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2021 Key Private Bank Investment Briefing Notes

July 2021

Friday, 7/30/21

General Takeaways:

The economic data released during this week was once again generally positive. As reported in the Case-Shiller US Home Price Index, house prices increased another 2.1% in May and have increased 16.6% year-over-year on a national basis. Real GDP grew 6.5% in the second quarter.

Consumer confidence remains strong, unemployment claims have stabilized (but remain elevated relative to pre-pandemic levels), and several regional gauges of manufacturing output continue to indicate strength in the economy. Friday morning, data on Personal Income and Consumer Spending both exceeded expectations.

On the inflation front, on Friday, we also learned that the Core Personal Consumption Expenditures (PCE) Price Index rose 0.4% month/month and 3.5% year/year in June. Both increases were slightly below expectations. PCE inflation is one of the Federal Reserve’s favored measures of inflation.

Another important metric of inflation, the Employment Cost Index, was also reported Friday morning. This metric increased 0.7% quarter/quarter and 2.9% year/year. Economists were expecting a 0.9% rise in the quarter.

The Beveridge Curve indicates a skills mismatch between job openings and available jobs. In other words, job openings are plentiful, but there appears to be a shortage of workers with the necessary skills to fill many of them.

COVID-19 cases in the US have increased by almost 50% from the prior week. The 7-day moving average of daily cases has increased from about 40,000 one week ago to about 60,000 one week later. Hospitalizations have also increased while the rate of vaccination has stalled.

A bipartisan group of Senators struck an agreement on a roughly $1 trillion infrastructure bill on Wednesday, voting 67-32 to begin consideration of the bill. This bill contains approximately $550 billion of new federal spending.

Equity Takeaways:

Stocks were mixed in early trading on Friday. The S&P 500 fell about 0.25%, while the tech-heavy Nasdaq fell about 0.5%. International shares also fell slightly, while small caps rose about 0.5%.

About 75% of the S&P 500 has reported 2Q:2021 earnings. On average, companies have beaten analyst estimates by about 17%, with financials the largest outperformer. About 87% of companies have exceeded consensus earnings estimates.

The second quarter is resulting in more typical price action after earnings reports – companies that have exceeded estimates are being rewarded, while companies that have missed estimates are seeing their stock prices punished. During the earnings recovery after the COVID-induced recession, investors were mainly focused on the forward outlook rather than on reported earnings.

Fixed Income Takeaways:

The 10-year Treasury note yield has held firm in recent weeks and traded at 1.25% early Friday morning. If the 10-year Treasury closes at this level on Friday, it would be the fifth consecutive week of lower yields.

The investment-grade (IG) corporate bond new issue calendar ramped up this week. Deals continue to price into very high demand – spreads are tight. The pace of new issuance has slowed compared to last year but remains elevated relative to historic levels (2020 saw record levels of new issuance).

In this week’s Federal Reserve (Fed) meeting, Chairman Jerome Powell successfully took baby steps towards tapering (the reduction of Fed bond purchases) without sounding too hawkish.

Market participants are worried that the Fed might remove stimulus too soon. In this week’s meeting, Powell seemed to calm some of those fears. The Fed’s message indicated that economic progress is being made but that the Fed is in no rush to remove stimulus. Continued progress in the labor market remains a focal point for the Fed.

Powell also noted that the Fed is not even considering raising interest rates at this point. The initial reduction of stimulus will revolve around the tapering of Fed bond purchases.

Municipal bonds have seen positive inflows in 62 of the last 63 weeks. August is set to be a heavy month for municipal bond maturities, which will help maintain an elevated level of cash in the market that will need reinvestment. September, on the other hand, is a light month for maturities.

Monday, 7/26/21

General Takeaways:

As we noted in last Friday’s comment, the National Bureau of Economic Research (NBER) dated last year’s recession as the shortest on record, beginning in February 2020 and ending just two months later.

During the ensuing economic recovery, the S&P 500 rose 48% between April 2020 and June 2021. These returns are among the strongest of any expansion in the last nine decades. Only the expansion that began in 1933 showed stronger initial returns.

Evercore ISI Company Surveys are booming. Retail sales momentum continues, and companies are reaping the benefits. This data is consistent with very strong corporate earnings (discussed below). However, inventories remain very low, which could cause future supply issues.

On Friday, the Employment Cost Index (ECI) will be reported. This number is an important inflation metric. Expectations are for a 5% increase, which would be the most significant increase for many years but not unprecedented.

COVID-19 update: cases in Israel are beginning to rise, even amongst the fully vaccinated. Thankfully, hospitalizations and fatalities have not increased significantly. A flare-up in cases in the Jiangsu province of China is also prompting some concern, as China’s approach to COVID has been “isolate and control” from the beginning.

Within the United States, COVID-19 cases and hospitalizations are on the rise, especially amongst the unvaccinated. First dose vaccine administrations are showing signs of bottoming after weeks of steady decline.

Credit spreads remain a critical indicator for the health of the overall market. They have remained primarily stable over the past few weeks despite the recent uptick in equity volatility – details below.

Equity Takeaways:

US large cap stocks were essentially flat in early trading on Monday, while small caps rose about 1%. International shares were generally lower, led by weakness in emerging market stocks.

The S&P 500 hit another all-time high last week. It has been 179 trading days since the last 5% drawdown in the S&P 500. Since 1929, the average period between 5% drawdowns has been 94 trading days.

24% of S&P 500 companies have reported 2Q:2021 earnings. On average, revenues are coming in 4% above expectations, a record going back to 2008. 86% of companies have beaten revenue expectations.

The S&P 500 appears poised for 20%+ aggregate earnings growth during the quarter. 88% of reporting companies have reported earnings above expectations, with the average beat 19% above analyst estimates.

Key Private Bank believes the equity market is currently in a mid-cycle transition phase. We expect a choppy market over the next few months. As bond yields have fallen over the past few months, growth stocks have reasserted market leadership. We expect this dynamic to continue throughout the third quarter of 2021.

In the fourth quarter, once the “summer doldrums” are complete, we expect the reflation trade to reassert itself. Cyclical sectors like financials, industrials, materials, and energy have lagged over the past several months – we believe these sectors will likely reassert leadership in the fourth quarter.

Earnings estimates for the rest of 2021 and 2022 are probably still too low, but expectations are high, so it is important that realized earnings continue to show strength. Based on where credit spreads and equity valuations are currently, we believe that equities still hold good relative value to bonds.

Market leadership (breadth) narrowed in 2Q:2021. When breadth narrows, active managers tend to have a tough time outperforming the indices.

Emerging markets will continue to be driven by the outlook in China. The Chinese government has been cracking down on any sector that appears to be “hot.” Recent examples include a crackdown on companies that provide online tutoring, as well as a recent hike in mortgage rates for first-time homebuyers.

Fixed Income Takeaways:

The 10-year Treasury yield was 1.29% in early trading on Monday, 1 basis point higher on the day.

Investment-grade (IG) credit spreads moved 8-12 basis points wider last Monday in conjunction with the selloff in equities but tightened throughout the rest of the week to close mainly unchanged on the week.

Last week was a light one for new IG corporate bond issuance, as many investors were likely spooked by last Monday’s volatility in credit spreads.

The Federal Reserve Open Market Committee (FOMC) is set to meet again this week. At this meeting, the Federal Reserve (Fed) is expected to further hint at the tapering of bond purchases, but no explicit updated guidance is likely to be given.

The Fed will not be releasing an updated set of economic projections after this meeting. This fact will likely allow Fed Chairman Jerome Powell to control the post-meeting messaging. Powell remains one of the more dovish members of the Committee.

Within actively managed fixed income funds, active managers tend to outperform the indices when credit spreads are tightening and vice versa. Credit spreads narrowed in the second quarter of 2021. Thus, most active managers showed strong relative performance during the quarter.

Friday, 7/23/21

General Takeaways:

In last week’s Key Questions, Key Private Bank’s Chief Investment Officer, George Mateyo, discussed the National Bureau of Economic Research (NBER) and their method of dating recessions, noting that the NBER had yet to officially declare the end of the 2020 recession. This week, the NBER determined that the 2020 recession lasted two months from peak to trough (February 2020 to April 2020), making it the shortest recession on record.

The housing market remains robust. In June, housing starts increased 6% over May levels, driven by low mortgage rates. 30-year mortgage rates continue to hover near all-time lows, last checking in at 2.98% on average.

Lean inventories and supply chain constraints are creating strong demand for transportation – Evercore ISI Trucking Survey data confirms this trend. This trucking survey tends to correlate with US real GDP growth.

The Conference board is projecting year-over-year real GDP growth of 6.6% in 2021. The Leading Economic Index (LEI) rose 0.7% in June, after increases of 1.3% in April and 1.2% in May. Economic growth remains strong but appears to be slowing. As George Mateyo noted in the aforementioned Key Questions article, the economy seems to be transitioning from an early-cycle “V-shaped” recovery to a mid-cycle phase of more moderate growth.

Cryptocurrency items of note: the SEC said this month that it would seek public comment on WisdomTree’s proposal to launch a bitcoin ETF. The SEC is also looking at new regulations to help prevent fraud in the cryptocurrency markets. Several regulatory bodies are looking at updating the accounting rules surrounding cryptocurrencies held on corporate balance sheets.

Equity Takeaways:

US markets rose in early trading on Friday. The S&P 500 rose about 0.4%, while the Nasdaq rose about 0.25%. Small caps also rose about 0.25%.

The Nasdaq is currently trading at all-time highs, and the S&P 500 is once again approaching an all-time high. The recent dip in bond yields has provided support for technology stocks, which have resumed market leadership. Value stocks have significantly lagged growth stocks over the last several months.

This week, the focus in the market shifted from “peak growth” fears and concerns about the Delta COVID-19 variant back to earnings season, which is off to a strong start. After a sharp dip on Monday, stocks staged a solid snapback rally throughout the week.

Back in April, over 90% of S&P 500 stocks were above their 50-day moving averages. Currently, less than 50% of S&P 500 stocks are above their 50-day moving average. Breadth has been declining, and the largest stocks are supporting the averages.

Earnings season: 111 of 500 S&P companies have reported second-quarter numbers. 82% of companies have beaten revenue estimates, with 87% beating on the bottom line. In addition, commentary from management has been optimistic about the outlook, with few companies reporting a business impact from the Delta variant. In addition, profit margins remain robust, indicating that companies are passing their increased labor and material costs through to consumers.

A mean reversion pause for stocks could be driven by various factors, with the most likely being a slowdown in economic growth and corporate profits. Less likely scenarios include a more hawkish (less accommodative) Federal Reserve (Fed) or a return of disinflation/deflation.

The European Central Bank (ECB) made a few subtle changes to their long-term guidance, resulting in more accommodative policy for a longer period. The ECB stated that they would rather raise rates too late than too early (this is a change from their stance after the 2008 Great Financial Crisis).

Fixed Income Takeaways:

The 10-year Treasury rate was trading at 1.30% in early Friday trading, about 2 basis points higher on the day.

A combination of fundamental (slowing growth and stimulus) and technical factors has driven rates lower than expected in a short period of time. Likely, interest rates will once again begin to drift higher as we head through the remainder of 2021.

There is currently a dearth of single-A and higher-rated paper available in the corporate bond market. More and more issuers have taken on cheap debt, resulting in credit downgrades. About 51% of the investment-grade credit market is rated BBB. With debt costs so low, many companies have made the conscious decision to increase leverage.

The Fed is likely to begin removing monetary accommodation sometime in 2022. The market is expecting a formal announcement of asset purchase tapering in December 2021.

Over the past week, investment-grade (IG) corporate bond funds saw their first outflows in many weeks. All three major corporate bond asset classes (IG, high-yield, leveraged loans) each saw outflows – this is the first time all three saw outflows in the last 18 weeks.

Conversely, municipal bonds continue to see inflows and have seen positive flows in 61 of the last 62 weeks. The fundamental picture in the municipal bond market remains solid, with state revenue normalizing after the pandemic. However, municipal bonds are expensive relative to treasuries on virtually all historical metrics.

Monday, 7/19/21

General Takeaways:

A few weeks ago, we listed several items to consider for the second half of the year; and it appears many are unfolding and worthy of continued monitoring:

  1. Delta variant and continued vaccination challenges
  2. Inflation pressures are building (energy, commodities, and wages = margin pressures and lower earnings)
  3. Economic growth and fiscal support peaking (transition, not turmoil in our view)
  4. Policy error: Fed miscommunication, tax policy, or regulatory over-reach
  5. China slams on the brakes on their economy and their companies
  6. Sentiment/Valuations, and some feelings of complacency
  7. Something else we don’t know/aren’t thinking about

One week does not a trend make, but there may be some signals in last week’s stock market declines. Indicators favor a focus on quality as large cap stocks outperformed small cap stocks.

This quarter’s earnings season might need to be perfect. Last quarter, approximately 90% of companies that reported earnings exceeded expectations. For stocks to continue working in the near term, this trend may need to continue. Given the focus on inflation, the outlook for margins will be an essential data point to assess.

Stocks have historically paused after an earnings peak, but not a reason to panic. Cycles in 1993, 2004, and 2009 all experienced short-term declines in S&P500 market returns in the subsequent six months; however, returns were strong in the following 12-36 months.

There is a disconnect between current interest rates and inflation relative to other times in history. In past periods when inflation was higher than usual (US Core CPI near 4%), 10-year bond yields were in the 5-8% range. The 10-year Treasury yield is currently at 1.3%. This is an unusually abnormal period, and Fed policy regarding the pandemic economic recovery may need to reflect this environment carefully.

Credit spreads are at/near all-time lows, and there is an open question as to how long this might persist. Particularly in the Investment-grade (IG) space, spreads are at about 111 basis points above Treasuries, near an all-time low. High-yield spreads are also low at 314 basis points (bps) above Treasuries, levels not seen since 2007.

Some transitory inflation indicators might become more structural. Consumers’ mindsets are shifting relative to the demand for goods and services, and inflation expectations one year ahead are at 4.8%. Further out into the future, 3-year and 5-year expectations are still elevated at 3.5% and 2.9%, respectively, compared to the last five years.

