio.

The German constitutional issued a ruling yesterday that could adversely affect the European Central Bank’s ability to implement quantitative easing.

Equity Takeaways:

Major US indices opened about 0.5% higher this morning.

For much of the day yesterday, US stocks were up close to 2% but faded into the close to finish between 0.5% and 1% higher.

Healthcare, tech, utilities, and real estate performed well yesterday. Growth outperformed value. Even with prices closing higher, the day still had a "risk off" feel to it given the strong relative performance of defensive sectors.

Much of the recent snapback rally in the S&P 500 (from 2200 to 2900) has been driven by fiscal and monetary policy. Fundamentals may play are more important incremental role going forward.

If the economy does not return to its full pre-crisis strength, corporate profits will be adversely affected. Any long-term impact on corporate profits will be negative for the stock market.

Fixed Income Takeaways:

Investment-grade (IG) corporate bond new issuance hit $40bb in just the last two days. The pace of supply is about 90% higher than it was at the same time last year.

Deals continue to be well-received by investors. Spreads were solidly tighter again yesterday in both IG and high-yield paper.

The purpose of many of these new deals is to build corporate cash positions to buffer against the uncertainty surrounding COVID-19.

Municipal bonds had a busy day in the new issue market yesterday, with about $3 billion pricing.

Several hospital and transportation deals were able to price new agreements. This is a good sign that investors are beginning to warm back up to municipal bonds.

There is still a bias towards quality in the municipal bond market. Better-rated / higher-quality deals are receiving more investor sponsorship than lower-rated deals.

The municipal bond curve continues to steepen - the difference in spread between 1-year and 5-year paper has increased. The pickup in the spread as you go out towards 10-years is even greater.

Tuesday, 5/5/20

General Takeaways:

Yesterday, after a weak opening, both large and small cap US indices rallied in the afternoon to finish up between 0-1%. Large caps outperformed small caps slightly. Energy and technology shares outperformed the broad indices, while industrials and financials underperformed.

Energy shares have been rising in conjunction with oil prices, which are up another 10-15% this morning. After recently trading as low as $12, West-Texas Intermediate (WTI) crude for June delivery is now back to $24.

The US Treasury Department announced that they will be borrowing $3 trillion dollars this quarter, bringing total government debt to approximately $25 trillion. Over the near term, we don’t think this new debt portends inflation, given the deflationary forces currently affecting the economy.

President Trump is considering banning Chinese stocks from US pension funds. Exposure to Chinese companies within emerging market indices is very high, so for now this comment is likely political posturing. (See our KQ article dated Oct. 7, 2019, for more insights)

The rising profile of large tech companies (virus contact tracing, etc.) is also causing some consternation within the administration. Any move towards increased anti-trust enforcement will bear watching. (See our KQ article dated June 17, 2019, for more insights)

The US economy appears to be reopening faster than initially expected: About half of the country is still closed, down from 2/3 last week, and California announced it would begin partially reopening soon. Meanwhile, the number of new daily cases of COVID-19 in the USA has not gone down, however – it has seemingly plateaued.

The People’s Bank of China is set to meet on May 22nd and is expected to announce a large fiscal stimulus package.

Equity Takeaways:

Major US indices opened between 1-2% higher this morning, bolstered by positive sentiment around the reopening of the economy as well as rising oil prices.

Yesterday was the lowest volume day on the New York Stock Exchange (NYSE) since February 21st. Although prices were slightly higher, advancing volume trailed declining volume, and the average stock had a negative day according to the Valueline Geometric index.

Implied volatility (VIX) edged lower to settle at approximately 36. After peaking above 80 in March, the VIX has been oscillating between 30 and 40 for several weeks now.

Aggregate earnings continue to beat estimates (although estimates have been lowered dramatically).

Growth stocks continue to outperform value stocks by a wide (and increasing) margin. The magnitude of the outperformance of growth over the past several years is high compared to historical data starting in 1990. The high relative performance and high relative valuations increase the risk of a sharper factor rotation

Fixed Income Takeaways:

Yesterday, our municipal bond team released a new Key Questions article that discusses our process of municipal bond selection.

Muni bond spreads tightened a bit yesterday. The new issue calendar remains fairly quiet, but we are starting to see stressed areas (hospitals, transportation) attempt to access the market again.

Negotiations on a "Phase 4" fiscal stimulus package continue. This package seems very likely to contain significant aid for state and local governments.

In the new-issue corporate bond market, both investment-grade (IG) and high-yield (HY) borrowers are set for an active week, with 8 more deals in the market today alone.

Corporate spreads are opening slightly tighter this morning in conjunction with rising equities.

The Federal Reserve (Fed) announced more guidelines surrounding its fixed income ETF purchase program. The Fed announced that it will not purchase ETFs that are trading at a premium to net-asset-value (NAV) of more than 1%.

Monday, 5/4/20

General Takeaways:

On Friday, major US indices were down about 3%, with small caps down 3.5%. Energy stocks were down about 6%, while the defensive consumer staples sector was essentially flat.

Quality / ESG stocks are down less than 10% year-to-date (YTD) and have outperformed the broader S&P 500, which is down about 12% YTD. Recall that ESG managers seek out environmentally and socially responsible companies for investment.

Other factors of note: value stocks are down 36% YTD, and even after a recent run of outperformance, small caps are still down 27% YTD.

Atlanta, Dallas, and Houston have been the most aggressive cities in reopening their local economies. Traffic picked up in Georgia over the weekend, especially on Saturday. Morning commute traffic has remained subdued in all three cities, as employees continue to work from home whenever possible.

In China, weekday morning commute traffic is approaching 2019 levels, but weekend traffic remains lighter than usual, although some of this past week’s data might be skewed by the May Day holiday.

President Trump has ramped up rhetoric against China once again, concerning both trade and COVID-19. The administration is also advocating for "turbocharging" efforts to disconnect global supply chains from China. Australia and other nations are backing up the United States on this issue. In an affront to China, Australia has called for Taiwan to be admitted into the World Health Organization (WHO) which has been opposed to by the Chinese.

Negotiation on the next federal stimulus package (expected this month) may become more contentious. President Trump has already said that he will not accept a package that does not include a payroll tax cut.

The Federal Reserve’s (Fed) recent balance sheet information indicates that they have recently slowed purchases of both mortgage-backed-securities (MBS) and Treasuries.

Equity Takeaways:

Major US indices opened about 1% lower this morning, continuing weakness from Friday. In addition to concerns around COVID-19’s effect on the economy, the recent increase in anti-trade rhetoric is weighing on the market.

On Friday, implied volatility (VIX) jumped into the high 30s and is approaching 40 once again (recall that the VIX peaked over 80 back in March).

The selling pressure from Friday erased strong gains from earlier in the week, with the S&P 500 ending down about 0.2% last week.

From company earnings call transcripts, many are guiding to 2021 for a real recovery in earnings and the economy. About 75% of companies have already reported Q1 earnings.

Fixed Income Takeaways:

The new issue investment-grade (IG) corporate bond market continues to hum along. New issuance in March and April hit consecutive monthly volume records.

Spreads were much tighter for April but widened somewhat on Friday in sympathy with a weak equity market.

Over the month of April, IG spreads retraced 50-60% of their YTD widening.

In the commercial paper market, investors are buying a bit farther out from the curve (9-12 months) as they become more confident. The usage of the Fed’s credit facility in this space has been sparse, which is a positive sign.

Municipal bonds rallied on Friday, especially in shorter-term paper (5-year and in). The Fed is expanding its municipal liquidity facility, and also, non-traditional municipal bond buyers are being enhanced by the current wide spread of municipal bonds over Treasuries.

The new issue calendar in municipals has picked up over the past few weeks. Volume remains below normal but has been creeping higher.

State and local governments could receive some relief from budget shortfalls in the next round of stimulus funding. In the first round, federal funds were specifically targeted towards virus relief.

Friday, 5/1/20

General Takeaways:

A strong run of performance took a breather yesterday, with large cap US stocks down about 1% and small caps down 3.5%. Cyclical sectors underperformed (financials, materials both down ~ 2.5%). Certain tech stocks outperformed significantly – defensives such as consumer staples also performed relatively well.

This six-week running total of unemployment claims has surpassed 30mm, erasing a decade’s worth of job gains. Hopefully, many of these losses will prove temporary.

European Q1 GDP reports came in very weak. Due to earlier lockdowns, many large countries in Europe saw GDP decline at an annualized rate of over 20% during the same period (compared to 4.8% in the USA).

April's consumer spending declined at its fastest rate since 1959. Conversely, the savings rate spiked to levels not seen since 1981. The consumer sector continues to see extreme weakness, with several high-profile bankruptcies recently announced.

Another Federal Reserve program, the Main Street Lending Program, has recently expanded its scope to allow for greater business eligibility.

Amazon (AMZN) announced that they will spend over $4 billion on COVID-19 related initiatives, including a company-wide testing program.

Gasoline demand is typically 9-10mm barrels per day. At the trough, demand fell to 5mm barrels per day. Recent numbers indicate that gasoline demand has rebounded to about 6mm barrels per day.

This week, US mortgage rates hit an all-time low average of 3.23%.

Equity Takeaways:

In April, the US major indices had their best month since 1987.

On this first day of May, US major stock indices opened between 1-2% lower. Sobering news from several of the S&P 500’s largest components put a damper on sentiment.

Decliners outnumbers advancers by 2.77 / 1 yesterday, but this reading is not high enough to qualify as a distribution day.

Yesterday, Implied volatility (VIX) jumped back towards 35 but did fall over 19 points in April. On a historical basis, April’s decline in volatility was very large in both absolute and percentage terms.

Putting some numbers to the volatility: The S&P 500 has rallied about 35% off the March lows in just 37 days. The initial sharp 30%+ decline in stocks from late February to the March lows took place in under 30 days.

Investors will soon begin looking towards Q2 earnings, as over 2/3 of companies have reported their Q1 numbers. Q2 earnings are expected to decline over 40% on aggregate (YoY) for the S&P 500.

Fixed Income Takeaways:

After 9 deals priced yesterday, investment-grade (IG) corporate bond issuance reached $290bb for April. This number surpassed the record for monthly issuance (incidentally set the month before).