The cure for higher prices is higher prices – and higher prices are causing demand destruction in certain areas as consumers protest mark-ups. The University of Michigan consumer surveys on a good time to buy a house or a car indicate both are down sharply. US house sales have stalled, despite record-low mortgage rates, because of surging prices. And now, with lumber production greater than lumber new orders, lumber prices are crashing, so perhaps the CPI surge will turn out to be transitory. We believe wages will be the key.

Optimism is generally evident within the economy, especially within small businesses. In addition, optimism is showing via the general public’s receptivity to re-engaging in everyday activities such as dining out, returning to work, staying at a hotel, and using public transportation.

Regarding the Delta variant and vaccination challenges, cases and hospitalizations are again rising in the US and globally. There is a disparity between states with lower fully vaccinated rates seeing a recent higher spike in new cases and those with higher fully vaccinated rates experiencing fewer new cases in the US.

The most concerning resurgence of COVID has been in the UK. This is because the UK is the second farthest along among developed countries in getting vaccinated. Despite this, infections in the UK have surged back close to January 2021 highs. Notwithstanding higher cases, fatalities remain low. Moreover, cases are rising more slowly in the age 70+ population group as arguably these individuals have been vaccinated at a higher rate relative to their younger peers.

Bottlenecks in construction supplies are creating longer lead times in real estate development. The industrial sector has had very high demand from several trends, including e-commerce, the need for data centers, and logistics hubs. Strong demand existed throughout the sector over recent years, and COVID accelerated it.

A 24% increase in materials and lead times have increased to 12-18 months to develop industrial buildings where it has historically been 8-10 months, leading to a tight market. This constrained supply in an environment of increasing demand has been bullish for commercial real estate. The existing buildings needing to keep up with replacement costs also provide a favorable backdrop.

Equity Takeaways:

Stocks fell in early trading on Monday. All three major indices declined, with the S&P 500, Dow Jones Industrial Average, and Nasdaq all being down about 1.3%, while small caps declined 2.0%.

Markets are trading lower due to the Delta variant increase and the potential impact for a successful re-opening of the economy. This dynamic paints a significant conundrum for public health decisions as the risks need to be considered regarding vaccinations. There is not an easy solution for government officials to address those who refuse to be vaccinated.

The S&P 500 last week endured a 1% weekly loss and finished at its lows – marking the first close on its lows since June 18th. Downside follow-through during most recent selloffs has been lacking, and we haven’t seen a 3% drawdown since mid-May.

Earnings season is likely to bring more volatility. Expectations set the bar at a point to be beaten. However, the key to continued momentum will be guidance on upward earnings revisions and is a prerequisite to a higher market.

We still believe we are in a mid-cycle transition. Also affecting the market environment, the period from the second week of July to the second week of October has historically tended to be the weakest market period of the year. So together with the mid-cycle transition, there is a recipe for potential weakness.

Market breadth turned negative last week, with 70% of the S&P500 down for the week. Sixteen names dropped more than 10%, and ninety stocks fell more than 5%; on the upside, zero were up more than 10%, and only one stock was up more than 5%. Small caps were down over 5% for the week.

Fixed Income Takeaways:

Rates markets are rallying with a risk-off mode. The 10-year Treasury is down about 7 bps, dropping below its July 8th low, currently at 1.22% and below its 200-day moving average. A double-bottom is in sight at levels of 1.19%/1.21%. These levels are significant to see if investors take a stand at that level or if yields fall further to the next support level at 1.15%. The 30-year Treasury is down sharply to 1.84%.

We see a pronounced bull-flattening bias on the yield curve. We saw it last week, and it is more pronounced today. In fact, we saw the long-end rally last week after another strong Consumer Price Index (CPI) print and Fed Chair Powell’s commitment to accommodative monetary policy at his testimony in front of Congress. With no Federal Reserve members speaking due to the blackout period in front of next week’s FOMC meeting, it might help stabilize the market.

With the movement in Treasuries, credit markets have also not been spared, albeit spreads have been relatively orderly. OAS stand at 86 basis points, the widest level since May 21. However, we have talked about spreads being in this tight range in the low-mid 80s since April. Yields remain in stable range for investment-grade (IG) bonds. High-yield spreads were unchanged on Friday but were also out 15 basis points last week.

Supply is supposed to pick up this week, with syndicate desks estimating $15-20 billion in new issue IG supply for the week. Yet, some issuers may delay coming to market to avoid some of the volatility today. July volumes for new issuance are at $47 billion. With two weeks left to go in the month, estimates are at $90-100 billion for the entire month. Those numbers are subject to change as spreads are getting volatile. The environment continues to be very favorable for issuers to come to market.

Friday, 7/16/21

General Takeaways:

Five topics for today:

  1. Inflation

    - The headline Consumer Price Index (CPI) rose 0.9% in June and 5.4% year/year – both were the largest increases since mid-2008.

    - Core CPI (excluding food and energy prices) rose 4.5% year/year, the largest increase since 1991.

    - Some of these increases are likely a recovery from last year’s declines. If higher inflation expectations were to become embedded in consumer behavior, however, some of these recent increases could prove longer lasting than expected.

    - Federal Reserve (Fed) Chairman Jerome Powell testified to Congress this week. He said that “inflation has increased notably and will likely remain elevated in coming months before moderating.” He did not signal an imminent change in monetary policy, noting that the standard of “substantial further progress” in the labor market is still some time off.

    - Shelter costs, motor fuel prices (including gasoline), used car and truck prices, and transportation costs (including airline prices) were the four major contributors to the recent spike in inflation. The spike in used car prices is likely transitory. However, an increase in shelter costs could prove “stickier” over the long term.

  2. Economic Progress

    - The Fed’s monthly Beige Book report was released this week. Many Districts reported that firms continue to have difficulty finding workers, and that labor market tightness is expected to continue into the fall – a tailwind for wages.

    - Another sign of an improving labor market: weekly unemployment claims continued to fall, coming in at 360K vs. 386K the week prior. Continuing claims also fell.

    - June retail sales rose 0.6% month/month, vs. expectations of a drop of 0.4%, showing continued strength in consumer spending.

  3. COVID-19

    - The US is averaging about 23,000 new cases per day, about twice the average from three weeks ago.

    - According to the Center for Disease Control (CDC), about 58.8% of American adults are fully vaccinated.

  4. Corporate Earnings (see equity section)

  5. Chinese GDP

    - 2nd quarter Chinese GDP rose 7.9% year/year, down from the prior quarter due to base effects, but still a very strong showing given that China’s economy held up much better than most during the pandemic.

Equity Takeaways:

Stocks rose slightly in early trading on Friday. The S&P 500 rose about 0.2%, while the Nasdaq rose 0.5%.

Small caps reacted favorably to the strong retail sales report this morning, rising 0.7%. Small caps tend to have a more domestic focus than large caps and are thus more sensitive to the US economy.

Markets tend to be forward looking, and much of the recent strong economic data is from June. US markets continue to exhibit strength, but other markets around the world are diverging by exhibiting weakness over the past month, and bond yields remain low.

Second quarter earnings season has kicked off with solid bank results. Market participants are expecting a strong earnings season to support equity prices and help resolve some of the divergent signals noted above.

Christine Lagarde of the European Central Bank (ECB) noted that the ECB will likely revise its forward guidance for its quantitative easing program in the coming weeks. The ECB will likely continue with aggressive easing for the foreseeable future.

Conversely, the Bank of England (BOE) seems to be becoming a bit more hawkish. Recent inflation numbers have been higher than expected in England.

Chinese regulators continue to squash initial public offerings for Chinese companies attempting to sell shares outside of China. China is seeking to control the data that these companies generate. Chinese regulators are also seeking to increase competition within the tech sector.

Fixed Income Takeaways:

We saw strong volume in the new issue corporate bond markets this week, with over $30B of new investment-grade (IG) deals priced. Deal flow was driven by several large financial service companies.

Environmentally and socially conscious bond issuance continues to increase. We are on track for the biggest issuance year on record in this space.

High-yield spreads moved about 7 basis points wider this week. CCC-rated paper is trading about 60 basis points wider than the tightest levels of earlier this year. Conversely, IG spreads have remained very stable since April.

Municipal bond funds continue to experience strong inflows. After two quiet weeks, the new issuance calendar picked up this week as well, with supply rising to meet demand.

Secondary trading in the municipal market remains thin. Longer-dated municipals drifted about 2 basis points wider this week in light trading.

Monday, 7/12/21

General Takeaways:

Currently, there is significant noise around state-level COVID-19 data. Some correlation seems to exist between lower vaccination levels and higher case counts, but the results are not uniform.

The bottom line is that COVID-19 deaths have fallen significantly since the pandemic's peak, but the overall vaccination rate has slowed. According to Bloomberg, herd immunity (75%+ population vaccination) will take an additional nine months in the United States at the current level of daily vaccination. This timeline has been extended and is a bit longer than expected.

The laggards of 2020 are leading in 2021. According to Evercore ISI survey data, both airline and commercial real estate companies continue to report improving sales. In addition, overall retail sales are showing continued strength, with retailers maintaining very strong pricing power.

Survey data also indicate an improving situation for state tax receipts (a tailwind for municipal budgets). A low inventory to sales ratio also means continued tight supply across retailers.

This week, Consumer Price Index (CPI) inflation will be reported. Expectations are for a 5.1% year/year rise in headline CPI, with core CPI expected to rise 4.2% year/year. The CPI is not the Federal Reserve’s favored metric of inflation. Nevertheless, we expect this number will receive significant attention in the press, as we are currently seeing the highest core CPI readings recorded since the turn of the millennium in 2000.

As noted on Friday, China cut interest rates for the first time in many years. China had a small nominal growth recession in 2015. China has been cracking down on large technology companies, so this rate cut could be an attempt to forestall a slowdown in growth by stimulating credit (perhaps to prevent a situation similar to their 2015 slowdown).

Equity Takeaways:

The S&P 500 opened essentially flat in early Monday trading, while small caps fell about 0.7%. The Nasdaq rose about 0.2%.

One of the most important questions for stock prices going forward – will actual earnings continue to beat estimated earnings? Expectations for earnings growth in the remainder of 2021 are very high. 63% year/year earnings growth for Q2 2021 is expected.

Analysts tend to take a "wait and see" approach on earnings revisions, so it is quite possible that their 2Q 2021 estimates are too low, and earnings will come in significantly higher than expected. Based on recent trading, it appears that market participants are expecting such a scenario.

Last week the S&P 500 rose about 0.4%, it's third consecutive all-time weekly high. Despite choppiness, the market remains optimistic heading into earnings season.

Breadth was mixed last week, with about 50% of S&P 500 stocks advancing. Despite this mixed trading, Friday was a strong day which brought the cumulative advance/decline line to an all-time high – confirmation of the bullish trend.

The private equity market has entered "ludicrous" mode, with deal flow continuing to increase. Buyout multiples have remained stable, but debt loads are growing on the average deal. The public markets remain wide open – going public is becoming a more common exit strategy for private equity deals.

Fixed Income Takeaways:

After trading as low at 1.25% last week, the 10-year Treasury yield has drifted back up to 1.35% as/of Monday morning. Rates were essentially flat in early Monday trading.

Another example of the current low-yield environment: the current yield on the investment-grade (IG) corporate bond index is below 2%, below the average 10-year Treasury yield from 2000 to the present.

IG corporate spreads traded in a one basis point range during the entirety of last week, between 82 and 83 basis points (bps). Spreads have remained in the low-80s range since mid-April.

As we proceed through earnings season, we expect continued heavy issuance of corporate debt. Companies generally cannot issue bonds during their earnings blackout periods. Any temporary decline in supply could provide another catalyst to drive spreads even tighter.

Federal Reserve (Fed) Chairman Jerome Powell is set to testify in front of Congress on Wednesday and Thursday. Powell remains one of the Fed’s most dovish members and continues to believe that many aspects of the current inflation spike are transitory.

Friday, 7/9/21

General Takeaways:

Events this week highlighted several points from Tuesday’s Investment Brief:

Much of this week’s market volatility can likely be traced to a “growth scare,” as investors question the strength and duration of the economic recovery. We believe the economy is in transition, likely from early-cycle to mid-cycle dynamics, but no recession is imminent. Transitions in leadership can cause short-term volatility but should not lead to market turmoil in our view.

In addition, headline risk between China and the United States will likely continue indefinitely. This week was no exception, with the Chinese government launching a cybersecurity probe into a large, recently listed Chinese company.

Why are long-term interest rates falling? (point and counterpoint)

  1. Economic momentum is moderating.

    - We believe growth is still positive and could surprise on the upside due to excess savings.

  2. Inflation expectations are moderating (Federal Reserve becoming more hawkish).

    - If the Fed erred by becoming too hawkish too quickly, we anticipate it is a mistake that can be reversed.

  3. Quantitative Easing (QE) / Bond Buying (Federal Reserve suppression of interest rates).

    - We think QE also limits contagion risks.

  4. Fears of a possible “fiscal cliff” in 2022 due to political gridlock leading to recession.

    - We believe this scenario is unlikely.

  5. COVID-19 delta variant concerns.

    - COVID-19 has not been fully eradicated, but we foresee broad shutdowns as unlikely, and fatalities have remained low during the recent uptick in cases.

  6. Crowded trades/sentiment leaning too far in one direction.

    - Sentiment reversals tend to be temporary. We interpret elevated sentiment as usually a good sign, as it means investors want to buy stocks.

Equity Takeaways:

Global stocks rose on Friday after selling off on Thursday. The S&P 500 rose 0.7% in early trading, while small caps rose 2%. International shares also rose.

European shares rose over 1% on Friday in response to a new inflation framework from the European Central Bank (ECB). The ECB will now explicitly target 2% inflation over a full cycle, which essentially means they will allow near-term inflation to drift over 2%. This new framework is designed to support economic growth.

Conversely, Asian shares continue to lag due to COVID-19 concerns, as well as increased regulation on Chinese tech and finance companies. Chinese leaders are willing to sacrifice short-term growth for more sustainable long-term growth.

The Chinese government is seeking to control all large data sets. One repercussion of this policy will be fewer listings of Chinese companies in US markets.

Several emerging market nations, such as Mexico and Brazil, have recently been forced to raise interest rates (to protect their currencies) due to inflation. At this same time, Chinese officials recently cut interest rates to stimulate the economy.

Fixed Income Takeaways:

Despite falling 10-year Treasury rates and corrections in certain commodities such as lumber and copper, investment-grade credit spreads have remained stable over the past few weeks. Stable credit spreads indicate that the recent “growth scare” may be temporary.

Fund flows continue to support spreads, with investment-grade (IG) and high-yield funds showing large inflows over the past week.

IG spreads widened two basis points (bps) yesterday to 85 basis points (bps). This 2 bps of widening was actually the most spread widening we’ve seen since March, highlighting the extremely strong environment for corporate credit.

The slope of the yield curve remains strongly positive, although it has flattened somewhat recently. A positively sloped yield curve is usually a good sign for future economic growth.

We continue to expect that the Federal Reserve (Fed) will provide further guidance on tapering at their Jackson Hole meeting in August. This week, the Fed’s June minutes were released and provided no further hawkish surprises.

The municipal bond market has been very quiet over the past few weeks. Supply is down, and many market participants are on vacation.

Despite quiet trading, money continues to pour into municipal bonds. Positive fund flows have shown in 59 out of the last 60 weeks, with over $2 billion flowing into municipals during the last week alone. For year-to-date (YTD) 2021, fund flows have been the highest on record.

Tuesday, 7/6/21

General Takeaways:

Broad US equities rose over 8% in the second quarter and have risen about 15.1% year-to-date (YTD). Global equities (ex-US) have risen about 7.8% YTD.

During the second quarter, US bonds (municipal and taxable) rose between 1-2%. On a YTD basis, municipal bonds have returned about 1%, while US taxable bonds have dropped about 1.7%.

Large cap growth stocks made a comeback during the second quarter, rising 11.9%, but small value stocks continue to lead YTD. On a YTD basis, small value stocks have risen 26.9%, while large growth stocks have risen 13%.

Are economic indicators peaking while inflation continues to expand? Purchasing Manager Index (PMI) data across the globe seems to be peaking, while inflationary pressures are showing no signs of abating. The Employment Cost Index (ECI), National Federation of Independent Businesses (NFIB) pay increases, and NFIB job openings data will all be important metrics of inflation to watch in July.

Apartment rents and house prices are both “sticky” forms of inflation. House prices are rising at a historically fast year/year pace (perhaps the fastest on record). Apartment rents have also begun to rise quickly after lagging home prices for some time.

The pace of fiscal stimulus has begun to slow. At the same time, consumers have started to draw down their savings. That said, the combined Federal Reserve and European Central Bank balance sheets have expanded by over $8 trillion over the past year, to $17+ trillion – the spigots of monetary stimulus remain wide open.

What could go wrong in the second half of the year?

  1. Delta COVID-19 variant spread and uneven vaccination uptake.
  2. Inflation pressures leading to margin pressures and lower corporate earnings.
  3. Economic growth & fiscal support peaking – transition to more sustainable growth is the likeliest outcome in our view.
  4. Policy error – either monetary, fiscal or regulatory.
  5. China slamming on the brakes on their economy / increased regulation.
  6. Sentiment/valuations and some feelings of complacency (additional details in the equity comments).
  7. Something else we don’t know.

Equity Takeaways:

Stocks were mixed in early trading on Tuesday. The S&P 500 fell about 0.5%, while small caps fell nearly 1%. The tech-heavy Nasdaq rose slightly.

The S&P 500 was up 14.3% (price only) through the end of June. Since 1950, every time the S&P 500 has been up greater than 12.5% in the first six months of the year, the average return going forward (16 times since 1950) has been over 7%, with a 12/16 positive hit rate.

Put another way, based on the first-half performance, history tells us that the market will likely continue rising as we move through 2021, but that gains are likely to be muted relative to the first half of the year. (Always keep in mind that past performance is not necessarily indicative of future results).

The market’s “summer swoon” typically begins in mid-July and runs through Labor Day. We have not seen any material pullbacks in the S&P 500 year-to-date. In 2021, we have only seen four pullbacks of greater than 3%. It would not surprise us to see a pullback during the summer swoon period, but we are not expecting a deep correction.

Equity fund flows remain robust, and valuations look expensive relative to history. Sentiment is stretched (most hedge fund exposure is in the 90th-100th percentile on gross and net long exposure). In short, market participants appear complacent.

Fixed Income Takeaways:

The 10-year Treasury yield hit 1.41% on Monday, its lowest level since early March. Low treasury yields continue to keep corporate funding costs down, leading to continued strong new issuance.

In the second quarter, investment-grade (IG) corporate bond spreads tightened 10 basis points (bps) to approximately 82 bps. Spreads are tight relative to history, and all-in yields corporate bond yields remain extremely low.

The spread between US investment-grade bonds and US high-yield bonds is currently about 182 basis points. This differential is presently at its lowest level since mid-2007.

The amount of cash in the banking system continues to balloon, which has kept a lid on money-market rates. Even out of 1-year, money market instruments are yielding less than 20 basis points.

This week, June Federal Reserve Open Market Committee (FOMC) minutes will be released.

June 2021

Monday, 6/28/21

General Takeaways:

The federal government significantly supplemented household incomes during the recent crisis. Recently, private incomes are being supported more by increasing employment and wages.

Some are concerned that the decline in government stimulus may suppress consumer spending, but currently, household income and spending are above trend.

In addition, the valuation of financial assets as a percentage of total assets in the United States is approaching an all-time high. Historically, these levels of financial asset concentration have preceded corrections in the financial asset markets. However, the timing of such is far from predictable, and today’s low interest rates may justify higher valuations.

Another example of supply issues in the labor market – total job openings are spiking higher across industries, especially within the leisure and hospitality sectors. Extended unemployment benefits will roll off in September, and many states are opting out of these programs early.

The 100th anniversary of the Chinese Communist Party (CCP) is approaching. After outperforming most of the world in 2020, the Chinese economy has pulled back slightly in 2021, but some China watchers are quite bullish on China’s long-term prospects.

Europe’s reopening is behind the US, yet many measures of Europe’s economy are beginning to inflect higher. UK retail orders, German consumer confidence, and Italian economic sentiment are all on the improve.

Due to years of recent fiscal and monetary stimulus, Japanese household credit is expanding for the first time in many years. The deflationary expectations embedded in the mind of Japanese consumers since the 1990s bust seem to be abating.

Equity Takeaways:

Stocks were mixed in early trading on Monday. The Nasdaq rose about 0.6%, with the S&P 500 essentially flat. Small caps fell about 0.6%.

The S&P 500 was up 2.7% last week, the best weekly advance since early February and its second-best weekly performance of 2021. Both the S&P 500 and Nasdaq made all-time highs last week.

Since 2019, the market has been up more than 2% in a week 21 times. In the subsequent week, the market rose 13/21 times, with an average gain of 0.5%.

Breadth was very strong on the week, with over 90% of stocks advancing. Fifteen stocks in the S&P 500 rose 10%+ on the week, with only one S&P 500 stock declining over 10%. This strong breadth indicates a healthy stock market and portends well for future returns.

Small caps once again reasserted leadership, rising 4.4% to log their fourth weekly gain of at least 4% in 2021.

After rising sharply two weeks ago, implied volatility (VIX) declined sharply last week. After trading as high as 21.8 on June 21st, the VIX had retraced to 15.8 in early Monday trading. Typically, the VIX will continue to drift lower in the week after a sharp drop.

Morningstar fund flow data indicates a continued rotation out of growth funds into value funds. Year-to-date (YTD) ending May 31, about $42 billion has moved out of large growth funds into large value funds. $42 billion represents about 2% of the total stock of large growth funds.

Active equity funds continue to experience outflows, with the difference being made up by passive funds. Active equity funds have seen $250 billion in outflows over the last twelve months (TTM) ending May 31, while passive equity funds have seen $350 billion of inflows over the same period.

In total, equities have seen about $100 billion of inflows over the last twelve months. For context, bond funds have seen $900 billion of inflows over the same period.

Key Private Bank continues to underweight fixed income in client portfolios vs. equity due to persistently low bond yields and the threat of rising inflation.

Fixed Income Takeaways:

The 10-year Treasury yield rose 5 basis points (bps) to 1.49% last week. In general, longer-end yields drifted higher last week, while the front-end of the curve remained anchored at low yields.

Due to the Independence Day holiday, we expect a quiet week in the new issue corporate bond markets. Year-to-date (YTD) issuance levels are about 30% behind last year’s record pace but are still about 30% above 2019 issuance levels.

Investment-grade (IG) spreads continue to compress, tightening one basis point to 81 bps over Treasuries last week. High-yield spreads compressed 5 basis points to 275 bps. Any lightening of supply will tend to compress spreads further in the next few holiday-shortened weeks.

Speeches by Federal Reserve (Fed) governors were held on various topics last week. Some governors are more hawkish than others. Fed Chairman Jerome Powell is one of the more dovish members. Thus, we expect the committee to lean dovish at least through the August Jackson Hole meeting.

Friday, 6/25/21

General Takeaways:

Federal Reserve (Fed) Chairman Jerome Powell testified in front of Congress on Tuesday. Powell continued to stress the Fed’s commitment to achieving inclusive full employment for the benefit of the marginalized. He also stated that “inflation is expected to drop back towards our longer-run goal.”

A federal infrastructure bill appears to be taking shape, with approximately $579 billion of new spending and no additional taxes. That said, there are still many details to be worked out, and no final agreement is in place.

Antitrust pressure on large technology companies seems to be gaining some momentum. These companies are set to defend themselves in front of Congress in the coming months. Moreover, according to a recent Gallup poll, sentiment in favor of increased regulation of technology companies has increased since mid-2019.

Consumer balance sheets are in great shape. New home prices are up 18% year-over-year (YOY), and the Wilshire index of broad stock prices is up 43% YOY.

The core Personal Consumption Expenditures (PCE) price index rose 3.4% year/year in May, in line with expectations and reflecting the strong general situation for consumers. The month/month change was +0.5%, below expectations for 0.6% growth.

PCE inflation is the Fed’s preferred inflation metric, and the headline “miss” may at least temporarily calm fears of increasing inflation.

The US is pursuing full diplomatic relations with Taiwan. This move will undoubtedly anger the mainland People’s Republic of China. The goal is to promote free trade in the region and put mainland China on the defensive diplomatically.

Earlier this week, Brazil had its highest number of daily COVID-19 cases since the pandemic began.

Summer reading recommendation: The Psychology of Money, by Morgan Housel.

Equity Takeaways:

Stocks opened slightly higher on Friday. The S&P 500 rose 0.2%, while small caps rose about 0.5%. International stocks rose 0.5% to 1%.

All three major indices (Dow, S&P 500, Nasdaq) have put in strong performances this week, each rallying over 2%.

The banking sector is healthy. Large banks passed their recent round of federal stress tests with flying colors, opening the path to dividend increases and share buybacks. This news lifted financial shares on Friday.

Going back to 1987, there have been seven instances of the Fed hiking rates after a bottoming cycle. Three months after the initial rate hike, the market was generally flat, positive 3/7 times. Looking out over longer timeframes, the market was generally positive six months after the initial hike.

European markets traded sideways this week. That said, throughout the Eurozone, mobility numbers are at their highest levels of the year, and Purchasing Manager Index (PMI) data are at their highest readings in the last 15 years. Europe has reopened slower than the US but is making progress.

Mirroring the US Fed, the European Central Bank (ECB) wants to guard against tightening policy prematurely and is expected to continue accommodative policies for the foreseeable future.

Fixed Income Takeaways:

The bond market’s reaction to Friday morning’s downside surprise in PCE inflation was muted. The 10-year Treasury note traded with a yield of 1.52% Friday morning, up two basis points (bps).

This week, Federal Reserve governors generally tried to talk down the initial hawkish sentiment after last week’s meeting. Most of these governors have been attempting to remind market participants that the Fed is continuing to provide strong support to the financial markets and will continue to do so until the United States reaches maximum employment.

Corporate spreads remain firm, and new issuance remains robust. Investment-grade (IG) corporate bond funds have seen 33 weeks of consecutive inflows. High-yield funds also saw modest inflows.

The story remains similar in the municipal bond market, which has seen positive inflows in 57 out of the past 58 weeks.

Despite volatility in the Treasury market last week, municipal bond activity was muted. Spreads remain firm. New issuance volumes are expected to decline next week before the July 4th holiday.

Monday, 6/21/21

General Takeaways:

The key market moves from last week:

  1. Yield curve flattened sharply, with short-term yields rising as long-term yields fell.

    - 2-year Treasury yields rose 11 basis points (bps), 5-year Treasury yields rose 14 bps, while 30-year Treasury yields fell 12 bps. This type of trading activity is very unusual.

  2. US dollar index jumped about 2% from a 5-year low.

    - This move was the largest weekly gain in the dollar index since the first half of 2018.

  3. Inflation trades reverse: gold down 6%; copper down 8%.

    - Despite these moves in the metals complex, oil prices and credit spreads were generally stable last week, which is a positive signal for the health of the financial markets and global economy.

  4. Value/cyclical sectors declined, while growth stocks were flat to slightly higher.

    - Small cap value stocks declined about 5.3% last week, while large growth stocks rose about 0.5%.

Corporate and consumer survey data remains very strong. Despite some concerns about the new COVID-19 delta variant, mobility trends continue to improve.

Inflation update: some components are likely transitory, but others may be stickier.

- Examples: Used car price inflation (which has accounted for almost half of the recent monthly surges in the Consumer Price Index) is likely transitory. Housing-related data, such as rising rents, may prove to be longer-lasting.

- Overall, inflation expectations have moderated from recent highs, but remain elevated and investors should anticipate continued volatility in the weeks ahead.

Equity Takeaways:

Stocks generally rose in early trading on Monday. The S&P 500 rose about 0.5%, while small caps rose over 1%. The Nasdaq, which significantly outperformed other indices last week, was down slightly.