IG spreads finished off a very strong month by tightening about 2bps yesterday – high-yield spreads also finished the month significantly tighter.

Yesterday, municipal bonds spreads were essentially flat. For April, longer municipal bond yields (10-30yr paper) increased 15bps – 30bps. The short-end of the curve (5yr paper and in) held up much better than the long-end.

New municipal bond issuance in April was about 85% of April 2019 levels. More General Obligation (GO) bonds are pricing than revenue bonds – many revenue bonds are associated with the transportation and hospital sectors, which are both still under pressure.

Municipal fund outflows had stabilized for much of early April, but last week increased once again, primarily in the high-yield municipal space.

Municipal money-market funds have also shown outflows, as VRDO rates have declined from elevated levels due to Federal Reserve support.

Thursday, 4/30/20

General Takeaways:

US equity indices had a very strong day yesterday. Large caps were up about 2.5%, with small caps up 4.5%. Energy was the best sector, up over 7%, while defensive sectors such as utilities underperformed the broad indices and posted modest declines for the day.

News that the Federal Reserve is prepared to keep rates low for a very long time, as well as positive news on possible virus treatments, bolstered sentiment. The Fed is all-in with respect to monetary policy and will do everything in their power to ensure that liquidity remains plentiful.

Fed Chairman Powell noted that interest rates will remain at 0% "until the economy has weathered these events." Powell also nudged Congress to do more, noting that additional fiscal measures are necessary.

1st quarter GDP fell at 4.8%, the fastest rate since the 2008-09 Great Financial Crisis. The services sector fell by 10%. Health care spending dropped about 20% as elective procedures were canceled – the health care sector alone subtracted about 2.5% from GDP.

Unemployment claims remain at extremely elevated levels and may be somewhat understated due to processing delays at the state level.

In a recent poll, roughly 60% of Americans said they would be unable or unwilling to use the COVID-19 contract tracing program that is currently being developed by Google. This has future implications for our ability to manage this ongoing healthcare challenge.

Equity Takeaways:

The S&P 500 is trading slightly lower this morning, taking a breather after its strong performance in the last few days.

Yesterday was the 6th consecutive day that the S&P traded up intraday more than 1%. Prior instances occurred in 1982, March 2009, and August 2011.

We have not had a traditional "breadth thrust" off the March bottom, however, breadth has been improving. Advancers outnumbered decliners by a ratio of over 7:1 yesterday.

Several very large S&P 500 components will be reporting today on what is another very busy day for earnings.

Hedge fund positioning remains cautious, indicating that many hedge funds are skeptical of the current rally in the stock market.

Fixed Income Takeaways:

We continue to see tremendous investor demand for investment-grade (IG) corporate bonds. Typically, on a Federal Reserve meeting day, supply is low, but that was not the case yesterday. New deals continue to be met with strong demand.

Year-to-date IG issuance is over $700bb. In 2019, it took until August for us to get to that level of issuance.

Commercial-paper market participants will be fixated on month-end maintenance today. Spreads continue to tighten.

The front-end of the municipal bond curve was stable yesterday, but farther out the curve we saw about 4-8bps of spread widening. This movement continues a recent trend of curve steepening in the municipal bond market.

Bids on weaker municipal credits continue to be at wider-than-usual levels.

Wednesday, 4/29/20

General Takeaways:

Major US indices were slightly lower yesterday. Continuing a run of recent strength, small caps rose by 1.5%, outperforming the broader indices by about 200 basis points (bps).

Health care stocks lagged yesterday, with energy stocks outperforming. West Texas Intermediate (WTI) crude for June delivery is bouncing this morning, up over 20% to about $15.

Positive news on COVID-19 clinical trials and possible vaccine timelines bolstered sentiment this morning.

A large mall operator announced that it is reopening 50 of its biggest malls later this week. Surveillance measures will be added to ensure social distancing / mask usage.

Due to fears of impending shortages, President Trump has signed an executive order to keep the meatpacking industry open.

The first quarter GDP declined by about 4.8%, even though the economy was mostly open through mid-March. Second-quarter GDP is expected to show a much larger decline.

The Federal Reserve’s (Fed) two-day meeting finishes up today. Given the recent increase in central bank balance sheets / money supply, investors will be closely watching today’s comments from the Fed.

Equity Takeaways:

Yesterday marked the fifth consecutive day with a positive gap opening on the S&P 500. Today, major indices gapped higher on the open by another 1-2%. This type of price action has never been recorded before.

The equal-weight S&P index had another day of strong outperformance relative to its market-cap-weighted counterpart.

A very busy week of earnings will continue today – the five largest S&P components are all reporting this week.

Negative news is currently being ignored by the market. Stocks that are missing on revenue and earnings guidance typically underperform the broader market by about 3% on the day of the earnings miss. This quarter, the underperformance after a revenue and earnings miss has only been about 1%.

Fixed Income Takeaways:

New issue supply in the corporate bond market was steady yesterday. Today and tomorrow both look busy. Deals continue to be well-supported by investors.

Several bond ratings agencies have noted that oil prices (as prices on the futures curve) are currently below their long-term projections, which could put pressure on energy company ratings.

Municipal new issuance has picked up this week – this is the busiest week for supply for the last 7-8 weeks. With retail investors still cautious, this additional supply has put some pressure on spreads.

The slope of the muni curve has steepened over the past few weeks. The spread between 1-year, 5-year, and 10-year yields has been widening.

Tuesday, 4/28/20

General Takeaways:

Major US stock indices were up between 1-2% yesterday. Small caps were up almost 4% yesterday, significantly outperforming large caps.

Continuing yesterday’s strength, US markets opened higher by another 1-2% this morning.

The yield curve steepened yesterday, with the 10-year yield rising by 6 basis points (bps) and the 30-year rising by 8 bps (the 2-year yield was essentially flat). This curve steepening helped financial stocks outperform the broader indices.

Market participants are beginning to look past the COVID-19 virus and are now beginning to pay more attention to plans for reopening.

Negotiations on an additional fiscal stimulus plan continue – this plan will likely provide aid to state and local governments. Treasury Secretary Mnuchin remains directly involved in negotiations.

Continuing unemployment claims will be an important economic indicator over the next month. A decline in continuing claims could indicate that the Payment Protection Program (PPP) is enabling employers to rehire workers.

Indicators such as airline travel and new home sales are starting to creep higher (albeit off extremely low levels). The rate of change is turning positive.

Equity Takeaways:

Yesterday, breadth was strong – it was a day of accumulation. Advancers outnumbered decliners by a factor of 3.6 / 1. A ratio of over 3 signals accumulation.

The equal-weighted S&P index was up 2.8% vs. 1.5% for the standard market-cap-weighted S&P 500, indicating that the rally is broadening out to include smaller companies. Yesterday’s reading was the widest daily spread ever between these two indices since 2009.

On a busy day, 39 companies in the S&P 500 will report on Tuesday.

Implied volatility (VIX) continues to decline, currently trading in the low 30s. A sustained break below 30 would be a notable positive. Spot volatility is now trading below 3-month volatility, another sign of normalization in the markets.

Fixed Income Takeaways:

Yesterday, we saw a diverse array of supply in the corporate credit markets. We even saw the first new preferred stock issue since February. Investors received this wide variety of new issuance very well.

In both the investment-grade (IG) and high-yield corporate bond sectors, spreads tightened slightly yesterday and are opening with a firm tone again this morning.

The new issue calendar remains robust – we are expecting another heavy week of corporate credit supply.

Some large corporate bond managers are beginning to worry about "zombie companies" – businesses that were in trouble prior to the crisis remaining afloat only due to federal support.

Commercial paper flows slowed yesterday, but spreads continue to tighten. Market participants tend to conserve liquidity over the month-end.

The municipal bond market is not as healthy as the corporate bond market. Prices have drifted slightly lower over the past few days.

The municipal new issue calendar begins ramping up in earnest today – it will be interesting to see how the market digests this new supply.

Yesterday, Senator Mitch McConnell seemed to walk back some of his comments regarding possible bankruptcy filings at the state level. He did acknowledge that another federal aid package is likely for state and local governments.

After listening to investor feedback, the Federal Reserve tweaked its municipal bond-buying program to allow smaller cities and municipalities to access the program.

Monday, 4/27/20

General Takeaways:

Major US indices were up 1.3% on Friday. Technology stocks led the market, up by about 2%. Energy stocks lagged.

West-Texas-Intermediate (WTI) crude for June delivery was up about 3% on Friday but is falling by 25%-30% Monday morning to about $12 a barrel.

Year-to-date (YTD) returns: S&P 500 down 11.7%; S&P Small cap 600 down about 29%.

Healthcare and technology are the best sectors YTD, down about 1% each. Conversely, energy and financials are the worst sectors YTD, down about 40% and 30% respectively. Such wide divergences present an interesting opportunity set for active managers, in our view.

The S&P 500 is up by about 27% off the lows, and down roughly 16% from mid-February highs.

Credit spreads are about 100 basis points (bps) wider than the trough lows of February but are about 200bps tighter than their widest levels of March.

Some of the data has gotten so bad, things can likely only get better (or at least "less bad") from here. As an example — restaurant sales and gasoline sales have both started to tick higher from extremely dislocated levels. Restaurant sales were down almost 100% at one point.

Certain US states, such as Georgia, are beginning the process of fully reopening, which has provided a boost to sentiment this morning. By Mother’s Day we should know if this decision was a good one or not.

US central banks are purchasing assets at a much faster rate than they did during the 2008-09 Great Financial Crisis. The Federal Reserve has a two-day meeting scheduled for this week — we will be watching for any changes in long-term policy guidance. The European Central Bank and Bank of Japan will also be on stage this week.

Global governments are acting strongly on the fiscal side as well. For example, Japan announced a massive fiscal stimulus program last week. The program is ten times greater in size than fiscal measures taken during the 2008-09 Great Financial Crisis.

Equity Takeaways:

This morning, major US indices opened about 1% higher on the back of a strong finish to last week. US investors have been heartened by the fact that several states are beginning to fully reopen.