Last week saw the first 1% daily decline in the S&P 500 since May 18th. Overall, the S&P 500 closed 1.9% lower on the week, its worst weekly showing since February.

The S&P 500 closed below its 50-day moving average on Friday. Recent closes below the 50-day moving average have marked significant interim trading lows.

Despite weakness in the S&P 500, the tech-heavy Nasdaq closed higher on the week, setting a new all-time high in the process. Recent trading feels rotational in nature and does not feel like capitulation.

The market is trying to flush out the nature of the long-term recovery. Last week’s rotation back towards growth stocks and away from cyclical value bears close watching. As we discussed last week, we expect value stocks to reassert leadership as the economy continues to recover.

Some of the strength in growth stocks can likely be explained by the drop in Treasury yields last week. Lower long-term yields provide a tailwind for growth stocks, which generally have long-duration cash flows.

Implied volatility (VIX) rose over 20% last week to close at 20.70. Recent short-term spikes in volatility have generally fizzled out quickly since the March 2020 lows.

The stock market tends to wobble around the start of a Fed rate hiking cycle. Rate hikes are not imminent, but it does seem like the stock market is beginning to price an initial rate hike sometime in 2022.

Fixed Income Takeaways:

After last week’s dramatic flattening, Treasury yields drifted higher in early Monday trading, with the 10-year yield approaching 1.49%, about 5 basis points higher on the session.

The spread between 5-year and 30-year Treasuries narrowed last week to its lowest level since late 2020. One week of trading activity reversed several months of reflationary steepening.

Declining Treasury yields have made the new issue corporate bond market even more attractive for borrowers.

Typically, issuance levels decline over the summer, but with such cheap financing available, we expect new issue volumes to remain robust in both the investment-grade (IG) and high-yield bond markets.

IG spreads are approximately 82 basis points, while high-yield option-adjusted spreads are approximately 286 basis points. Spreads in both markets were stable last week despite volatility in the Treasury markets.

Federal Reserve (Fed) Chairman Jerome Powell will speak in front of Congress tomorrow. In addition, about ten different speeches are expected from Fed governors this week.

Friday, 6/18/21

General Takeaways:

The Federal Reserve Open Market Committee (FOMC) meeting this week was a shocker. The committee took on a more hawkish tone than expected, while Chairman Jerome Powell continues to be one of the more dovish members.

The median expectation on the Federal Reserve (Fed) “dot plot” is now for two rate hikes in 2023, implying faster rate hikes than the market was expecting prior to this week.

Three next steps for the Fed:

  1. The Fed will likely begin explicitly talking about tapering asset purchases in the near future.

    We expect a tapering announcement to occur at the Jackson Hole meeting in late August. There is one additional Fed meeting in July before the Jackson Hole meeting, but we don’t expect a significant announcement during the July meeting.

  2. The Fed may begin to acknowledge the fact that inflation may become more persistent than expected.

  3. The Fed continues to focus on dislocations within the labor market. Certain pockets of the labor market remain distressed, and this situation may persist for longer than expected.

Other important news items from this week:

- Initial unemployment claims came in a bit higher than expected on Thursday, at +412K. That said, the number of ongoing unemployment benefit claims is falling sharply, and the number of workers quitting jobs is on the rise. Both metrics indicate a continually improving labor market despite some noise in the headline numbers.

- The Supreme Court upheld the Affordable Care Act against a technical challenge from certain US states.

- Juneteenth is now a federal holiday (June 19th).

Equity Takeaways:

Stocks opened lower on Friday, with the S&P 500 down about 0.75% in early trading. Small caps fell a similar amount. The S&P 500 recently failed to break out of the top end of its recent trading range, which could set us up for a longer period of sideways trading action.

The rotation into value stocks and away from growth stocks has taken a pause this week, with growth stocks outperforming. Cyclical sectors, such as industrials, materials, financials, and energy, all fell more than 2% in the five trading sessions before Friday. During the same timeframe, technology stocks were up 1.6%.

As the market continues to digest Fed policy changes, we think the equities are approaching a critical juncture that will determine market leadership over the rest of the year. We continue to believe that cyclicals will resume leadership as the economy normalizes, but we will ultimately let the data be our guide.

Friday is a “quadruple witching” day, with single stock futures, stock index futures, stock index options, and single stock options all expiring on the same day. In addition, the Russell indices are being reconstituted on Friday. Both events can cause heightened short-term volatility.

International stocks were also lower on Friday, declining between 1-2%. Emerging market equities continue to lag developed international markets, led by weakness in Chinese and Indian shares.

The European Central Bank (ECB) and Bank of Japan (BOJ) continue to signal very dovish forward policy expectations. Neither bank is expected to remove monetary accommodation for at least the next several years.

Given that the FOMC signaled a more hawkish stance than expected, and international central banks generally remain dovish, the US dollar rose significantly against international currencies this week. US dollar strength has an impact on a wide variety of global markets, including equities and commodities.

Fixed Income Takeaways:

Despite a Fed meeting that contained many new data points and moving parts, Treasury yields were stable this week. The 10-year Treasury yield began the week at 1.50%, temporarily rose to 1.58% after the midweek Fed meeting, and dropped back down to 1.50% in early Friday trading.

During their last meeting, the Fed slightly raised yields on certain types of money-market instruments to a minimum yield of approximately 0.05%.

Money continues to pour into the municipal bond market. Net inflows have been seen 56 out of the prior 57 weeks. Even if the year ended this week, 2021 would be the third-largest year for calendar inflows since the data has been tracked (approximately 30 years).

Even as treasuries rallied yesterday, municipal bond yields rose. Despite this day of unusual price action, municipal bonds remain expensive relative to treasuries.

Support for an infrastructure bill seems to be growing within the Senate, which would be another positive for municipal debt.

Monday, 6/14/21

General Takeaways:

The Federal Reserve Open Market Committee (FOMC) meets this week, with Chairman Jerome Powell’s press conference scheduled for Wednesday. In addition, Treasury Secretary Janet Yellen will testify to Congress on Thursday.

Three Things for Today:

  1. Vaccination Update:

    - At the current rate of about 1.1M vaccination doses per day, 75% of the US population will be vaccinated in another five months. If daily vaccinations stall or decline this summer, the target will be extended beyond previous estimates.

    - Global vaccine distribution has been uneven. With just over 4% of the world’s population, the US has administered over 13% of total global doses.

  2. More Signs of Inflation:

    - Seaborne container shipping rates have soared and are now 547% higher than the 5-year seasonal average. (Drewry Shipping)

    - Despite recent spikes in various inflation metrics, the 2-year-moving-average of US Consumer Price Inflation (CPI) remains muted at approximately 2%.

    - We remain optimistic about our allocation to real assets (infrastructure, etc.) due to under-investment in the sector over the past several decades. Real assets should continue to perform well even if the recent inflation spike proves to be transitory.

  3. FOMC Preview / Yield Snapshot:

    - The Federal Reserve (Fed) is likely to begin preliminary discussions surrounding the tapering of asset purchases sometime in the next few months.

    - Market participants will be closely watching for clues about the Fed’s future intentions during this week’s meeting (future interest rate expectations, etc.). See below for more details.

    - The US 10-year yield finished Friday, June 11, at 1.46%. With inflation running at about 2.35%, the real 10-year yield is negative, at near -0.90%.

Equity Takeaways:

The summer doldrums are here. S&P 500 futures traded in a very tight 5-point range in the overnight futures session.

Equities are essentially flat in early trading on Monday, after most indices drifted slightly higher last week.

Commodities are mixed. Crude oil is trading above $70/barrel, to a 30+ month high. On the other hand, lumber prices have dropped in recent weeks and are about 30% off their recent highs.

The S&P indices will rebalance after Friday’s closing session. These rebalancing trades can occasionally cause volatility. However, this week’s changes should be fairly limited. Later this month, the Russell indices will be rebalanced, with more significant changes expected.

Fixed Income Takeaways:

The yield curve flattened last week, with the 10-year Treasury yield dropping about 20 basis points (bps) to its Monday morning level of 1.47%, its lowest yield in about three months.

As discussed above, market participants will keenly be watching this week’s FOMC meeting. The Fed is expected to continue supporting an accommodative monetary policy stance, focusing on continuous improvement in the labor market.

Since the last Fed meeting, the economic data has been somewhat confusing, with monthly job growth missing expectations. We don’t believe the Fed will make any significant changes to guidance until the late summer Jackson Hole meeting.

The Fed is likely to be very careful with any changes to its messaging regarding asset purchases. The Fed likely learned a lesson from the adverse market reaction to their 2013 tapering announcement.

Investment-grade (IG) credit spreads are currently at 14-year lows, at approximately 84 basis points.

High-yield spreads also remain firm, with the yield-to-worst (YTW) on the high-yield index under 4%, near all-time lows. The credit markets are wide open, and corporate borrowers continue to take advantage.

Year-to-date (YTD), we’ve seen over $750B of new IG corporate bond issuance. For the full year 2021, we’re tracking towards about $1.5T of new IG issuance.

Historically, credit spreads can stay tight for extended periods of time. Within our fixed income allocations, Key Private Bank continues to look for ways to add yield in a prudent manner while maintaining a cautious stance on fixed income in general.

Friday, 6/11/21

General Takeaways:

Four topics of interest today:

  1. Taper tantrum replay?

    The question remains whether the inflationary dynamic that has accelerated in recent months is transitory or sustaining. Headline data released yesterday indicated the overall CPI for May increased 5.0% year-over-year, the largest increase since 2008; CPI excluding food & energy components increased 3.8%, the largest increase since 1992. Both numbers are subject to the base effect to some degree.

    Interestingly, higher prices are beginning to hurt demand. To wit, house sales have recently stalled, despite record-low mortgage rates, because of the surge in prices. The price of lumber has collapsed by approximately 30% recently but is still high relative to year/year comparisons.

    This dynamic is prompting investors to wonder if the Federal Reserve (Fed) may soon begin tapering asset purchases similar to 8 years ago in May 2013. Looking back, the S&P 500 Index, which had already rallied 16% YTD in 2013, stalled out from May 22nd all the way to October 8th before rallying another 12% into the end of the year. The maximum drawdown from “Taper Day” was 5 percent – the low in late June. Bond prices, however, sold off as interest rates jumped roughly 100 basis points (1%).

    So, watch what the Fed does vs. what they say they might do (or think about doing). Returning back to 2021, although the FOMC meets next week, we believe a more tangible decision would occur in August at their meeting in Jackson Hole.

  2. Global reopening + global stimulus = global expansion

    According to ISI, although there has been divergence in the past, there is recent synchronization of stimulus provided by the Fed as well as the European Central Bank (ECB). Together with the Bank of Japan and other central banks around the globe, this should lead to global expansion.

  3. Asset class performance during different inflation regimes

    Real assets can be beneficial during rising inflation, but timing can be tricky. Equities, TIPS and Real Estate are attractive across different environments. Real returns (returns after inflation) during various accelerating inflationary environments from 1973-2019 were positive in asset classes such as TIPS, Natural Resources Equities, REITs, and Commodities and out-paced traditional asset classes such as Bonds, US Equities and International Equities.

  4. Human ingenuity is alive and well

    According to the WSJ, the FDA approved the first Alzheimer’s drug to slow the disease. Biogen’s drug was approved after facing doubts over whether it slows progression of the memory-robbing disease.

Equity Takeaways:

All three major market indices opened essentially flat in early trading.

Growth has out-performed Value for the past week. The S&P 500 is up just over 1%, while the NASDAQ is up close to 3%. Performance has been led by Growth-oriented sectors (Heath Care, REITs, Technology, Communication Services) rather than Value sectors (Energy, Industrials, Financials, Materials), which is not surprising due to the moderation in yields.

The odds may be increasing for additional stimulus related to infrastructure spending based on recent progress towards agreement in Congress.

Our view is that the backdrop for equities continues to be favorable, with the inflation caveat being the biggest risk. We will continue to watch closely.

The majority of S&P 500 stocks remain above their 200-day moving averages and the market has historically done well when there is some slack in the economy but decreasing, which is where we are now.

International markets continued to slightly under-perform US markets this week. Europe has done well while Asia continues to lag due to pandemic issues. Emerging markets have also under-performed versus Developed markets.

This week at the G7 summit, member countries agreed to tax large multi-national companies where the services are sold and agreed to a 15% global minimum tax. This would mostly affect large US Tech and Communication Services companies via digital services taxes. Continued discussion by individual countries would need to occur before legislation is finalized.

Fixed Income Takeaways:

The yield curve continues to experience a bull-flattening, with the movement lower in intermediate- and longer-dated Treasuries. The 10-year yield is at 1.45%, after reaching a low of 1.43% yesterday which was the lowest level seen since March 3rd of this year. The 10-year yield has declined 10 basis points this week, which is significant in the face of rising inflation expectations.

The ECB announced yesterday that they will maintain asset purchases until at least March of 2022, which we anticipate will cause enhanced European demand for US bonds to continue.

Even as the economy re-opens and inflation expectations rise, 10-year Treasury yields continue to remain range bound between 1.45% and 1.70% over the past two months. Treasury auctions this week all performed well and did not cause rates to move higher.

What would we need to see as a catalyst for rates to move higher? We believe a number of events would need to occur, including (1) a slow-down of foreign participation, such as Japanese/European pension funds buying Treasuries as well as (2) global yields would need to rise.

Both investment-grade (IG) and high-yield spreads remain tight. The bond markets remain conducive for new issuance. $36 billion of new debt came to market this week and volume was boosted by bank issuers.

The Municipal Bond market continues to maintain its trend. Absolute yields remain low and ratios to Treasuries remain low at 52%-64%, significantly below historical levels of 75%-80%. Fund flows continue to be positive, this week garnering $2.5 billion in inflows, which is the third highest this year and contributing to 55 of the past 56 weeks of positive fund flows.

We are also seeing a bifurcated market between new issues and secondary trading. Strong activity and deal flow exists in the primary market (volume up 12% year/year), while trading in the secondary market has decreased considerably (down 36% year/year). Contributing factors include last year’s sell-off due to the pandemic and capital gains selling this year due to the strong rally.