This week will be a busy one with respect to corporate earnings, with several bellwether stocks set to report this week.

Last week, the implied volatility index (VIX) dropped under 40 again, settling around 36 on Friday.

Breadth was moderately positive on Friday, with advancing issues outpacing declining issues 1.7 / 1.

Certain other measures of short-term breadth continue to flash cautionary signals (TRIN index).

Markets continue to differentiate between possible winners and losers from the pandemic. Healthcare stocks are perceived as potential winners and have held up relatively well — conversely, consumer discretionary, energy, and financial stocks have been under severe pressure.

The S&P 500 Price/Earnings (P/E) ratio is back to its pre-pandemic level, even though only 29% of its components have seen P/E multiple expansion this year. As a result, S&P 500 returns have become more concentrated, with the largest winners driving a greater percentage of returns relative to history.

Fixed Income Takeaways:

Year-to-date corporate bond issuance is 73% higher TD vs. 2019. Companies are taking every opportunity to bolster their balance sheets.

The investment-grade corporate bond market continues to have a firm tone. IG spreads opened slightly tighter again this morning.

High-yield spreads widened last week in sympathy with falling oil prices.

Municipal bonds underperformed treasuries last week. Part of the reason is that the primary new issue calendar has finally ramped up after six weeks, adding supply to the market.

Bifurcated muni market continues: institutional buyers can still get good execution (sized 1mm and up), but smaller blocks of bonds remain tough to trade.

We continue to believe that state and local governments will receive substantial aid in the next fiscal stimulus package.

In the commercial paper market, 3-6 month spreads continue to tighten. Investors are expecting lower rates in the future and continue to gobble up available supply. Demand remains high.

Friday, 4/24/20

General Takeaways:

After a strong open, large cap stocks faded into the close ending flat on the day. Small caps were up about 1%. Sector performance was mixed, with utilities the weakest, down just over 1%.

Yesterday, oil bounced again, extending gains for a second day (albeit from extremely low levels).

Recent Purchasing Manager Index (PMI) data indicates that the services sector is now reporting weaker economic data than the manufacturing sector. Recall that readings below 50 indicate contraction, while readings above 50 indicate expansion. UK manufacturing: 33. UK services: 12. Japanese services: 23. USA manufacturing: 37. USA services: 27.

A report was briefly circulated on the World Health Organization’s (WHO) website regarding Gilead’s potential treatment for COVID-19, Remdesivir. Gilead disputed the contents of the report, calling it inconclusive, and the report was quickly taken down.

Bankruptcy filings are beginning to ramp up, especially in the retail and energy sectors.

According to a recent survey, 60% of people would support the collection of anonymous data for COVID-19 contact tracing. 85% would support screening before large gatherings (such as sporting events).

Equity Takeaways:

Major US indices opened slightly higher this morning. West Texas Intermediate (WTI) crude for June delivery also opened higher, up another 5% to about $17 / barrel.

Implied volatility (VIX) has declined below 40 again. A sustained break below 30 would be notable, and likely a bullish sign.

Several measures indicate increased complacency in the market. The put/call ratio (a measure of bearish option bets relative to bullish option bets) is declining, potentially indicating less hedging activity.

In addition, participants in the American Association of Individual Investors (AAII) survey remain bearish overall, but bullish sentiment is increasing. This survey tends to be a contrary indicator — very high bearish survey readings (like we saw in mid-March) have historically marked interim bottoms in stock prices.

Fixed Income Takeaways:

We saw another strong day in the investment-grade (IG) new issue corporate bond market yesterday. Certain deals were as much as 6x oversubscribed.

Both investment-grade and high-yield spreads are opening flat to slightly tighter this morning.

The municipal market continues to trade choppily. New issues are not being as well received as they are in the IG corporate bond market.

Yesterday, spreads were wider by about 5-10 basis points on the generic municipal bond curve.

For the second straight week, municipal bond mutual funds saw slight inflows. Back in March, similar funds were seeing extreme outflows.

The new issue calendar for next week is building strongly and this supply will be another test for the market.

We continue to expect another fiscal stimulus bill in May that will contain support for state and local funding.

Thursday, 4/23/20

General Takeaways:

Major US equity indices jumped between 1-2% yesterday. Large caps were up over 2%, with small caps up 1.5%. Energy and technology were the strongest sectors, while defensives such as consumer staples lagged slightly.

Yesterday, West Texas Intermediate (WTI) crude oil for June delivery was up about 19% to $13.80 / barrel and is up another 15-20% this morning.

Treasury Secretary Mnuchin noted yesterday that most of the US economy should be reopened by the end of summer. The state of Georgia has plans to reopen most businesses this week. Georgia’s experience will be a litmus test to monitor.

Senate majority leader Mitch McConnell hinted at bankruptcy as a possible option for states going forward, rather than more direct federal aid. This week’s expansion of the Paycheck Protection Program (PPP) did not provide any further funding for the states.

Conversely, Mnuchin and President Trump have both said on the record that the next stimulus package (likely set for May) will contain further aid to the states.

The European Central Bank (ECB) announced an extensive asset purchase program yesterday (through September 2021). The program mirrors the Fed’s recent expansion into the corporate bond markets and may have been implemented to forestall a downgrade of Italy’s debt. The ECB will be able to purchase fallen angels (credits that have been downgraded from investment-grade to high-yield).

European Purchasing Managers' Index (PMI) readings were out this morning and they were weak, plunging to 13.5. For reference, a reading above 50 suggests that economic activity is expanding; a reading below 50 suggests that economic activity is contracting.

In the US, new unemployment claims for the last week came in at 4.4 million – slightly lower than previous weeks, but still at extremely high levels. In some states, more than 20% of eligible workers have filed for unemployment. Continuing claims – a key indicator to watch in the future – totaled 16 million.

COVID-19 cases have begun a second wave in Japan and economic activity there is plunging. In some portions of China, businesses are being forced to shut back down again, also due to fears of a second wave.

Equity Takeaways:

US equity markets opened slightly higher today. Leadership continues to be concentrated in large, high-quality companies.

The US market traded in a tight 1.4% range yesterday.

Implied volatility (VIX) remains elevated (above 40), even on a day with a small intraday range.

Trading volume was very low yesterday compared to recent history. Sentiment does continue to improve, but we would like to see broader participation across sectors (better breadth) before becoming more constructive on the market.

Fixed Income Takeaways:

The pace of investment-grade (IG) corporate bond new issuance has slowed this week. At the same time, new issue activity in the high-yield market is increasing.

IG spreads are slightly tighter this morning, led by energy credits.

The municipal bond market was soft again yesterday, with spreads slowly moving wider.

At the same time, the municipal new issue market did see a good number of deals price yesterday.

Bidding was more active than in prior weeks, showing evidence of a deeper (more liquid) market.

As liquidity improves, short-term municipal rates continue to fall and are now well below 1.00%.

In the commercial paper market, we are seeing continued yield tightening. Investors are still being selective while choosing credits, but overall yields continue to drop.

Wednesday, 4/22/20

General Takeaways:

Yesterday, major US stock indices were down 2-3%. Small caps declined by about 2%. Large, traditionally defensive names in the technology sector underperformed.

After declining precipitously over the past several sessions, the price of West Texas Intermediate (WTI) crude oil for June delivery has bounced this morning from $12 to about $14.

Legislation to expand the Paycheck Protection Program (PPP) was completed yesterday. $310 billion was allocated to expand the existing PPP (bringing the total to $660 billion). Additional resources are earmarked for disaster assistance, as well as an additional $60 billion for small-business lenders.

State and local governments were excluded from this week’s bill, so expect another fiscal stimulus package in the future to address municipalities.

A large oil company in Singapore filed for bankruptcy last night – we expect to see the pace of new bankruptcies increase throughout the next several months.

Equity Takeaways:

Major US indices opened 1-2% higher this morning. Several encouraging earnings reports, as well as a bounce in oil prices, are bolstering stocks.

Yesterday, stocks closed lower for the second consecutive day. The last time stocks closed lower two days in a row was March 31st – April 1st.

The recent 30% rally off the March lows has been weak in terms of breadth. The rally was driven by very large companies in certain sectors (especially technology).

Volatility (VIX) jumped higher once again yesterday and is now back up into the mid-40s.

Fixed Income Takeaways:

Mirroring the demand seen in the US, the demand for investment-grade (IG) European bonds has been extremely strong recently. Yields remain low by historic standards, but buyers continue to flood into the market.

The new issue IG corporate bond market has slowed somewhat this week. Investors are becoming more selective.

Both IG and high-yield corporate spreads were wider yesterday, with high-yield underperforming.

The energy sector continues to suffer under the weight of falling oil prices.

Municipal bond market participants remain extremely cautious, waiting for more clarity on future fiscal support.

Liquidity for municipal bond positions under $1 million in size is spotty.

Airlines, hospitals, and mass transit bonds have been under pressure for quite some time, but now even local issuers are coming under some pressure as costs from the virus mount.

The Fed’s municipal purchase program (founded on April 9th) has been most beneficial to states and large counties. Smaller local issuers have not seen as much benefit.

Yields in the commercial paper market continue to grind lower.

Tuesday, 4/21/20

General Takeaways:

Stocks were in "risk-off" mode yesterday. The broad US equity indices were down between 1-3%. Cyclical sectors fared the worst, with quality and ESG factors outperforming.

Yesterday was a historic day in the energy markets. The May futures contract for West Texas Intermediate (WTI) crude closed with a negative price. Lack of demand has resulted in a massive short-term oversupply in WTI crude, leading to a lack of storage space for the commodity.

The daily increase in COVID-19 cases has been in a flattening pattern over the last few weeks.

There is a similar trend in the USA, leading some states to plan relaxing stay-at-home restrictions.

Japan and Singapore are both going through a second wave of COVID-19, with daily new cases accelerating.

The Paycheck Protection Program (PPP) is likely to be expanded as early as this week. Hospitals are likely to receive additional funding in this bill. Additional funding for states and municipalities will likely also be required at a future date.

Equity Takeaways:

This morning, US equity indices opened down between 1-2%.

The WTI crude contract for June delivery was down over 40% at one point overnight before rebounding slightly this morning. The June Brent crude contract is also down over 20% this morning to approximately $20/barrel. Brent crude is the global benchmark.

Along with the extreme volatility in oil, equity volatility as measured by the Volatility Index (VIX) rose sharply yesterday and is back above 40. We continue to expect choppiness in the equity markets going forward.

Emerging-market countries that export commodities could find their economies under pressure due to the recent weakness in oil prices.

During the current earnings season, companies that exceed earnings expectations are being rewarded with strong stock performance.

Fixed Income Takeaways:

New issuance in the investment-grade (IG) corporate bond market cooled off yesterday. Several deals were pulled due to the volatility in the oil and equity markets and deal volume, in general, was much lower than we’ve seen in recent weeks.

IG corporate spreads widened slightly yesterday. High-yield corporate spreads were also weak, widening by about 15 bps (basis points) yesterday, although spreads remain much tighter than they were 3-4 weeks ago.

This morning, spreads are widening slightly once again in both the IG corporate and high-yield markets.

The commercial paper market is on a strong run. Spreads have been tightening virtually every session over the past few weeks.

The tone in the municipal bond market mirrors the tone in corporates. The market feels a bit "squishy." There are fewer bidders (less depth to the market) for credits rated below AAA.

The highest-quality (AAA) municipal bond paper remains well supported.

Monday, 4/20/20

General Takeaways:

On Friday, large caps gained about 2.5%, with small caps up even more at 4.5%. Large caps are down about 10% year-to-date (YTD) a/o Friday’s close, with small caps diverging much lower at -30% YTD.

Cyclical sectors led the market on Friday, with more economically-sensitive sectors such as energy, financials, industrials and materials outperforming defensive sectors like health care, consumer staples, and technology.

According to a recent Pew Research Center poll (taken about 1.5 weeks ago), 2/3 of Americans are worried about lockdowns being removed too soon, while 1/3 are worried about keeping restrictions in place too long.

Several European countries (Spain, Netherlands) are beginning to remove restrictions, while in the USA, Dr. Anthony Fauci noted that the economy could begin reopening ‘in some way’ sometime next month.

Even amidst talks of reopening the country, deaths from COVID-19 continue to make record highs in the USA, and we’re seeing instances of second-wave infections overseas (Japan, Singapore, etc.).

This week, a bill to replenish the Paycheck Protection Program (PPP) seems likely — the second round of funding is expected to amount to $400 - $500 billion. There is no provision for state and local funding within this bill, implying that even more, fiscal stimulus may be necessary at a future date.

Due to concerns about near-term oversupply/storage issues, the futures price of West Texas Intermediate crude for May delivery is trading at a huge discount to the June contract. The May contract is trading under $12, while the June contract is trading at $23.

In contrast, Brent crude for June delivery (the global benchmark) is trading at about $26.

Equity Takeaways:

This morning, US equities opened about 1-2% lower.

On a very short-term basis, stock prices and oil are moving in the same direction. With oil prices weakening dramatically this morning, stocks are under pressure.

Many companies are pulling forward earnings guidance. Analyst estimates are likely too optimistic going forward for that reason.

On Friday, volatility (VIX) declined below 40 once again but remains at elevated levels.

After the recent very strong rally in the stock market, it would not be surprising to see a period of consolidation over the next few weeks/months.

To feel more comfortable about the stock market, we would like to see breadth (advancers vs. decliners) continue to improve. Improving breadth would be a sign of accumulation and is usually a necessary precursor to a long-term bottom.

Fixed Income Takeaways:

Treasury yields remain anemic, with the 10yr trading around 0.65%.

The municipal bond new issue calendar is heavier than this week than it has been for quite some time. California was able to bring a new deal to market last week — a positive sign.

Airports, hospitals, and mass transit bonds remain under pressure. Energy-dependent states may also face pressure on municipal funding levels due to the recent weakness in oil.

Investment-grade corporate bonds continue to see strong investor demand. Companies continue to tap the market aggressively, and deals continue to trade well.

The high-yield corporate new issue market has also picked up, with several deals pricing last week (albeit at wide levels relative to history).

There is a bifurcation within the high-yield market — weaker companies are likely to be locked out of the new issue market due to fear of downgrades.

This morning, corporate spreads are softer and are being led wider by the energy sector.

Friday, 4/17/20

General Takeaways:

Yesterday, the S&P 500 was up about 0.60%, with small caps down about an equal amount. Quality/growth companies, including technology, led the market. Cyclicals lagged.

In March, housing starts shrank by 22%, the steepest one-month drop in 30 years. New multi-family starts were also very weak, down more than 30%.

NY Federal Reserve President John Williams hosted a webinar yesterday where he discussed the recent Fed programs. Williams specifically mentioned that the Fed will continue to target the corporate bond market going forward. Williams projects a slow recovery coming out of this crisis.

Chinese GDP declined 6.8%, the first reported decline since the report’s inception in 1992. This data covers the month of February, which was the worst part of the outbreak for China. March’s data should hopefully show substantial improvement.

The White House released a three-phase plan for reopening the US economy. The report is a bit scant on detail but did seem to bolster sentiment yesterday.

Anecdotal positive data on the study of a new anti-viral drug to treat COVID-19 is pointing to a strong opening this morning.

Equity Takeaways:

Major US indices opened higher between 2-3%, bolstered by hopes of new treatments for COVID-19. In contrast to recent trends, small caps are outperforming, up over 4% in early trading.

In another positive sign, volatility (VIX) has declined below 40 again. A sustained move below 30 would indicate a return to a more normal market environment.

Many large investors have been expecting a pullback in stocks over the past several weeks.

Often the consensus is wrong over the short-term, which could be one reason why the stock market has continued to show strength.

Environmentally and socially conscious (ESG) managers generally outperformed the broad market in the first quarter. These types of strategies tend to be underweight financials and energy, while being overweight quality companies.

Fixed Income Takeaways:

High-yield bond funds had their biggest inflows ever over the last two weeks (setting records on consecutive weeks).

Positive inflows continued into investment-grade bond funds as well.

The US investment-grade corporate bond market had another strong day on Thursday with solid issuance and strong orderbooks.

This morning, the tone in the corporate bond market is firm, led by the health care sector.

The commercial paper market continues to tighten. Money keeps flowing back into the sector. The Fed’s new commercial paper funding facility did not receive much use this week, which is a positive sign.

Municipal bond markets are still showing spotty liquidity for smaller issuers. Large issuers can now access the market, but smaller municipalities are still having trouble pricing new deals.

Thursday, 4/16/20

General Takeaways:

Major US indices finished down over 2% yesterday. Small caps underperformed, falling over 4%. Defensive sectors such as consumer staples were in favor, with cyclicals such as energy and materials lagging.

There is an increasing national discussion around the best method to re-open the economy. We believe there are three major areas to focus on:

  • Capacity of the health care system
  • Bending the curve of cases and number of deaths (reducing the rate of increase)
  • Increased testing of the broader population (the US is lagging in this area)

US leaders are negotiating on a fourth stimulus package. The very popular Paycheck Protection Program (PPP) is nearly out of funding, so it seems likely that Democrats and Republicans will come to an agreement on additional stimulus but with Congress on recess, the legislative process is prone to volatility.

Weekly jobless claims rose another 5 million-plus this week, bringing the four-week running total to over 20 million. Analysts were expecting about 6 million claims, so this number is actually a bit less than expected, but make no mistake, the economy is retrenching.

Another look at several components of yesterday’s retail sales report (month-over-month, MoM): food and beverage sales +25%, warehouse clubs +12%, restaurant sales -27%, clothing sales -51%.

March Industrial Production came in at -5% MoM. This is the worst reading since 1946 when the US economy was transitioning post World War II.

The Fed’s Beige Book report was released, covering a period from mid-February through early April.

The Beige Book is a compilation of anecdotal data from various districts around the country. All districts reported major softening in their respective economies.

The Governor of the Bank of France is talking about "helicopter money" – essentially, direct support of private business/consumers by the national bank. We expect nations around the world to continue experimenting with unconventional policies as we move through this crisis and such conversations are reflective of the severe economic pressures we are facing.

Equity Takeaways:

Yesterday, down volume outnumbered up volume by a factor of over 7:1. It was a day of "internal distribution," with cyclical sectors especially weak.

Volatility (VIX) has risen back above 40 – we are well off the recent highs in this index, but readings over 40 are still elevated relative to history. We would feel more comfortable once this falls to 30.

This morning, equities opened slightly higher but then sold-off.

Fixed Income Takeaways:

Investment-grade (IG) corporate bond new issuance volume declined yesterday, with only three borrowers coming to market.

IG spreads widened slightly yesterday. High-yield spreads were also wider. Overall, the tone was weaker, with investors taking a pause after the recent rally.

Within the commercial paper market, increased demand from a variety of sources is driving down yields. This is another sign that the market continues to thaw. Investors once again seem willing to buy slightly longer-dated paper.

Municipal bond prices were unchanged yesterday, with spreads widening slightly as Treasuries rallied. Prices had rallied during the previous eight sessions.

The municipal new issue market remains slow, especially compared to the corporate bond market.

Secondary municipal bond markets remain thin – there are fewer active bidders in the market.

Wednesday, 4/15/20

General Takeaways:

Yesterday, US stocks rallied across the board. Large caps were up about 3%, with small caps up about 2%. Investors remain optimistic about plans to reopen the country. Banks underperformed, while technology and consumer names outperformed.

Year-to-date (YTD), the S&P 500 is down about 11%. The tech-heavy Nasdaq is essentially flat YTD, while small-caps are down about 28% YTD. These are massive divergences in the context of history.

Key Private Bank portfolios remain defensively positioned. We continue to recommend positioning that is slightly underweight equity, as well as overweight quality / minimum volatility factors.

We also believe some mean-reversion is possible among smaller-capitalization stocks due to their recent dramatic underperformance.

Retail sales fell almost 9% last month, which is one of the weaker readings in history. In another divergence, food sales were up 26% last month while gasoline station sales were down 17%, motor vehicle sales fell 26% and clothing store sales plummeted by an astounding 50% as consumers stayed away from malls.