Monday, 6/7/21

General Takeaways:

Five things for today:

  1. Vaccinations down

    - Across the country, daily COVID-19 vaccinations in the US are declining, while the pace is accelerating in the EU and China.

  2. Survey optimism higher

    - According to the ISI group, survey respondents now view inflation and higher interest rates as the greatest possible headwind to future stock market performance. Increased taxes and regulation are perceived as the second largest threat.

    - Also according to ISI, about 80% of companies plan to hold in-person meetings by the end of 2021.

    - With respect to commercial real estate, about 75% of companies believe their physical footprint will stay the same (or are undecided). 17% of companies are considering increasing their physical footprint, while only 7% plan on decreasing. (ISI, NY Regional Business Survey)

    - Both Purchasing Manager Index (PMI) and individual company surveys indicate a continued increase in pricing power for corporations.

  3. The Federal Reserve (Fed) may be at a critical juncture

    - According to ISI, the Fed is likely to begin discussions of the tapering of bond purchases in either June or July. These discussions will likely be the first in a series of steps that will result in a reduction of bond purchases sometime around the end of 2021.

  4. Key data point this week

    – CPI on Thursday. The European Central Bank (ECB) also meets on Thursday to discuss their continued stimulus programs.

  5. NY Times Article title: The Best Investment of All: The People You Love the Most

Equity Takeaways:

The S&P 500 opened essentially flat in early Monday trading, while small caps rose about 0.5%. International shares were also flat to slightly higher.

The summer doldrums have arrived. Recent S&P 500 price action has been primarily sideways in limited volume. This type of price action is not necessarily a bad thing, as many times the market needs time to consolidate gains before moving higher.

As corporate earnings have improved while equities have traded sideways, the Price/Earnings multiple on the S&P 500 has fallen over the past few months. If higher prices for goods and services continue to translate into higher corporate revenue and earnings, the stock market will continue to have a strong tailwind.

Another positive sign – cyclicals continue to lead the market. Energy, materials, industrials and banks have been the strongest sectors throughout 2021, and this pattern has continued over the past several weeks. Overall, the stock market is healthy.

Due to strong recent performance, “meme” stocks have begun to account for an increasing percentage of passive small cap indices. As meme stocks become a larger percentage of passive indices, the outlook for active investing in small caps gets brighter (more opportunity to underweight companies with poor fundamentals).

Fixed Income Takeaways:

After a strong session on Friday that saw the 10-year treasury yield drop about 6 basis points (bps), yields are slightly higher this morning, with the benchmark 10-year trading at 1.58%. Several treasury auctions are on tap for this week which will likely influence the near-term direction of bond prices.

If inflation is rising, why aren’t bond yields rising as well? Strong continued flows into bonds are one reason, with foreign buyers as well as pension funds continuing to add to their holdings. Another reason for continued low yields is ongoing support from the Federal Reserve (Fed). KPB does expect yields to drift higher as we progress through 2021.

The Fed is likely focused on the fact that many employment sectors remain depressed relative to their pre-COVID peaks. The labor participation rate has also yet to rebound to pre-COVID levels, suggesting continued pockets of weakness in the labor market. As a result, the Fed remains loath to remove stimulus before the labor market has fully healed.

The Fed announced that they will be liquidating their corporate bond portfolio, which amounts to about $14B of corporate bonds and ETFs that were amassed during the crisis. The program was designed to reduce borrowing costs during the pandemic. The ending of this program is a small incremental reduction in overall monetary stimulus.

Both investment-grade (IG) and high-yield spreads remain stable at near historically low levels. The bond markets remain conducive for new issuance.

Friday, 6/4/21

General Takeaways:

Five things for today:

  1. COVID trends may be changing.

    - Indian case counts have declined significantly after peaking about six weeks ago. Fatalities trail cases by about three weeks and have also inflected lower.

    - In the US, vaccination uptake is skewed by age, with younger people slower to react. Overall, a little over 50% of the US population is fully vaccinated.

  2. Fiscal policy may be changing.

    - On Wednesday, President Biden signaled some flexibility on his infrastructure plan. He put forward a $1T proposal, down from the initial $1.7T. To fund the plan, instead of his initial plan to boost the corporate tax rate from 21% to 28%, Biden floated the idea of a 15% minimum tax for the nation’s largest companies.

    - Republicans remain resistant to the idea of higher taxes, so the path forward for this infrastructure bill remains much in doubt.

  3. Federal Reserve policy may be poised for change.

    - The Federal Reserve (Fed) is effectively unwinding one of its emergency pandemic purchase programs related to corporate bonds.

    - In addition, recent comments from NY Fed President John Williams suggest that the Fed could begin a discussion of quantitative easing tapering as early as June.

  4. Speculative behavior is alive again.

    - Certain entertainment stocks exploded higher this week, with stock prices becoming divorced from fundamentals.

  5. Human ingenuity is alive and well.

    - United Airlines plans to bring back supersonic flights, and recent studies indicate continued progress in the fight against both breast cancer and Alzheimer’s disease.

    More reasons for optimism:

    - In corporate America, bankruptcies are declining, and capital spending is on the rise.

    - In the labor market, non-farm payrolls rose 559K, vs. expectations of 671K, while initial claims fell. Despite a headline “miss” in non-farm payrolls on Friday, average hourly earnings rose, and labor supply constraints are causing significant noise in the monthly numbers. Overall, the labor market continues to improve.

    The “bottom line” on inflation:

    - While no one knows for sure, we expect inflation will continue to increase over the summer, prompting some anxiety. As we enter the later stages of 2021 into 2022, certain inflationary pressures (both on the supply and demand side) should fade as the post-COVID economy normalizes.

Equity Takeaways:

US equity markets have generally traded sideways over the past week. The S&P 500 was essentially flat over the past five sessions prior to Friday. Underlying corporate earnings continue to improve, however, likely setting the stage for an eventual move higher.

The stock market saw through the headline “miss” in Friday’s non-farm payroll employment report, with equities moving slightly higher after the release of the data. The S&P 500 rose about 0.6% in early trading, while the Nasdaq was up over 1%.

Market participants seem to realize that the next few months of data will contain a lot of noise, and slightly weaker-than-expected numbers may allow the Fed to keep its accommodative policies in place for longer than expected.

International markets slightly outperformed US markets this week, with Japan leading the way. Japanese markets have had a tough year overall – even after this week’s bounce, Japanese stocks have significantly trailed other developed international markets on a year-to-date (YTD) basis.

The Japanese Central Bank has limited its purchases of ETFs this year, which could be one reason for the relative underperformance of Japanese equities.

Fixed Income Takeaways:

Despite increasing inflationary pressures in supply chains and portions of the labor market, treasury yields have stabilized. The 10-year treasury yield last traded about 1.57%, about 5 basis points lower on the day after the release of Friday’s non-farm payroll number.

Global bond yields remain very low, which is likely one factor putting downward pressure on treasury yields. It is also possible that bond investors view recent inflationary pressures as temporary, although as noted above, there is a lot of noise in recent data.

Strong inflows into municipal bonds continue, which has been the theme for the past year. At the same time, June is a heavy month for maturities in the municipal bond market, which has left municipal bond investors with extra cash.

Overall, there is currently a shortage of tax-exempt new issuance relative to demand. As a result, municipal bonds are expensive. 5-year AAA municipals yield about 53% compared to treasuries. A normal ratio for 5-year AAA municipals would be 80-90% of comparable maturity treasuries.

BBB-rated municipals have outperformed AAA-rated municipals by over 300 basis points (bps) year-to-date, reflecting yield-seeking behavior as well as an increased appetite for risk.

Tuesday, 6/1/21

General Takeaways:

Four things for today:

1) New COVID cases in the US reached their lowest level since last June, while US mobility data tracked by Apple reached its highest level since the pandemic began. Global cases are down 40% since April. At the same time, vaccinations in the US have declined, extending the timeline for projected herd immunity to approximately 5 months from now to cover 75% of the population. Elsewhere, however, vaccinations are on the rise including parts of Europe, Japan and China.

2) We are almost to the half-way point for the year and equities are still ahead, with both global equities and US equities outpacing bonds by more than 10 percentage points YTD through May. US Small-cap Value stocks are leading the market at a 27.5% return YTD. Within market sectors, Energy and Financials are up almost 40% and 30%, respectively.

3) Bi-partisanship may be over, as President Biden unveils the $6 Trillion Spending Plan, while the margin of majority in US Congress for a 1st Term Democratic President is the narrowest in the past century at 3 seats in the House and 1 seat in the Senate.

4) Strong economic activity continues in many areas and inflation is heading higher in the short-run.

The US Employment Cost Index rose 3.7% (annualized) for the first quarter of 2021 and is anticipated to move higher toward 4.0% for the second quarter.

Last week’s release indicated US initial unemployment claims fell to 406,000 – the fourth consecutive week of declines and reaching a new low since the pandemic began.

Also, last week, US Personal Consumption Expenditures (PCE) Index for April showed a 3.6% year-over-year increase, while Core PCE (excluding food and energy) was up 3.1%.

However, it is worth noting that the 2-year annualized average, that considers both the pandemic-related decline in prices and the subsequent rebound, shows Core PCE at approximately 2.0%, closer to long-term averages.

Recently, rising home prices have been a drag on confidence measures and some housing market data have weakened. Lumber prices have moved significantly lower as a result.

The cure for higher prices might just be higher prices.

Equity Takeaways:

Stocks rose slightly in early trading on Tuesday, with the S&P 500 up about 0.2% and the Dow rising about 0.3%. Technology stocks were flat to mildly down in early trading, with the Nasdaq declining just under 0.2%.

Activity continues to pick up for consumers across the economy as business restrictions due to the pandemic continue to get lifted. PMI data continues to support the recovery and raw materials prices are pushing higher.

Global stocks continue to rise due to ample liquidity, while the market waits for jobs data later in the week.

Following strong monthly gains in March and April, the S&P 500 Index’s 0.55% gain in May was the smallest monthly move since January 2020. Although minimal, it represents the fourth consecutive month of positive returns. As a result, we believe it would not be a surprise to see a pause in the market during the summer prior to seeing an upturn resume in the back half of the year.

Various index reconstitutions typically occur in either May or June and will result in changes to the weightings, factors, and/or sectors within several key market indices. The changes may surprise some investors, but it is fairly normal for swings in weightings to occur and recently reflect shifts in market leadership from Growth to Value.

Fixed Income Takeaways:

Two Fed speakers will opine today and our belief is they will continue to describe inflation as transitory. Some of this messaging over the past week appears to have resonated with investors, as the 10-year yield has stabilized and remained range-bound, currently at approximately 1.62%.

Issuers continue to take advantage of the market environment, with approximately $143 billion in investment-grade (IG) new issuance for the month of May. Borrowers continue to benefit from bringing supply to the market to satisfy some of the investor demand.

Investment-grade (IG) corporate bond issuance continues at a strong pace. YTD total inflows into IG funds is $92 billion, with positive flows over twenty-one consecutive weeks. We have not seen any outflows; however, the amount of inflows last week was the lowest of the past twenty-one weeks, potentially indicating some investor fatigue.

US High-grade credit spreads have an option-adjusted spread (OAS) of 84 basis points over Treasuries, hitting a 14-year low last Friday. Investors are balancing between inflation fears and the positive momentum of the economy re-opening. The last time IG spreads were at this level was in 2007, so it may be something to keep an eye on.

On the short-end of the curve, even though Fed policy is keeping a floor on short-term rates, yields may have room to drop further, possibly near or at 5 basis points. A number of factors are contributing to this, including reserve growth over the next few months, the central bank’s ongoing asset purchase program, the flow of pandemic stimulus payments to taxpayers and federal relief payments to state and local municipalities.

May 2021

Monday, 5/24/21

General Takeaways:

Four things for today:

  1. About half of the US population is now vaccinated, but statistics vary significantly by state/region.

  2. It’s shaping up to be a hot summer, and not just in terms of temperature.

    - OpenTable restaurant data and TSA checkpoint crossings both recently hit post-pandemic highs.

    - Markit Composite Purchasing Manager Index (PMI) data surged to 68.1% in May, a record high.

    Recall that any reading above 50% indicates economic expansion. The Composite PMI combines data on both the services and manufacturing sectors of the US economy.

    - The Federal Reserve’s (Fed) balance sheet continues to expand – it increased $92 billion last week and is set to increase by $120 billion per month through the end of the year, if not longer.

  3. Case for active management has recently improved.

    - Longer-term correlations have fallen back to their long-term median and are below their typical levels since the Great Financial Crisis. This type of environment improves the outlook for active management.

    - In addition, the earnings of value stocks have improved relative to the earnings of growth stocks since mid-2020 (relative earnings trajectory of value stocks has improved relative to growth). Value stocks continue to trade at a very wide discount to growth stocks on a Price/Earnings basis. These dynamics set up some interesting opportunities for active managers.

  4. Asset allocation uncertainty amidst various inflation regimes.

    Inflation remains a significant concern among market participants. While we continue to see rising prices in many commodities, it is important to note that other measures of inflation remain relatively muted.

    Unit labor costs are up about 1.6% year/year, in line with historical averages, while productivity has increased sharply over the past year. Capacity utilization is about 75%, and U6 unemployment is over 10% - both numbers imply slack in the economy.

    In short, it remains to be seen whether the recent spike in inflation will be permanent or transitory.

Key Private Bank continues to favor stocks vs. bonds in the current environment. We also believe diversifying assets, such as gold, real estate, and Treasury Inflation-Protected Securities (TIPS), serve an important role in portfolio construction.

Equity Takeaways:

Stocks rose in early trading on Monday, with the S&P 500 up about 0.7%. Technology stocks led the way in early trading, with the Nasdaq rising about 1%, while small caps rose about 0.5%.

The S&P 500 was essentially unchanged last week despite some intra-week volatility. Trading activity was muted, and the market continues to back and fill. Choppiness will likely prevail until we can break out of the recent trading range.

We are also approaching the summer doldrums, where trading volume will likely decline.