The International Monetary Fund (IMF) is projecting a contraction of global GDP by about 3% this year. According to the IMF, emerging market economies are particularly vulnerable going into this crisis.

We continue to believe that recovery from this crisis will be a process, not an event – it will take time.

One of our small-cap managers is seeing a record amount of insider buying in the companies they follow (almost double the amount of insider buying they saw during the financial crisis). Insider buying is generally considered to be a bullish signal.

Equity Takeaways:

This morning, the major US indices opened about 2% lower on negative economic news. As noted above, retail sales were very weak, and several state-level measures of economic growth also showed weakness.

Yesterday, Volatility (VIX) dipped below 40 for the first time since late January / early February. However, the VIX has increased to 42 this morning.

Upside volume has been weak during the recent rally. We’d like to see stronger volume on days when the market rallies, as this is a sign of accumulation.

The 2800 level on the S&P 500 is important technical overhead resistance. We are pulling back off of that level today.

Fixed Income Takeaways:

Tremendous investor demand continues in the investment-grade corporate bond market. The amount of new issuance is already at record levels for April, and we’re only about halfway through the month.

Corporate spreads had another day of tightening yesterday in both investment-grade and high-yield asset classes.

This morning, corporate spreads are slightly wider with stocks opening lower.

The commercial paper market continues to thaw, but we’re still seeing spread tiering between different types of issuers.

In stark contrast to the red-hot corporate bond market, the municipal bond new issue market is still not firing on all cylinders. Spreads are tightening but deal volume has yet to pick up.

Over the last few weeks, municipal bond prices have been driven higher by spread tightening, not by rallying treasury prices.

Tuesday, 4/14/20

General Takeaways:

Major US stock indices were down about 1% yesterday. Smaller capitalization companies and more cyclical names underperformed. Quality / defensive sectors outperformed.

The stock market is focused on possible plans for a reopening of the economy. An uneven opening across the country is likely.

There is a similar story in Europe: France remains on strict quarantine, but Austria and Spain are both talking about relaxing some of the strictest lockdown measures.

Silver linings: pollution, crime and accidental deaths are all way down. Acts of compassion are way up. Perhaps this crisis will lead to an explosion of ingenuity and a net positive restructuring of the way the United States does business in the future.

Equity Takeaways:

The stock market continues to act in strange ways. Yesterday was the first time since 1985 where the S&P 500 was down over 1% while the Nasdaq rose over 1%.

This morning, stocks were up between 2-3% - optimism continues to rule, bolstered by recent Fed actions.

This upcoming earnings season is likely to be very unusual. 88 companies within the S&P 500 have withdrawn guidance. 50+ have suspended stock buybacks, and 10-20 have even suspended dividends outright.

About 20 S&P 500 companies have reported earnings so far. Not surprisingly, all missed previous guidance.

Recent equity factor performance has shown extreme dispersion recently – the volatility hearkens back to the days of the financial crisis. Key Private Bank will be monitoring these divergences for opportunities going forward.

Fixed Income Takeaways:

Municipal bonds: The Fed’s actions are not targeted towards high-yield municipals. The Fed is targeting shorter-dated, higher quality paper.

That said, over the past few days, high-yield municipals are starting to catch a bid. Retail mutual fund flows tend to be a large driver of high-yield municipal returns. The market for these types of bonds is still much thinner than AAA or AA paper, though.

The municipal new issue calendar is set for its heaviest day of recent memory. It will be interesting to see how the market reacts to increased supply.

The structured product market remains under pressure. Many of these bonds are backed by mortgages, franchise agreements, etc. Forbearance levels (delayed payments) on mortgages are increasing.

The investment-grade corporate bond market continues to show strength. Yesterday the best sector was energy, which tightened by about 10bps.

Overall, we have retraced about 60% of the spread widening in IG corporates.

We are also starting to see an upward-sloping credit curve in the corporate credit market. In other words, longer bonds are pricing at slightly wider spreads.

Monday, 4/13/20

General Takeaways:

Last Thursday, the Federal Reserve (Fed) launched another swath of programs designed to support the economy and financial markets. Stocks rallied after this news, with broader US indices finishing up between 1-2% on Thursday. Stock and bond markets were both closed in the US on Friday.

The new Fed programs are broad in nature and are designed to support small businesses, municipal borrowers, and even high-yield corporate borrowers. Small businesses will be backstopped with increased lending. In addition, the Fed will now be purchasing high-yield and municipal bonds in addition to investment-grade corporate bonds.

Will it be enough? The program sizes are large, but probably not enough to cover all impacted small businesses. Depending on how long the current lockdowns last, it would not be surprising to see further actions.

OPEC+ completed a major agreement on production cuts over the long weekend. Producers agreed to initially remove just shy of 10 million barrels per day from the market. Oil prices are essentially flat on this news, implying that the market was already expecting a large cut.

New COVID-19 cases in Europe continue to drop, leading some countries to begin discussing plans to restart their economies. In doing so, they give hope that perhaps there is light at the end of the tunnel.

German Prime Minister Angela Merkel says that additional restricting measures may "not be necessary."

Meanwhile, hospitalizations continue to level off in NYC, and Washington state seems to have dramatically slowed the spread of the virus. Various announcements from drug makers on new treatment regimes, though far from approval, are adding to the recent optimistic sentiment around the virus. Conversely, economic indicators are expected to remain extremely weak for the near-intermediate term.

Equity Takeaways:

Last week, equities had their best week in about 45 years, with US markets up about 12%.

Breadth during Thursday’s session was solid. Financials and real estate led (two previous laggards), while technology and energy lagged. A common theme of last week: previous laggards turned into leaders. How stocks react to company earnings – and a cloudy outlook looking forward will be key to the market’s next move.

Volatility (VIX) continued its recent slow decline – the VIX index is now in the low 40s after peaking around 80 a few weeks ago.

This morning, US stock markets opened slightly lower.

The current composition of the S&P 500 contains much less cyclical exposure than history.

Cyclicals comprised about 45% of the S&P 500 before the 2008 financial crisis, but the current weighting of cyclicals in the S&P 500 is only about 24%.

We continue to favor US equities compared to international, in part because of the lower cyclicality (more stable earnings) of US companies.

Fixed Income Takeaways:

Credit markets continue to heal, bolstered by the support of the Federal Reserve. After the announcement that the Fed will be purchasing high-yield bonds, high-yield spreads tightened 86 bps (basis points) on Thursday for their best single-day performance in about two decades.

We expect the new issue corporate bond calendar to continue its torrid pace. The pace of issuance in the high-yield market should begin to pick up going forward.

Commercial paper issuance remains light after the Easter holiday. Spreads continue to compress.

The tone in the municipal bond market is strong as well. Muni bond prices rallied each day last week. The new issue municipal bond market remains slow, but we expect volumes to pick up this week.

The new Fed municipal liquidity facility could have a beneficial impact on larger issuers (states and larger municipalities). The Fed is limited to purchasing municipal bonds of 2-year maturity and shorter. The program is designed to help municipalities who may be having trouble refinancing their debt.

Thursday, 4/9/20

General Takeaways:

Yesterday’s market rally was impressive, with the broad US indices up between 2-4%. High-beta and beaten-down sectors continued to outperform the broader market. The best sectors were Energy, Real Estate, Utilities, and Materials. Defensive sectors generally lagged once again – this is a theme that has persisted for the past three sessions.

Energy stocks rallied yesterday on hopes of a substantial OPEC+ agreement on production cuts.

Bernie Sanders dropped out of the US presidential race yesterday – this news also seemed to support stocks.

Initial jobless claims rose 6.6 million in the past week and have risen over 17 million in the past three weeks. This number was close to expectations but still reflective of a very stressed employment situation.

This morning, shortly after the release of the initial jobless claims data, the Federal Reserve announced even more monetary stimulus. Much of this new stimulus is targeted at state and local governments.

Looking forward – even after the lockdown begins to end (possibly in late spring or summer), it will likely take quite some time for the economy to return to normal. Improved testing and treatments will both be paramount.

Equity Takeaways:

Yesterday, volatility (VIX) declined for the fifth day in a row and is currently around 43 – still an elevated (but more normalized) level.

This morning, futures were indicated lower but reversed higher after the announcement of the new Federal Reserve liquidity programs. US markets opened 1-2% higher in early trading.

Yesterday saw 90% of NYSE volume in advancing issues (the second time this week we hit that level). 90% advancing-issue days are a positive sign for market breadth.

Earnings season begins next week. It will be important to see how the market digests the expected negative company-specific news.

The current market environment is truly without precedent. We remain cautious and expect continued volatility over the next several months.

Fixed Income Takeaways:

Bond markets close at 2 pm today – we expect a quiet session.

Municipals: the SIFMA index for VRDOs (municipal money market instruments) got as high as 5% in mid-March. Currently, this VRDO basket has reset to about 0.75%, a much more normalized level.

Municipals have had a very strong rally this week but continue to be undervalued vs. Treasuries on a historical basis.

Part of the Fed’s new program is specifically designed to support the municipal bond market by purchasing certain types of notes.

Corporate bond spreads continued to tighten again yesterday. Some new deals that were pulled in mid-March have returned to the market.

Corporate spreads initially opened slightly wider this morning, but after the announcement of the new Federal Reserve programs, spreads have reversed and are now about 5bps (basis points) tighter.

Yields on commercial paper have dropped considerably since their widest levels in March. The money markets are not fully back to normal yet, however.

Liquidity remains king.

Wednesday, 4/8/20

General Takeaways:

Yesterday we saw a large reversal in US stock markets. In the morning, stocks were up as much as 3-4%, but closed slightly lower. Higher-beta stocks outperformed defensive names once again. Beaten-up industries also continued their short-term bounce-back rally.

Conversations around the world are being held about plans to restart economies. China has essentially ended its lockdown in Wuhan (the original epicenter of the crisis). In the US, the Administration is considering a second coronavirus task force focused on reopening our economy.