Last week, 62% of stocks declined. In the week before last, 65% of stocks declined. Breadth has been weakening over the past several weeks but has not turned severely negative. This price action is another indication that we will likely see some choppiness as we head into the summer months.

Fixed Income Takeaways:

Three Treasury auctions (Tues, Weds, Thurs) will set the tone of the Treasury market for the week. The 10-year Treasury note has recently traded in a tight range, yielding 1.62% as/of Monday morning.

Market participants continue to focus on speeches from Fed governors. Recently, the Fed has attributed much of the current inflationary pressures in the economy to transitory supply chain issues. Any change in this stance could cause large ripples in the bond market.

Investment-grade (IG) corporate bond issuance continues at a strong pace. In the meantime, spreads continue to tighten. IG spreads were about seven basis points tighter last week.

Over the past few years, high-yield bond issuance has been relatively muted. That dynamic has changed dramatically in 2021. High-yield issuers are taking advantage of wide-open capital markets by issuing new bonds at a furious pace.

Friday, 5/21/21

General Takeaways:

The US Federal Reserve (Fed) provided some mixed messaging this week as they seek to maintain their outcome-based policy stance. The Fed appears to be “thinking about thinking about” changing forward guidance on their pace of bond purchases.

Indeed, this week’s Fed minutes indicated several governors felt that “… it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

Key Private Bank feels that an official tapering announcement will likely not occur until the Federal Reserve’s annual meeting at Jackson Hole in August, with official implementation occurring months after the initial announcement.

Five Things for Today:

  1. White-hot economic data has cooled somewhat but remains hot. Recent measures of employment, retail sales, and housing starts all trailed expectations.

  2. Despite moderating data, US CEO confidence is at an all-time high, which bodes well for CAPEX, M&A, and hiring. Supply chain issues and increasing inflation could put a damper on some of this activity, though.

    • Many states have begun to opt out of the federal unemployment benefits extension program in response to increasing worker shortages. In total, about 1/3 of the US labor force resides in states that have opted out. Expanded federal unemployment benefits expire in September.

  3. Europe’s economy is improving, while Asia remains shaky. Several large Asian economies are experiencing COVID-19 lockdowns as they attempt to prevent larger outbreaks. In addition, Chinese industrial production and retail sales both weakened in April.

  4. Stimulus (both fiscal and monetary) may be on the cusp of fading – see above comments regarding the Fed.

    In addition, the pace of US federal outlays inflected lower in April for the first time since the beginning of the pandemic.

  5. COVID-19 policies in the US are confusing – more clarity is needed as the economy continues to reopen.

Equity Takeaways:

Stocks rose in early trading on Friday. The S&P 500 rose about 0.5%, with small caps up about 1%. International stocks also rose about 0.5%. This morning’s price action builds on a positive Thursday session, which saw the S&P 500 rise over 1%.

Yesterday’s strong price action stopped a 3-day losing streak for the S&P 500. Growth and momentum stocks led the way, with the Nasdaq rising about 2%.

Despite a strong week for technology stocks, value stocks are still outperforming growth stocks year-to-date (YTD). Value stocks are up about 16.4% YTD, while growth stocks are up about 6.9% YTD.

The number of S&P 500 companies above their 50-day moving average is just over 60%. Earlier this year, this number was over 90%. In general, the S&P 500 has a bias towards growth stocks.

Corporate margins have reached all-time highs, and S&P 500 companies beat bottom-line analyst estimates by over 20% on average in the past quarter. Despite these very strong earnings, the market reaction has been somewhat muted, as concerns about future inflation have become a headwind to the markets.

European equities have started to show some signs of life. The Euro Stoxx 50 (an index of the Eurozone’s largest companies) recently hit its highest level since 2008.

In addition, European bank earnings beat (albeit low) expectations by an average of over 20% in the last quarter. Emerging market equities have also had a great week, rising more than 2.5%.

Chinese equities are the exception and continue to lag. As we’ve noted in the past, Chinese economic data was very strong relative to the rest of the world in 2020. As the rest of the world catches up, Chinese data has looked relatively weak over the past several months.

Fixed Income Takeaways:

Increasing near-term inflation will likely result in a further steepening in the yield curve. With the 10-year Treasury yield at 1.63%, the 2-year / 10-year spread is currently 148 basis points, and we expect this differential to widen.

The current situation in the bond market has some similarities to the setup before May 2013’s “taper tantrum.” May 2013 was when Fed Chairman Ben Bernanke first hinted at the tapering of bond purchases after the Great Financial Crisis.

Yields initially spiked higher after Bernanke’s comments but then began to slowly drift lower. Equities also experienced some volatility after his remarks, but stocks still rose significantly in 2013 to put in the strongest calendar year performance of the entire 21st century to date.

The story remains the same in corporate bond land – issuance remains high, and spreads remain tight. Investment-grade (IG) corporate bond funds continue to see strong inflows as investors search for income and safety.

Despite continued strength in IG paper, high-yield bonds have shown mild price weakness over the past several weeks, mainly in response to very heavy new issue supply. High-yield bond funds have seen outflows for the past three weeks.

Municipal bonds have seen positive net flows in 52 of the past 53 weeks. Year-to-date, net flows into municipals have topped $45 billion, which is a huge number relative to history. These flows have continued to drive spreads tighter. Overall, municipals remain expensive relative to Treasuries.

In the quest for yield, municipal bond investors have also begun to pull money out of shorter-dated high-quality securities. These investors are extending out the curve and are also purchasing bonds from lower-quality issuers.

Monday, 5/17/21

General Takeaways:

Equity Takeaways:

Fixed Income Takeaways:

Friday, 5/14/21

General Takeaways:

Employment update

Jobless claims fell to a new cycle low this week (although they are still elevated relative to pre-COVID numbers). Underneath the surface, we see some positive signs for the labor market. Job openings are increasing rapidly, and the quit rate is also moving higher. Layoff announcements are plummeting, and small business optimism is improving rapidly.

These data points all paint a similar picture that the soft May non-farm payroll employment number reported last week was likely a fluke and that the labor market continues to improve steadily.

Inflation: Transitory vs. Permanent?

Earlier this week, we learned that headline Consumer Price Inflation (CPI) rose 0.77% in month/month April, resulting in a 4.2% year/year increase in this metric. The core CPI (which strips out food and energy) surged 0.92%, which translates into a 3.0% year/year gain.

Used vehicle prices rose at an annual rate of 21% in April. Without used car inflation, headline CPI would have been +3.6% year/year, and core CPI would have been +2.3% year/year (instead of +3.0%).

Other examples of price increases reported in the April data (year/year percentage increases):

  • Gasoline: +49.6%
  • Rental Cars: +16.2%
  • Airline Fares: +10.2%
  • Hotels: +7.6%
  • Public Transportation: +5.8%
  • Sporting Events: +3.4%
  • Clothing: +0.3%
  • Owner Equivalent Rent: +0.2%
  • Healthcare Services: Flat

Key Private Bank believes that recent patterns in the economy and stock market suggest that as inflation turns higher, it will likely persist longer than expected. We don’t expect “scary high” inflation, with the caveat that current monetary & fiscal policy is an experiment, and we will continue to monitor the data closely.

Our advice remains focused on patience and long-term wealth creation. We continue to recommend that investors stay diversified while tilting portfolios towards cyclical exposures that should benefit from increasing inflation.

Equity Takeaways:

After a sharp dip on Wednesday, the market found its footing on Thursday and is rising once again in early Friday trading. The S&P rose about 1.1% Friday morning, with small caps up a similar amount. All 11 major S&P sectors rose in early Friday trading.

Key Private Bank has been repositioning portfolios in a more cyclical manner since mid-2020 in anticipation of an economic recovery (and ensuing inflation). Federal Reserve (Fed) policy remains loose, and the Fed will likely let inflation run above the long-term 2% target, which should be a tailwind for equities all else equal.

Inflation has a sizeable behavioral component. If consumers believe prices will continue to rise over the intermediate to long-term, they may modify their purchasing patterns. Such a shift would have significant implications for certain sectors of the market – companies with operating leverage that can pass through price increases will benefit the most.

Earlier this week, the European Central Bank (ECB) mentioned that they are targeting 2% long-term inflation.

Recent readings are well below 2%, so this target is mostly aspirational at this point.

In Japan, there is no measurable inflation. In China, producer prices rose by more than 6%, but consumer prices rose only 0.9%. China is a large exporter and can generally pass much of its producer price inflation to its end customers, including the US.

Fixed Income Takeaways:

The hot CPI print earlier this week caused bond yields to rise immediately. The 2-year – 10-year Treasury spread reached 149 basis points (bps) but is still below its widest level of 162 bps set in late March.

This morning, the 10-year Treasury yield is slightly lower, at 1.64%. The US Treasury conducted a series of successful bond auctions this week, which show continued strong demand for Treasuries.

Despite the higher-than-expected CPI number reported earlier this week, Fed governors have remained consistent in their message. The Fed believes that future inflation expectations remain well-anchored and that there is significant slack in the labor market. The Fed continues to believe that recent increases in inflation are explained primarily by transitory factors.

Market participants do not completely believe the Fed’s message. Market measures of interest rate expectations, such as Fed Funds Futures, predict that the Fed’s initial rate hike will occur in either late 2022 or 2023. Most Fed governors are projecting very limited rate increases until 2023 at the earliest.

Corporate bond spreads remain tight relative to historic levels, and the amount of leverage in the system is high. Should credit trends weaken, there is a chance that ratings agencies could be quick to downgrade.

The municipal bond market had another quiet week. We continue to see historically low ratios of municipal bond yields to Treasuries. Municipals are expensive no matter what your tax bracket is.

Inflows continue into municipal bond funds despite low absolute and relative yields. Municipals offer safety and tax avoidance, which both remain in high demand by individual investors.

Similar to the corporate bond market spreads on municipals remain tight. June, July & August tend to be strong technically due to low overall new issuance and a high amount of overall maturities, so we could see continued strength into the summer.

Monday, 5/10/21

General Takeaways:

Friday’s disappointing employment report was probably a fluke, as there was a sizeable seasonal revision component that may have created some significant noise in the data. On a non-seasonally adjusted basis, more than 1 million jobs were created in April. Seasonal adjustments were then applied – these adjustments included data from April 2020, where a significant number of jobs were lost and may have skewed the April 2021 adjusted data lower.

Other recent employment data has been strong and does not corroborate Friday’s weak number. Layoff announcements have significantly dropped. According to the National Federation of Independent Businesses (NFIB) April report, about 44% of all small businesses are having trouble filling open jobs, a record level for this survey indicator.

In addition, the US Employment Cost Index (ECI) showed the first quarter of 2021 total compensation growth at a 3.7% q/q annualized rate. This ECI reading is the highest since before the Great Financial Crisis of 2008.

Inflation update: The price of various raw materials, such as lumber and copper, continues to spike. Rents have also inflected higher since the beginning of 2021. Gains in productivity will be one key towards managing future inflation. Indeed, productivity growth was 4.1% in the 2021 first quarter, its highest level of quarterly growth in about a decade.

Progress against COVID-19 continues unevenly. Globally, over 20 million vaccine doses are being administered daily. According to Bloomberg, it will take another 16 months to cover 75% of the population at this pace. India is administering almost 2 million cases daily. However, due to the country's large size, it will still take about 2.7 years to inoculate 75% of the Indian population.

Signs of froth: according to the Wall Street Journal, the combined market value of all cryptocurrency has eclipsed total US currency in circulation (more than $2 trillion). In addition, Tesla’s market capitalization is larger than the next five largest automakers combined.

Bitcoin has likely taken some market share from gold recently, while tokens such as Ethereum have applications in Decentralized Finance (DeFi). Ethereum can also help facilitate non-fungible tokens (NFT) trading, which are becoming increasingly popular.

Equity Takeaways:

Stocks opened mixed in early trading on Monday. The S&P 500 dropped about 0.10%, with small caps dipping a similar amount.

Technology shares fell about 1%.

Equity market investors seemed to shrug off last week’s disappointing non-farm payroll data, as the S&P 500 rose about 0.75% on Friday, and rotation continued towards cyclical sectors of the market even after the release of the data. As noted below, the bond market sent a similar signal on Friday, with rates initially spiking lower before drifting higher in the afternoon to close unchanged.

A weekend cyberattack on the main pipeline carrying gasoline and diesel fuel to the US East Coast is also impacting the markets on Monday, with shares in the energy sector rising over 1.5% in early trading.

The first-quarter earnings season is winding down. As of Friday, 88% of S&P companies have reported. Of these, 86% have beaten analysts’ expectations, the highest beat rate on record back to 2008. 76% of reporting companies have beaten revenue estimates for the quarter.

Fixed Income Takeaways:

The 10-year Treasury yield settled in at 1.58% last week after trading as low as 1.47% immediately after the release of Friday’s non-farm payroll number. Bond prices are essentially unchanged in early trading on Monday.

The US will be auctioning several different tenors of Treasuries this week. The reception of these deals often has a significant impact on short-term moves in the Treasury markets. We expect a busy week of corporate bond issuance, with several large companies set to price deals.

Investment-grade (IG) corporate bond spreads have tightened to a 3-year low, with the broad index trading at 87 basis points (bps). Foreign investors remain a significant source of demand due to low overseas yields.

High-yield bond spreads also contracted again last week. Supply is rising to meet this demand, with the pace of high-yield issuance during the first half of 2021 approaching record levels.

During speeches last week, several different Federal Reserve governors continued to downplay inflation fears, noting that the Fed does not have any near-term plans to slow their current pace of stimulus.

Friday, 5/7/21

General Takeaways:

This week, investors received several major economic data points. ISM Manufacturing PMI data for April was reported at 60.7, vs. March’s reading of 64.7. Recall that any number above 50.0 indicates expansion.

A few days later, ISM Services activity was reported at 62.7, vs. March’s reading of 63.7. These reports indicate continued strong growth in the economy's manufacturing and services sectors (although both reports were slightly below expectations).

On Thursday, weekly US jobless claims were reported at 498,000 (vs. expectations of 527,000), the lowest since March 2020.

On Friday, US non-farm payrolls were reported. Total non-farm payroll employment rose by 266,000 in April, a major miss relative to expectations of a rise of 1 million jobs. We will be digging into the underlying numbers over the next few days, but at first glance, this miss appears to be driven by a worker supply issue.

Despite Friday’s non-farm payroll miss, two major themes have been dominating recent market activity:

  1. Economic activity is booming (but the Fed is standing pat for now). According to ISI:
    - GDPNow (a measure for estimating economic growth) for the second quarter is +13.6%.
    - Vehicle sales surged to 18.5 million in April.
    - Nominal consumer spending surged +14.6% q/q annual rate in the first quarter.
    - WTI crude oil is at about $65 today vs. $24 one year ago.
    - Lumber prices are up to $1,635 vs. $300 one year ago.
    - ISI’s proprietary company surveys have been surging.

  2. Equity markets are rotating (and perhaps becoming more volatile):
    - Growth stocks with little or no current profits have suffered significant headwinds over the past several months, while cyclical stocks, such as energy, materials, industrials, and financials, continue to outperform on a relative basis. More on this theme below, which continues to inform Key Private Bank’s recommended portfolio positioning.

Equity Takeaways:

Friday’s trading will revolve around this morning’s shocking non-farm payroll miss. In early trading, the S&P 500 rose about 0.5%, with small caps essentially flat. The tech-heavy Nasdaq, which tends to be sensitive to interest rates, rose 0.8% as the 10-year Treasury yield fell in early trading.

This morning’s trading notwithstanding, growth stocks (especially non-profitable growth companies) have significantly underperformed their cyclical counterparts over the past 3-6 months. This is a trend that we expect to persist over the short to intermediate-term as the economy recovers.

The level of margin debt held by investors hit an all-time high in March 2021. That said, the overall level of margin debt tends to be closely linked to the size of the overall stock market. While the recent rise in margin debt is the largest in absolute terms, it is not as large on a relative basis as the moves we saw in 2000 and 2007. In both of those years, the rise in margin debt outpaced the total gain in market cap.

Earnings season update: Over 70% of reporting companies have beaten analysts’ 1Q:2021 revenue estimates, with only 19% missing on revenue. More than 80% of companies have beaten estimates on the earnings front, with only 11% missing.

Companies (especially growth stocks) guiding towards any type of earnings deceleration are seeing their stocks sell off sharply. Investors appear to be somewhat discounting this quarter’s strong earnings, becoming more focused on the future.

Emerging market equities are facing two major headwinds. India continues to experience a major COVID-19 outbreak. In addition, Chinese stocks, which were significant outperformers in 2020, continue to struggle on a relative basis in 2021.

While China is a major consumer of raw materials, China is also a notable exporter and has been able to pass price increases through to their end customers. China’s GDP growth is expected to top 8% this year after 2%+ growth in 2020 (a year where most world economies contracted). This growth should bode well for the future performance of China’s stock market.

Fixed Income Takeaways:

Before the non-farm payroll number was released on Friday morning, the 10-year Treasury yield was 1.57%. Immediately after the number was reported at 8:30 am ET, the 10-year yield dropped to 1.47%, but rates settled down quickly and, at the time of this writing, were trading at 1.54%.

On Tuesday morning, US Treasury Secretary Janet Yellen said: “… it may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat ….”

Later in the day, Yellen walked back those comments, remarking: “… I don’t think there’s going to be an inflationary problem. But if there is, the Fed [US Federal Reserve] will be counted on to address them….”

Federal Reserve officials quickly rebutted those comments, with Vice Chair Richard Clarida stating that the Fed is not ready to begin removing stimulus. The next Federal Reserve meeting is on June 16th.

Between now and the next Fed meeting, we will receive one more monthly non-farm payroll employment reading.

This morning, spreads are opening slightly tighter once again, continuing a recent pattern of slowly grinding lower. This type of environment is conducive to new issuance, which remains robust in both the investment-grade (IG) and high-yield markets.

High-yield bond funds experienced outflows of $1.4 billion last month. Despite these negative flows, high-yield spreads remain at very tight levels relative to history.

Another $2 billion flowed into municipals last month, bringing cumulative year-to-date net flows to $44 billion. Investors continue to seek tax-free income, despite very low municipal yield ratios relative to Treasuries.

The municipal new yield calendar remains robust and contains a significant number of taxable deals. This week’s Key Questions discusses a growing and misunderstood area of bond land: taxable municipal bond debt.

Monday, 5/3/21

General Takeaways:

The book is closed on April 2021, and global equities enjoyed a strong month, rising 4.2%. US stocks rose 5.3% on the month, with global ex-US equities rising 2.7%. Global bonds rose about 0.8% during the month.

On a year-to-date (YTD) basis, US equities have risen 11.8%, global ex-US equities have risen 5.7%, US taxable bonds have dropped 2.6%, and US municipal bonds have risen 0.5%.

April was also a month of reversals. US large caps rose 5.4% during the month, outpacing small caps, which rose 2.1%. YTD, small caps have still outperformed large caps, rising 15.1% vs. 11.6% for large caps.

Growth stocks, which have lagged recently, put in a strong month in April, up 6.8%. Despite a strong April for technology shares, cyclical sectors of the market, such as energy and financials, have significantly outperformed technology shares YTD.

Equity sentiment indicators remain stretched. For example, stock allocations among US households have reached an all-time high at 41%. Margin debt balances have also reached an all-time high, at $823B.

After such a strong start to the year, investors may ask if they should sell in May and go away? We don’t think they should. Stock market volatility is the norm, but it pays not to overreact. Key Private Bank generally advocates periodic rebalancing but not full-blown market timing.

Economic momentum remains strong and is supporting equities. Real GDP rose 6.7% in the first quarter, while nominal GDP (adjusted by a price deflator) rose 10.7%. Furthermore, many economists expected even more substantial growth in the second.

Stimulus payments have caused a sharp rise in disposable personal income (DPI), translating to higher consumer spending. The US personal saving rate was 18.8% in March, likely an all-time high in this metric, which bodes well for continued future strength by the US consumer.

According to ISI, spending preferences are shifting over the past few months, with activity in COVID-sensitive sectors (leisure, hospitality, etc.) beginning to improve. There is room to run for COVID-sensitive sectors, as spending in these areas remains depressed relative to long-term averages.

Equity Takeaways:

Stocks rose in early trading on Monday. The S&P 500 rose about 0.6%, with small caps up 1%. International shares also rose slightly as the European Union discussed the relaxation of certain COVID-19 restrictions.

Earnings momentum remains very strong, with 86% of reporting S&P 500 companies having beaten analysts’ estimates, the highest beat rate since FactSet began tracking the data in 2008. 78% of these companies have also reported better revenue growth than expected.

Overall, the index is on track to show over 45% earnings growth for Q1:2021 versus the same quarter last year. This number is the highest quarterly comparable since the first quarter of 2010.

Market participants are eagerly anticipating this Friday’s update on US non-farm payroll employment. As we discussed last Friday, it appears that this Friday’s report could come in significantly higher than expectations.

Over the last 20 years, profit margins have remained elevated at the expense of stagnant wages. In the past year, increased fiscal spending has supported profit margins and disposable personal income, leading to an explosion in corporate profits.

Fixed Income Takeaways:

Corporate credit spreads continued to grind tighter in April in both investment-grade and high-yield bonds.

That said, high-yield spreads are not yet to the all-time lows seen in May 2007.

US Treasury prices also rallied in April. The yield on the 10-year Treasury note dropped slightly over 10 basis points (bps) on the month, to early Monday trading level of approximately 1.63%. Overall, bond returns were generally slightly positive in April.

April was also a “stay the course” month for the US Federal Reserve (Fed), which left rates unchanged at very low levels and did not modify their accommodative forward guidance. This week, a series of Fed governors are set to speak, but we are not expecting any changes to the long-term outlook.

April 2021

Friday, 4/30/21

General Takeaways:

43% of the US population has received at least one dose of a COVID-19 vaccine, and reopening is progressing throughout the country. 30% of the US is now fully vaccinated. It will take another three months to cover 75% of the US population at the current pace.

That said, while COVID-19 case growth is moderating across North America, case growth in Asia continues to expand. India continues to deal with a dire situation, while areas such as Turkey are also seeing worsening outbreaks. This situation is likely to hamper emerging market economic growth over the near term.

President Biden released the next phase of his economic stimulus plan, with over $5T of new spending planned for the next decade. Some are comparing the current environment to the “New Deal” era of the 1930s.

One significant difference between the eras is that President Franklin Roosevelt enjoyed a large majority in Congress, while Biden’s margin is razor-thin. Thus, much of Biden’s announced plan is likely aspirational and is unlikely to pass in its current form without significant compromise.

The Federal Reserve (Fed) released an updated policy statement this week. During Chairman Jerome Powell’s press conference, no significant policy changes were announced. The Fed continues to be laser-focused on the progress of the employment market.

Recent economic data leads us to expect a very strong non-farm payroll report next week. Annualized real GDP rose 6.4% quarter/quarter annualized rate, while both weekly claims and unemployment insurance disbursements continue to drop.

The M2 money supply is rising at an unprecedented rate. Since early 2020, the sum of the Fed and European Central Bank balance sheets has increased almost $8 trillion. In the same timeframe, Consumer Net Worth has increased a staggering $27T.

It is not surprising that such money supply growth would lead to asset price inflation. The Fed’s preferred definition of inflation, CPI, has risen a modest 2.6% in the past year. During the same timeframe, the median US home price has risen 17%, the S&P 500 has risen 48%, copper has risen 85%, oil has risen 272%, and lumber has risen 286%. Asset price inflation indeed!

Equity Takeaways:

Stocks dipped slightly in early trading on the last day of April. The S&P 500 dropped 0.4%, with small caps down a similar amount.

International shares fell about 0.5%.

The S&P finished at another all-time high yesterday, also closing above 4200 for the first time. The cumulative advance/decline line also hit another all-time high (strong breadth continues).

In general, companies have been reporting very positive earnings growth during the quarter. With 71% of companies reporting, earnings growth for the S&P 500 has been 44%. This is stellar growth - well above expectations.

The strong GDP growth we see in the overall economy is flowing directly through to the corporate bottom line. As positive data continues to flow, analysts are now beginning to increase earnings estimates for 2022. Analysts are also starting to factor higher taxes into their 2022 estimates, a topic we discussed in this week’s Key Questions.

Key Private Bank continues to believe that the strong economic environment favors cyclical stocks (industrials, financials, basic materials) vs. defensive sectors of the market (consumer staples, utilities). This view continues to inform our portfolio construction process.

Implied volatility (VIX) has declined below the critical 20.0 level to its current level of 18.0. The stock market seems to be reentering a lower volatility, “grind higher” environment.

Fixed Income Takeaways:

Treasury yields have risen this week in sympathy with rising inflation expectations. That said, during April, Treasury prices are generally slightly higher – yields have stabilized, with the 10-year note trading at 1.65% early on Friday.

During this week’s meeting, the Fed kept policy unchanged. They continue to describe increasing near-term inflation as a transitory phenomenon. The Fed continues to look for “substantial further progress” in the labor market before they will contemplate a change in rate policy and/or tapering of bond purchases.

Corporate bond spreads remain tight, and credit volatility is low, a perfect environment for new issuance. April is set to be the fifth busiest month on record for high-yield bond issuance.

The riskiest portion of the high-yield market, CCC-rated credit, has gained for 13 straight months. That is the longest streak of positive monthly returns in CCC-rated credit since 1992. The yield on the CCC-rated index is approximately 6.1%, approaching historic lows.

The municipal bond market was quiet this week, with yields trending slightly higher in sympathy with rising Treasury yields. Municipal bonds remain very expensive. 5-7 year municipal bonds yield only 50% of comparable maturity Treasuries. Despite this fact, municipal bond fund inflows continue as investors seek tax-free income.

Monday, 4/26/21

General Takeaways:

India remains far and away the largest contributor to COVID-19 case growth. Over the past week, India has accounted for about 34% of global cases, with more than 1 million people having contracted the virus in the last three days alone.

Conversely, there are some signs of hope out of the UK / EU. Collectively, these two areas account for about 19% of global case growth, and new cases are generally on the decline in this region.

The US is the 3rd largest contributor to global cases, but as in Europe, daily new cases appear to be inflecting lower. Overall, more than 80% of the US population aged 65+ has been vaccinated, which is helping to keep the fatality count down. Indeed, state health officials throughout the US are now shifting their attention to vaccine promotion to ensure that the US reaches herd immunity.

Between $5 trillion of fiscal stimulus, over $3 trillion of Federal Reserve (Fed) balance sheet expansion, and over $3 trillion of above-trend money supply expansion, the US has seen over $11 trillion of stimulus added to the economy over the past 12-15 months. This amount is over 50% of GDP. In contrast, FDR’s New Deal spending accounted for about 40% of GDP.

This stimulus appears to be supporting corporate earnings. The COVID-19 profit recession was the shallowest in 30 years. Earnings-per-share dropped about 15% peak-to-trough in 2020. In the 2007-08 financial crisis, earnings dropped 45% peak-to-trough.

Inflation update: market participants continue to debate whether increasing inflation is transitory or structural. Wage growth remains the central focus of this debate.

The National Federation of Independent businesses recently surveyed 500 small businesses and reported that 42% of them had job openings that they couldn’t fill – a record high. Also, many restaurants are offering signing bonuses/perks, and several large companies are beginning to pass through raw material price increases to their customers.

On the other hand, the US Council of Economic Advisors cautions that real average wages could fall over the near term as more low-wage workers re-enter the labor force. Put another way – more low-paying jobs were lost during the crisis, and as the economy continues to reopen, those jobs will need to be filled.

Equity Takeaways:

US equities opened slightly higher on Monday. The S&P 500 rose about 0.25%, with small caps up about 1%. International shares also rose slightly.

Last week saw a slight decline in US equities, although Friday marked the closing high for the week. Small caps outperformed large caps, while large cap technology shares lagged the market. Despite the slight price decline, 76% of S&P 500 stocks finished higher last week. Breadth remains strong.

Earnings season continues. This week features a packed calendar, highlighted by the reporting of many mega-cap tech giants.