We expect continued volatility as the market attempts to understand the ramifications of recent policy actions as the President must evaluate both the health risks as well as the economic risks. The tradeoff between lockdowns to control COVID-19 versus steps to reopen economies will be closely watched over the next several months.

Oil is bouncing back slightly this morning after a sharp selloff yesterday. Recall that OPEC+ has scheduled a virtual summit tomorrow to discuss production cuts.

Equity Takeaways:

Yesterday was a very strange day in equity markets. Since April 1982, there have only been three other times when the S&P 500 traded over 3.5% higher and ended lower on the day. Those three occurrences were all in 2008 during the Great Financial Crisis.

This type of market action is not usually bullish – we expect continued high volatility over the next several months.

This morning, major US indices opened about 1% higher.

The stock market is caught between two huge forces. To the good, recent Federal Reserve actions have been very supportive of markets. On the other hand, much economic damage has already been done by COVID-19 and the ensuing lockdowns. We believe the Federal Reserve will ultimately prevail, but it is going to take time to form a sustainable bottom in the equity market.

Another sign of uncertainty – the dispersion between street analyst estimates is at extremely wide levels. Analysts are having significant difficulty modeling corporate earnings.

Within Europe, finance ministers met in a marathon 16-hour session yesterday but could not agree on a stimulus package. They are set to meet again tomorrow. The ultimate compromise is likely to result in a much smaller rescue package than we have seen in the United States – another reason we will continue to favor US equities over international stocks.

Fixed Income Takeaways:

Yesterday was the slowest day in the new-issue investment grade corporate bond market in a while. The deals that did price were met with extremely strong demand, however.

Given the holiday-shortened week, we expect any further new issuance for this week to price today.

Spreads continued to tighten yesterday, with both investment-grade and high-yield bonds continuing a "risk on" tone.

Sentiment in the commercial paper market remains improved. Volumes are slowing down, but that is typical for the week before Easter. Investors remain concerned about future rating agency downgrades, resulting in some tiering in the market.

Municipal bond prices continue their recovery - yields fell again yesterday as spreads continued to tighten versus Treasuries.

Municipal bond dealers are having a tough time hedging their inventory due to the disconnect between current municipal bond yields and Treasury yields (muni spreads remain extremely wide by historic standards). Thus, the new issue market has remained quite slow.

The potential for future credit downgrades in both taxable and municipal fixed income has many fund managers worried. We have spoken with several managers over the past few days that believe credit markets have gotten a bit ahead of themselves over the past week or two. We will be continuing to monitor markets closely.

Tuesday, 4/7/20

General Takeaways:

Equities rallied sharply yesterday, with major US indices up 7-8%. High-beta stocks and beaten-down stocks led the rally, with many up over 10%. Quality names and defensive stocks underperformed but still had very strong days on an absolute basis.

Recent buying in the stock market seems to be driven by the idea that the US has turned the corner in our fight against COVID-19, and that the worst may be over. We caution, however, that the global economy will likely be quite different once we emerge from this crisis, and the implications of such are unknown.

A new Federal Reserve program is being discussed to help finance small business loans. The Federal Reserve said Monday it would create a new program to finance loans that banks and other lenders make through the government’s emergency small-business lending program. The move will free up financial firms to make more loans guaranteed by the Small Business Administration’s Payroll Protection Program. This program is part of a $2.2 trillion economic relief package President Trump signed last month to help individuals and businesses affected by the coronavirus pandemic

Bloomberg is reporting that China’s industrial sector is about 90-95% back online. Chinese consumers have not fully recovered yet, but China’s economy appears to be on the mend.

The US money supply recently grew at an annualized rate of over 12%. An increasing money supply should at the very least help ward off deflation; it’s not a cure for the virus, but it does provide key support to financial markets.

Equity Takeaways:

After yesterday’s extremely strong move, US stocks opened another 2-3% higher today. Sectors that have been beaten up over the last few months, such as airlines, cruise ships, and hotels are opening higher again today.

Volatility (VIX) continued to decline yesterday but remains at elevated levels.

Yesterday’s advancer/decliner ratio was about 9.9 / 1, indicating widespread buying. Yesterday was also the first day in a while that we saw "reflation trade" buying – homebuilders, materials, etc.

A key level to watch on the S&P 500 is 2800 – this level approximates a 50% retracement from the recent high/low range and is on the radar of many market technicians.

Companies are having a very hard time forecasting earnings for the rest of 2020, implying that volatility may continue even as we make progress against COVID-19.

Fixed Income Takeaways:

"Risk on" sentiment continues in the credit markets. Investment-grade corporate bond spreads were about 7-10bps (basis points) tighter yesterday, with high-yield also performing well.

We expect continued extremely strong new issuance in the corporate bond market. Some lower-rated issuers have been able to access the market, and we even saw a leveraged loan deal price yesterday for the first time in about a month. Even beaten-down energy credits tightened yesterday.

In speaking with credit managers, many remain relatively cautious, expecting a weak earnings season as well as possible future credit downgrades. Some are nibbling at new positions after the recent selloff, but we are not seeing aggressive buying yet among these managers.

The commercial paper market continues to strengthen. Liquidity in the money markets is much improved from several weeks ago. Buyers are getting a bit more "grabby."

Municipals: Variable-Rate Demand Obligation (VRDO) rates (which had spiked above 5% a few weeks ago) have been trending downwards, and daily rates are now back below 1%. VRDOs pay interest based on short-term municipal rates.

Municipal bond rates fell yesterday even as 10-year yields increased – spreads continue to tighten.

Monday, 4/6/20

General Takeaways:

On Friday, equities dropped in a volatile session. Large cap US equities dropped about 1.5%, with small caps down about 3%.

On Friday, oil rallied strongly for the second straight session on hopes of a global, coordinated supply cut. Members of OPEC+ (traditional OPEC producers plus Russia) have scheduled an impromptu meeting later this week to discuss balancing the market. Non-OPEC+ members, including the US and Canada, are also likely to attend, but the outcome is far from certain.

Oil opened down slightly this morning, but is still above its recent lows.

The weakness in March’s unemployment report was most pronounced in the hospitality and retail sectors, but job losses were broad-based across sectors, even including some areas of healthcare, a sector facing some headwinds as elective procedures have been significantly curtailed and cost pressures intensify. In a small silver lining, roughly 75% of the increase in unemployment was focused on temporary workers which should be rehired once economic activity begins to gradually normalize.

That said, Next month’s job losses will likely be substantially larger than March’s historically high number with some economists predicting an unemployment rate as high as 15-20%. This would rival what was experienced in the Great Depression. Then, high unemployment persisted for years. This should not happen this time.

The rate of change of new COVID-19 cases has begun to decline in NYC. Last night, Vice President Pence commented on a "glimmer of hope" surrounding the COVID-19 situation in the US while at the same time cautioning that the worst may still not be over.

Measures of traffic congestion in China (a measure of economic activity) are almost back to normal in several large cities, although consumer activity is still well below prior levels.

Equity Takeaways:

This morning, US equities opened sharply higher to the tune of 3-4%. The situation in NYC seems to be slowly improving, which has supported risk appetite.

Last week, the volatility index (VIX) dropped below 50, even as we continued to see daily moves of 2-3%. Ultimately, we would like to see the VIX drop below 30 for us to consider trading conditions as normalized.

Defensive sectors continue to outperform. More aggressive / cyclical factors, such as value, high-beta and small cap, continue to underperform.

We will continue to monitor the relative performance of factors to gain insight into the underlying health of the stock market.

Fixed Income Takeaways:

In the municipal bond market, Friday’s tone was better, with spreads about 10bps (basis points) tighter. A few new deals were able to price on Friday, which is very unusual – issuers will likely be opportunistic with new issuance whenever possible. This morning we are opening to a firm tone again.

Municipal bonds remain very cheap to treasuries on a historical basis. 3% yields are achievable a bit longer out the curve in high-quality municipals.

The Fed’s Money Market Mutual Fund Liquidity Facility (MMLF) has been a key factor in support of the commercial paper market – the tone continues to improve in this market as well.

Investment-grade corporate bond issuance finished March on an extremely strong note. Federal Reserve stimulus, combined with relatively-low overall interest rates and a choppy commercial paper market, has encouraged issuers to tap the bond markets.

Corporate bond spreads are opening tighter this morning in conjunction with a strong opening in the stock market.

Friday, 4/3/20

General Takeaways:

Yesterday was a choppy session with the S&P ending up 2.3%. Small caps ended about 1.3% higher – larger companies continue to outperform smaller companies.

The energy sector (up almost 10%) led the market higher yesterday on news of a potential truce between Russia and Saudi Arabia in their oil price war. After recording their biggest one-day percentage gain ever! Oil prices are higher again this morning as details about a potential deal to cut global oil production come to light.

After unemployment claims topped 6 million yesterday, today we saw monthly non-farm payrolls decline by about 700k. This was the worst monthly number since the Global Financial Crisis of 2008-09.

European Purchasing Manager Indices: the overall index came in just below 30. Italy’s services PMI fell to 17. Recall that any number below 50 indicates economic contraction. Italy’s survey level is historically low. China reported PMI numbers in the 30s last month but bounced back quickly due to their success in containing COVID-19.

Reported COVID-19 cases now top 1 million globally. One bright spot is China, which seems to have reduced the spread of new cases to a trickle.

The US Dollar was extremely strong compared to most global currencies during the first quarter, especially versus emerging markets.

Equity Takeaways:

US stocks opened mixed this morning. Energy is once again the strongest sector – news of potential global output cuts is positive for energy companies, although no deal has been finalized.

Yesterday, the volatility index (VIX) declined to below 50 for the first time since March 10th. Volatility is still elevated but has come off the extreme levels of a few weeks ago.

Even with all the recent volatility, as of Thursday’s close, the S&P 500 was very close to its level of last Friday. Wide-swinging trading ranges are not uncommon after large selloffs.

There is a dividend futures market in Chicago. Traders are expecting future dividend cuts across various S&P 500 sectors. Many companies are in capital preservation mode, and cutting dividends is one easy way of saving capital.

We expect market choppiness to continue over the next few weeks unless there is a breakthrough on COVID-19.

Fixed Income Takeaways:

New issuance records continue to be broken in the investment-grade corporate bond market. The large supply of deals continues to be met with strong demand.

Spreads have generally been tightening in both investment-grade and high-yield over the last seven trading sessions or so. The pace of tightening has begun to slow, however.

Generally, investment-grade spreads have recovered about half of this year’s widening. In other words, we have recovered somewhat, but spreads are still quite a bit wider than they were 4-6 weeks ago.

Liquidity continues to improve daily in commercial paper / money markets. Yields on money market paper are beginning to drop from elevated levels. The Fed’s new commercial paper facility is expected to launch later this month.

Municipal bonds were softer yesterday with spreads wider by about 10bps. The municipal bond new-issue market is still not functioning well. New issuance volume is about 10-20% of historic levels, with many deals being postponed.

On a recent competitive deal that would normally see 10-12 bidders, a large municipality saw only two bids. The municipality did end up going forward with the deal but had to pay a higher borrowing cost than expected.

Thursday, 4/2/20

General Takeaways:

Yesterday, global equity markets were down sharply across the board. Large cap US stocks were down about 4-5%, while small caps were down over 7%. Consumer staples was the best sector (down about 1.8%), while other traditional safe havens such as real estate and utilities were each down about 6%, indicating broad-based selling and concerns over general indebtedness in these two sectors. Healthcare and technology stocks were each down about 4%.

Oil prices are continuing their bounce from yesterday on news that President Trump is set to meet with US oil company executives –Russia and Saudi officials are also set for talks designed to stabilize energy markets.

Unemployment claims: 6.6 million people filed for unemployment last week. This number is about twice the level we saw last week and indicative that the economy is feeling real pressure.

The headline ISM Manufacturing index was 49.1 for March. Any number under 50 indicates contraction in the economy. This headline number is slightly overstated and will likely get much worse in April. We will be watching the ISM Services index closely when it is released later this week, as the services sector has been hit disproportionately harder than the manufacturing sector.

COVID-19 cases continue to sharply increase in the US, but one positive side effect of this crisis is that companies are innovating in multiple ways to retool their supply chains and demonstrate new levels of collaboration. The end effect could be a more dynamic and flexible economy once the crisis has resolved.

Equity Takeaways:

Equity futures were generally higher overnight but turned negative a few minutes before the open. In early trading, US equity indices opened essentially flat.

Yesterday, over 90% of stocks declined and volatility increased again. This type of price action indicates that the market still has a lot of work to do before a sustainable bottom is formed.

Earnings season begins in several weeks. Individual company analysts have no idea how to model earnings for the remainder of the year.

The utility sector is traditionally defensive but has been struggling recently. Utility companies have generally stable business models but do carry relatively high levels of debt. Market participants are currently avoiding the stocks of companies with high debt levels (the real estate sector is having similar issues).

Fixed Income Takeaways:

Municipal bonds saw another liquidity squeeze yesterday. Spreads are widening out again after tightening significantly last week. 25-50bps daily changes in the municipal bond pricing scale have become commonplace, whereas before the crisis a 5bps move would have been significant.

The best municipal bond relative value is still found in maturities of 1-5yrs, but across the curve municipals are yielding 200% or more compared to similar-duration Treasuries. These are extremely wide levels compared to history.

Two large firms account for over 30% of the municipal high-yield market, which compounds liquidity issues in that portion of the market. Key Private Bank generally does not traffic in high-yield municipals and continues to focus on high-quality issuers.

Investment-grade (IG) corporate bond issuance continues its extremely strong run. Most recent deals have been significantly oversubscribed and have been performing well.

We expect strong new issuance volumes to continue. IG spreads opened 2-5 bps tighter today.

Commercial paper liquidity continues to improve daily. The Federal Reserve’s new facility seems to be taking effect.

The market for securitized debt backed by commercial real estate has been essentially frozen for three weeks. The uncertainty surrounding commercial real estate could create opportunities for high-quality, core real estate property managers.

Wednesday, 4/1/20

General Takeaways:

Yesterday finished up the worst first quarter for US equities in history. Large caps were down about 1.5% yesterday vs. about 0.50% for small caps. Traditionally defensive sectors including utilities and real estate underperformed, while energy stocks rallied.

Large cap US stocks were down about 20% for the quarter. Small caps were down over 30%. Both developed international and emerging market equities were down 23-24% for the quarter.

Growth stocks outperformed value stocks by a wide margin in the first quarter. Quality and Minimum Volatility factors also outperformed by declining less than the broader index - KPB remains overweight these more defensive sectors in client portfolios.

Oil prices bounced slightly yesterday on news that the US and Russia are planning talks aimed at stabilizing energy markets. Oil prices opened essentially flat this morning at just over $20 / barrel.

Going forward, the progression of the virus will likely drive markets. The summer season will be especially important, as summer is the time of year that is crucial for many sectors of the economy.

The reported number of COVID-19 cases in the USA continues to accelerate. Stock markets globally are opening lower today, perhaps in response to the large reported increase in cases. Some of the quick increase in reported cases can likely be attributed to increased and more widespread testing. Policymakers and public officials are signaling worsening trends in the near-term while expressing optimism over the medium-to-long term.

Equity Takeaways:

US equity markets opened lower this morning to the tune of 3-4%. Even though volatility declined, yesterday’s session showed weak breadth. The S&P 500 tried to punch through the 2630 level on three separate occasions yesterday but was unable to do so.

It will likely take time to put a bottom into the stock market. There’s a good chance that we settle back into a volatile, wide swinging trading range over the next month or two.

History shows that after a large relief rally (like the one we saw in mid-March), markets often re-test the original interim trough price level.

Fixed Income Takeaways:

After no issuance for several weeks, early morning yesterday there were a few new deals in the municipal bond market. Several deals initially went okay, but spreads began to widen late in the morning, especially on longer-dated paper. Long-end muni spreads ended about 15bps wider yesterday.

The new-issue corporate bond market has been strongly supported by the recent actions of the Federal Reserve. Over the last several weeks, deals are pricing to strong demand. Year-to-date investment-grade corporate credit issuance is about 48% higher in 2020 vs. 2019.

High-yield spreads tightened yesterday as well.

Even after recent strong performance, investment-grade corporate bond returns were -7% in March, and high-yield bond returns were -11%.

The commercial paper market seems to be loosening up somewhat. We are starting to see improved pricing across different tenors. The Fed’s new commercial paper facility should come online sometime later in April.

Tuesday, 3/31/20

General Takeaways:

Stocks rallied strongly across the board yesterday, reversing most of the losses from last Friday. US large cap indices were up between 3% and 4%. That said, the rally had a bit of a defensive tilt, with large cap outperforming small cap, and healthcare / technology outperforming and energy / industrials lagging.

The S&P 500 is on track to close lower in January, February and March. This type of start to the year has only happened five other times in the past (1973, 1974, 1977, 1982, 2008). On all but one of those occasions, stocks closed lower for the full year. The average return of those five years was -12.7%.

While we caution that the above datapoint only captures 5 episodes, if history repeats itself, investors should expect continued volatility.

COVID-19 cases are still increasing, but at a slower rate in some key areas. Governor Cuomo recently reported that cases in NYC are doubling every 6 days, as opposed to every two days. There has also been some positive news around improved testing capacity as well as a possible vaccine that could be ready as soon as early 2021.

Oil prices are rising today on news that the US and Russia are planning talks aimed at stabilizing energy markets.

Several measures of Purchasing Manager Index (PMI) data out of China came in above the key 50.0 level yesterday, which indicates economic expansion over the previous month. Much of China was shut down last month, so these numbers indicate expansion off a very low base.

Equity Takeaways:

Today is the last day of the quarter. We expect that rebalancing flows should be a tailwind for equities today as large institutional accounts continue to reposition their portfolios.

Even with the US markets up 3-4% yesterday, only about 57% of issues advanced, indicating that the rally was not as broad-based as it appeared on the surface. In terms of factors, yesterday was a "risk off" day, with defensive sectors outperforming.

We are approaching key levels on the S&P 500 – many market technicians have been expecting resistance around current prices. The next week or so will be key to see if we can continue to rally, or if we pull back towards a possible re-test of the March low.

Another headwind to the equity markets over the short-intermediate term will be a relative lack of stock buybacks going forward. In the current environment, many companies have been forced to reduce or eliminate buybacks. Buybacks have been a steady contributor of about 1.5% - 2% to earnings.

Fixed Income Takeaways:

Credit markets are back open for business. Carnival Cruise is testing the waters with a possible new deal (expected tomorrow).

We saw one new high-yield bond deal in the market yesterday (first deal in over a month) – this deal was oversubscribed and upsized.

The largest corporate bond ETF has seen extremely strong inflows over the past week. In general, fixed income ETF liquidity has improved greatly over the past week or so.

Commercial paper issuance is down – some traditional commercial paper issuers are instead opting to issue longer-term debt in the current environment. We believe quarter-end has been affecting liquidity in the commercial paper market. Once quarter-end passes and the Federal Reserve’s new facility gets online, we should see continued stabilization in the money markets.

Municipal bonds were quiet yesterday. The new issue calendar is starting up again today and a few deals have already priced. 1-10yr paper is being best received.

Municipal bond mutual fund outflow data won’t be available until Thursday, but the early indication is that outflows have slowed down, which should help stabilize the market.

Monday, 3/30/20

General Takeaways:

Last week the S&P turned in its best weekly gain since 2009 (over 10%) but is still down over 20% from its February high.

Both Quality and Minimum Volatility equity factors have outperformed benchmarks year-to-date. Key Private Bank continues to advocate and implement overweight positions to both Quality and Minimum Volatility factors in client portfolios. Value stocks and smaller-capitalization stocks have underperformed. International and emerging market stocks have also slightly underperformed US domestic stocks YTD.

Social-distancing measures in the United States have been generally extended until the end of April. The COVID-19 caseload seems to be worsening in Japan, but several experimental treatments are being evaluated and offer early promises of hope. The situation in Italy also continues to slowly improve.

Later this week, we will get some important data on the economy, including housing starts, Purchasing Manager Index (PMI) data, etc. The monthly employment report will be released on Friday, but the jobless claims report on Thursday may be a more real-time indicator of the current state of the economy, however.

Oil prices are down about 70% over the past year and continue to pressure the energy sector.

Equity Takeaways:

US stocks traded in a wide range in the overnight pre-markets. Prices opened slightly higher today. Within the next few days, we expect to see heavy rebalancing activity as institutional accounts purchase stocks to reposition their portfolios. Much of this rebalancing activity likely occurred last week but should continue through quarter-end.

Implied volatility (as measured by the VIX index) remains elevated. Realized volatility over the past month has been higher than implied volatility and suggests the stock market will remain very choppy until volatility subsides.

Fixed Income Takeaways:

Credit defaults / workouts / losses are likely to increase in the coming months, but we don’t expect defaults to reach Great Financial Crisis (2008-09) levels.

We have spoken with several corporate bond fund managers who are taking advantage of the recent spread-widening by increasing their allocation to corporate credit.

Liquidity within the corporate bond market improved at the end of last week. Spreads tightened (prices rallied) for four straight days after widening for 13 straight days.

As spreads tightened in corporate bonds, many new deals priced. YTD, we have seen about 40% higher new issuance than we had at this time in 2019. Deals are being met with solid investor demand.

High-yield bonds also increased in price last week off 11-year lows. One large rating agency expects defaults to pick up from historically low levels, but the spike in defaults is expected to be relatively short-lived.

Corporate bond spreads are opening slightly wider today, especially in the energy sector. The energy sector remains under heavy pressure due to declining oil prices.

Commercial paper / money market products continue to slowly improve. Many investors continue to prefer holding cash, however, so yields continue to be higher-than-normal.

Municipal bonds took a breather on Friday after a huge rally from Monday – Thursday. The next test for the market will be a restart of the still-dormant new issue calendar, likely beginning on Tuesday this week.

The fiscal stimulus package passed last week does contain substantial support for municipalities, hospitals, airports, other forms of transportation, etc.

Municipal bond mutual funds had another week of very large outflows last week, even as spreads tightened.

Friday, 3/27/20

General Takeaways:

Both fiscal and monetary stimulus is occurring on a massive, global scale. The US House is set to vote on the Senate’s $2 trillion stimulus package today. Japan passed a new fiscal stimulus package that includes direct equity purchases. Nations such as Germany and Italy have already passed large fiscal packages of their own. The European Central Bank (ECB) announced a new bond-purchasing program, and many other nations have cut interest rates.

COVID-19 cases continue to increase globally – the curve has yet to flatten in many places. China is effectively closing its borders to prevent the re-importation of the disease. Chinese nationals that are overseas, in addition to foreigners, now have restricted access back into the country. Goods can still flow into China, but the flow of people has been severely restricted.

Even though Chinese factories have started to come back online, some finished goods are just sitting in storage as there is nowhere to send the goods. Customers are delaying orders, etc.

US Dollar update: up until this week, the dollar had been extremely strong vs. a basket of foreign currencies. This week, the dollar retraced some of those gains and weakened significantly, but there is still some stress in the short-term funding markets due to continued high demand for dollars.

Equity Takeaways:

It’s "March Madness" in the stock markets. Stocks were up over 5% yesterday and the Dow has rallied over 20% off its low. This past Tues-Thurs saw the best 3-day rally in the stock market since 1933.

Even with such a strong move off the lows, significant technical damage needs to be repaired. Some of the sharpest rallies occur during bear markets, so it is important to remain patient.

Global equity markets generally opened 2-4% lower today. A near-term pullback in stocks would not be surprising due to the magnitude of the recent move higher as well as continued high levels of volatility. Volatility, as measured by the VIX index, remains at elevated levels. Until the VIX declines to more normal levels, it will be tough for equities to mount a sustained rally.

We continue to advocate defensive strategies: Covered-call writing is one way to take advantage of enhanced volatility - clients can pocket higher-than-normal option premiums with this strategy. Structured notes have also provided clients with downside protection, and we reiterate our emphasis of owning high quality companies and securities in this environment.

Fixed Income Takeaways:

This week, we have seen significant demand leading to higher prices / spread tightening across all asset classes – corporate bonds, municipal bonds, and money market instruments.

Yesterday was the busiest day for new issuance in the investment-grade corporate bond market for months. Companies are tapping the bond market when they can, perhaps attempting to price new deals before 1Q earnings.

The high-yield bond market rallied over the past few sessions but has still generally lagged the rally in the investment-grade market. We still favor high quality over high-yield.

Municipal bond spreads have tightened significantly this week even as mutual funds continue to show outflows. The Federal Reserve has been supporting very short-dated municipal bonds. Farther out the curve, the spread tightening has been driven by crossover / opportunistic buyers.

Liquidity in the commercial paper market has improved but is not fully back to normal yet. There is high demand for the best quality paper.

Thursday, 3/26/20

General Takeaways:

Headline unemployment claims: 3.3 million claims were filed last week, approximately five times the previous largest print in history. Equity futures rallied on this news, perhaps expecting an even larger number of claims and in response to measures taken by the federal government to lessen the economic impact caused by efforts to contain further spreading of COVID-19.

Yesterday, the Senate passed a fiscal stimulus package valued at approximately $2 trillion dollars. This package is about twice the size of the Obama-era stimulus package passed in 2008-09. The bill provides support for various industries as well as direct support to consumers in the form of direct payments and enhanced unemployment insurance. The House will likely vote on it today or tomorrow.

Earlier this week, the Federal Reserve announced an unlimited, open-ended asset purchase program. In addition to US Treasuries and Mortgage-Backed Securities, the Fed can now purchase certain municipal bonds and corporate bond ETFs – this is a new feature of their asset purchase program. The Fed has been an active buyer all week in massive quantities.

The rate of change of new cases of COVID-19 in Italy continues to fall. New cases are still increasing, but at a slower rate.

Several Asian economies seem to be getting back to work. Exports recently increased in South Korea at a strong YoY pace, and indicators of activity in China are also improving.

The next several weeks will be crucial for the US economy, as the US is several weeks behind Asia in the progression of the disease.

Europe has yet to enact a coordinated economic response to the outbreak (several countries such as Germany and Italy have acted unilaterally). Coordination in Europe looks to be increasing over the past several days, however.

Equity Takeaways:

At one point yesterday, the S&P 500 was up over 5%, but faded into the close to end the day slightly higher. On a positive note, yesterday was the first time with two consecutively higher closes in quite some time.

Volatility (as measured by the VIX index), closed higher yesterday as well. Typically, the VIX will decline as the market rallies. Investors who were buying the rally were also buying protection, indicating that it was not a full "risk on" day.

This morning, US stock markets opened slightly higher. Futures had been indicated lower in the overnight session but began rallying after initial unemployment claims (while still extremely elevated) were not quite as terrible as feared.

Fixed Income Takeaways:

In speaking with several fund managers, some are looking for opportunistic buying opportunities in both corporate bonds and mortgage-backed securities. Forced selling by levered holders of both corporates and mortgages has created some very interesting opportunities.

The Fed has recently initiated several different programs to help liquidity in the commercial paper / money market arena. These programs are now up and running. The markets have thawed, but we’re not totally out of the woods yet.

Corporate bond spreads tightened sharply over the last few days and new issuance supply increased dramatically (a good sign for liquidity), however, spreads are opening slightly wider this morning.

Within municipal bonds, we’ve seen a sharp tightening of spreads in the last few days. Spreads are opening much tighter again this morning. Opportunistic / crossover municipal bond buyers are stepping in even as mutual fund outflows continue.

We have not seen many new deals yet, but it seems possible that the municipal new deal market could restart in the next few days.

In short: the tone in the fixed income market has markedly improved over the past few sessions, but we expect continued choppiness over the short-medium term.

Wednesday, 3/25/20

General Takeaways:

Yesterday was one of the best days in market history with the Dow rallying over 10%, but some of the sharpest rallies occur in bear markets, so patience is warranted. Key Private Bank does not advise chasing the current rally and aggressively over-allocating to risk but staying diversified.

Another reason for patience - future headwinds. Unemployment claims are expected to rise sharply in the coming weeks (report due out Thursday, 3/26), GDP is set for sharp contraction, and we are still not sure how COVID-19 will progress.

Equity Takeaways:

Volatility (as indicated by the VIX index) remained at elevated levels yesterday – investors who were buying the rally were also buying protection, indicating that it was not a full "risk on" day. Even with the market up slightly this morning, volatility also opened higher, which is a cautionary signal.

Yesterday was a "90% up day" – strong breadth with over 90% of stocks rising. This is a positive sign, but 90% days (both up and down) tend to occur in clusters.

It is important not to read too much into one day of price action. Time is required to generate a sustainable bottom.

Quarter-end rebalancing transactions will likely begin later this week and will continue through the end of March. This potential buying could be a near-term tailwind for equities. The Federal Reserve will continue buying large amounts of fixed income on the other side of these rebalancing trades.

The private equity market remains essentially frozen, but valuations are certain to be marked lower in the coming weeks and months. This fact presents an opportunity for buyers with dry powder.

Fixed Income Takeaways:

Earlier this week, the Federal Reserve announced an unlimited, open-ended asset purchase program. In addition to US Treasuries and Mortgage-Backed Securities, the Fed can now purchase certain municipal bonds and corporate bond ETFs – this is a new feature of their asset purchase program.

Credit markets have begun to show signs of stability. Yesterday, the main investment-grade index was up by about 1% in price. The index is still about 12% lower since the start of the month. Several new corporate bond deals priced yesterday and met with solid demand, tightening spreads (albeit from very wide levels).

Mortgage-backed security spreads have also firmed over the past several days, in large part due to massive amounts of Fed buying.

New issuance in the high-yield bond market remains nonexistent, but discounts to net asset value in the ETF space narrowed significantly yesterday as the stock market rallied. High-yield bonds are generally positively correlated with stock prices. The commercial paper market also remains soft, with some moderate signs of stability. Municipal bond secondary spreads were at least 30bps tighter in the 1-5yr space yesterday. The general tone was very strong, but there have not been any new deals for quite some time.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

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