As of Monday, 25% of the S&P 500 has reported Q1:2021 earnings. 84% of companies have beaten earnings expectations, with 77% beating revenue expectations. The average earnings beat has been 23.6% above expectations – FactSet notes that this level of average beat would be a record going back to 2008 if maintained.

At the start of the year, the street analyst consensus expected $168 / share in 2021 S&P 500 aggregate earnings. The consensus estimate has risen to $180 / share now, or 7% higher. These revisions account for just over half of the S&P 500’s 11% year-to-date (YTD) gain.

This quarter has marked a return to normalcy in terms of the market’s reaction to earnings. Companies that beat estimates on both revenues and earnings are up an average of about 1.5%, in line with historical averages. Companies that miss on both revenues and earnings are down over 2%, also in line with historical averages. This type of behavior contrasts with the fourth quarter of 2020 when all equities seemed to rise regardless of earnings.

Factor valuation update: value/dividend paying stocks remain cheap relative to their historical averages. Growth/momentum stocks have both cheapened somewhat relative to their historical averages. However, growth stocks remain expensive. In general, valuation is not a useful short-term market timing tool.

Fixed Income Takeaways:

Treasuries opened slightly lower on Monday, leading to a slightly steeper curve. Several tenors of Treasuries will be auctioned this week.

In major rating agency action, there have been over 600 corporate credit upgrades in 2021 YTD. Upgrades are outpacing downgrades by a factor of about 3:2.

Spreads were slightly tighter last week, reflecting continued mutual fund inflows into both investment-grade (IG) and high-yield corporate debt, as well as improving fundamentals for corporations.

The Federal Reserve (Fed) will meet this Tuesday and Wednesday, with the statement release and ensuing press conference on Wednesday. Market participants will likely be focused on the specific language used in the Fed’s press release, as well as comments from Fed Chairman Powell during Wednesday’s press conference.

The Fed remains committed to outcome-based guidance (maximum employment). Key Private Bank thinks it is unlikely that there will be any tapering of bond purchases (or any other significant Fed policy changes) announced this week.

Friday, 4/23/21

General Takeaways:

The Federal Reserve (Fed) continues to project a near-zero fed funds rate until 2024. An increasing number of market participants are beginning to doubt this forecast. One prominent bank CEO recently noted that if the recent increase in inflation proves to be long-lasting, it may force the Fed’s hand into raising rates earlier than expected.

Indeed, the Bank of Canada recently announced that they would begin tapering their current quantitative easing program due to strength in the Canadian economy. These moves pushed Canadian yields higher and strengthened the Canadian dollar.

COVID-19 update: many emerging markets, such as India, continue to experience a worsening outbreak of the disease. The suspension of certain vaccines is only exacerbating these public health concerns.

Initial unemployment claims for the week ending 4/17/21 came in at 547,000, a bit lower than expected—this number crested above 6 million last year. The recovery in the job market remains uneven, but steady progress continues to be made.

Could the recent economic data be the best we will see during this cycle? The Conference Board’s Leading Economic Index (LEI) rose a strong 1.3% in March. Goldman Sachs predicts that the peak in US GDP growth for this cycle will occur in the second quarter of 2021.

Due to strong recent stock market performance, future returns will likely be more muted and more volatile. Since 1980, the average intra-year calendar drawdown has been about 14%. In other words, drawdowns of more than 10% are not unusual during most calendar years.

Equity Takeaways:

After stumbling about 1% on Thursday, stocks rose in early trading on Friday. The S&P rose 0.50%, with small caps up about 1%.

On Thursday, stocks fell due to the specter of higher capital gains taxes. The Biden Administration plans on increasing long-term capital gains taxes to over 40% (including the 3.8% Medicare surcharge) for a select group of the highest-earning taxpayers.

Going back to 1968, there has been essentially zero correlation between changes in the capital gains rate and market returns during that same calendar year. In the very short term, the stock market is a bit extended due to its strong recent performance. The capital gains tax news could be the catalyst that touches off a bit of profit-taking.

In addition to the tax reform news referenced above, the Biden administration is also modifying its plan to control drug prices. This news is positive for the health care sector, especially the biotech sector, which showed strong relative performance yesterday.

About 75% of reporting companies have beaten earnings estimates, with a similar number beating estimates on revenue. The sectors with the strongest earnings (energy, materials, and financials) are showing poor relative performance after reporting. The implication is that much of the good news in these cyclical sectors has already been priced in.

Environmentally and socially conscious (ESG) investing continues to gain steam. 2020 was a record year for ESG fund flows, and over 90% of CEOs say that they will be shifting more resources into this space.

Also, the strong recent performance of many ESG funds has debunked many previous concerns about lagging returns. Strong due diligence is required in this space to avoid “greenwashing,” but we think ESG investing will continue to grow further.

Fixed Income Takeaways:

Emerging market spreads vs. Treasuries have dropped significantly since the 2020 trough, indicating increased risk appetite in the credit markets. In addition, BB-rated securities now comprise a larger portion of credit indices when compared to historical averages, indicating that the credit quality of major bond indexes is likely a bit lower than average.

After a sharp move higher in Treasury rates in the first quarter, the 10-yr note yield has settled into a range over the past few weeks. The 10-year note currently yields approximately 1.53%.

Overseas yield comparisons: German 10-year note: -0.28%, Japanese 10-year note: 0.07%; UK 10-year note: 0.72%. Many foreign investors continue to look towards the US market for better relative value compared to their home markets. This dynamic remains a tailwind for US Treasuries.

As more companies emerge from earnings season, we expect new issuance in the investment-grade (IG) corporate bond market to pick up in the coming weeks. Generally, companies cannot issue new debt in their earnings blackout periods.

The high-yield bond market also continues to see robust new issuance, with some new borrowers tapping the current easy credit conditions. A strong economic and demand backdrop continues to support spreads.

In the 1-5yr municipal bond space, yield ratios to Treasuries are about 45%. Typically, ratios in this area of the curve are about 75%.

Low yield ratios continue to indicate that municipal bonds are very expensive relative to Treasuries.

Any change in fund flows or more clarity around potential tax law changes could trigger a selloff in municipals. We saw a similar dynamic in late February.

Monday, 4/19/21

General Takeaways:

Despite record highs in the stock market, there are some causes for concern:

  • - COVID – still lots of unknowns and lots of risks.
  • - Rising taxes and regulation.
  • - Domestic social unrest and inequality.
  • - Geopolitical tensions in many places.
  • - Budget deficits expanding.
  • - Inflation acceleration – transitory or long-term?
  • - Bubbles are inflating.

On the other side of the coin, it appears that in the current environment, the positives likely outweigh the negatives:

  • + COVID – vaccinations are happening (although unevenly).
  • + COVID – hospitals not stressed and are far better prepared.
  • + Economies are reopening.
  • + Monetary stimulus – massive.
  • + Fiscal stimulus – massive.
  • + Inventories being rebuilt; capital spending and hiring both picking up.
  • + Consumers’ balance sheets fortified (positively impacting both stock prices and home prices).
  • + Banks’ balance sheets also fortified (deposit growth and benign credit).

On the COVID-19 front, this week could see total global vaccine doses administered reach one billion, an amazing feat for global ingenuity. As we noted last week, in the US, the supply of vaccines is no longer an issue. In the US, demand is now the limiting factor for vaccine uptake, especially in the South and Midwest.

That said, according to a recent survey from the Kaiser Family Foundation, sentiment towards vaccines is slowly improving, especially among respondents in the “wait and see” camp. As more data is released, the general comfort level around COVID-19 vaccinations seems to be increasing. However, the percentage of respondents who say they will not take the vaccine has remained relatively constant.

As the economy reopens, we may see a reversal of fortune among certain sectors. Sectors that benefited from the pandemic, such as health care, technology, grocery stores, autos, and furniture, could now face headwinds due to tough comparisons and slowing demand. On the other side of the coin, sectors such as restaurants, recreation services, and air travel are due for a rebound.

Consensus GDP estimates for the second quarter are now up to 10.2% year-over-year growth. It remains to be seen whether this strong GDP growth will translate into wage growth. Sustained wage growth could have a significant impact on long-term inflation.

Equity Takeaways:

Stocks opened slightly lower in early trading on Monday. The S&P 500 dropped about 0.15%. Small caps dipped about 0.50%.

About 9% of the S&P 500 has already reported first-quarter 2021 earnings, with the pace set to rise significantly over the next two weeks. To this point, 81% of S&P 500 companies have beaten earnings expectations, which is a substantially higher percentage than the long-term average. Financials look especially strong, with the average stock in this group topping earnings by over 38%.

Thus far, the companies that have reported have beaten bottom-line expectations by 30.3%, which would be a post-2008 record. Revenue surprises are also at record levels, with 84% of reporting companies exceeding revenue expectations. Strong revenue numbers indicate that it’s not just cost-cutting allowing companies to deliver these strong results.

If corporate earnings continue to surprise to the upside, the stock market will have a significant tailwind. We remain constructive on equities in this strong earnings environment.

Hedge fund net exposure (longs minus shorts) is at about 66%, which is in the 100th percentile over the last ten years. In other words, on aggregate, hedge funds are currently more bullish on stocks than they have been over the previous ten years.

Fixed Income Takeaways:

Since the beginning of April, the 10-year Treasury yield has dropped about 15 basis points (bps). Strong recent Treasury auctions and renewed demand from overseas buyers and pension funds have contributed to the recent strength in bonds.

Most bond market participants still believe that longer-term Treasury yields will likely move higher as we go through the year. As long as the move higher in yields is orderly and does not happen too quickly, we don’t believe higher yields will destabilize the markets.

New investment-grade (IG) corporate bond issuance tends to slow down during earnings season. This year, substantial recent issuance out of financial companies for regulatory reasons has bolstered overall activity.

High-yield debt new issuance is on pace for its busiest month ever. Another $15 billion of high-yield debt priced last week as investors search for yield.

Friday, 4/16/21

General Takeaways:

Despite recent concerns around COVID-19 vaccines from AstraZeneca and J&J, vaccine supply in the US is no longer the limiting factor in the expanding rollout. According to Axios, demand for vaccines is now the primary concern, especially in the South and Midwest, and possibly a reflection of some people’s hesitancy over vaccines in general.

The geopolitical concerns of the day include new US sanctions on Russia over cyberattacks/election meddling and continued rising tensions between China and the US.

Iran and Israel also continue to spar over the former’s nuclear program. Such tensions have yet to rattle markets but should be monitored nonetheless.

Headline initial unemployment claims fell more than expected this week, dropping 193,000 to 576,000. Continuing claims also continue to grind lower. Claims remain elevated relative to pre-pandemic levels, but the labor market is showing good progress.

As unemployment claims have begun to moderate, retail sales have exploded. Retail sales jumped 9.8% in March (vs. consensus of 5.8%). Strength was broad-based, with sporting goods, apparel, motor vehicles & parts, and restaurants all showing double-digit gains in sales.

The strengthening economy is also resulting in higher inflation, but the numbers over the short term must be examined in the context of a significant base effect. Inflation fell significantly during the spring 2020 shutdowns. Thus, year-over-year inflation comparisons may be a bit misleading for the next few months.

A key for future inflation will be wage growth. Many small businesses now report that certain jobs are hard to fill, and NFIB US Small Business survey data indicates a tightening labor market.

Evercore ISI survey data corroborates the NFIB data – companies generally expect wage inflation over the next 12 months. Also, Evercore ISI data indicates that most companies think inventory levels are too low, which could further trigger inflationary pressures. We will continue to watch the data for clues on inflation as we move into the summer months.

Equity Takeaways:

Stocks were flat to slightly higher in early Friday trading. The S&P 500 rose about 0.2%, while the Nasdaq dropped a similar amount. Small caps rose about 0.4%.

The S&P 500 closed at another all-time high yesterday after a strong session that saw the index rise over 1%. After a period of consolidation in mid-February through March, the index broke decisively above 4,000 in early April and has been steadily rising for the past several weeks.

Recent relative strength has been concentrated in the largest companies. The recent drop in Treasury yields could be supporting large caps vs. small caps. Small caps appear to be consolidating after very strong gains since the third quarter of 2020.

Gold miner equities have shown strength over the past several weeks. Shares in gold miners tend to lead the price of the metal itself by about two weeks.

Developed international markets are also making all-time highs, although recent performance has lagged the US. Commodity-linked stocks are showing good relative strength as the global economy reflates. European economies should also benefit from the recent US stimulus.

Emerging markets continue to struggle, with India experiencing a COVID-19 surge. Chinese equities also continue to lag after a very strong relative performance in 2020.

Fixed Income Takeaways:

Federal Reserve (Fed) Chairman Powell spoke again this week and reiterated that any changes in Fed policy would have a long lead time. The Fed plans to telegraph any tightening in policy by tapering bond purchases well before raising rates.

US Treasuries have found their footing. The 10-year Treasury yield approached 1.75% several weeks ago but has dropped close to 1.50% during this week’s trading. Recent strength can partially be explained by renewed interest from global investors and pension fund buying.

Despite this recent strength, the bulk of market participants continue to expect higher yields on 10-year Treasury rates over the intermediate-term.

Year-to-date supply in the investment-grade (IG) corporate bond market stands at about $517 billion, a drop of about 21% from 2020’s elevated levels. Spreads continue to show resilience and are approaching all-time lows in both the IG and high-yield markets.

Spreads remain supported by positive mutual fund flows, as well as a contracting supply dynamic. If supply remains under control, we believe spreads have room to tighten further.

Municipal bond yields continue to fall. Municipal bonds are rich across the curve, with a 10-year high-quality municipal yielding approximately 60% of the 10-year Treasury. Typically, a 10-year municipal bond will yield about 95% of the comparable Treasury note.

Over $2.4 billion of new funds poured into municipal bond funds over the past week, explaining the tightening in spreads.

Monday, 4/12/21

General Takeaways:

COVID-19 is not going away quietly. Both the Johnson & Johnson and AstraZeneca vaccines are under review for possible blood clotting issues. Also, it is unknown how the spread of variants will affect those who have already been vaccinated.

The good news: in the United States, more than 3 million vaccine doses are being administered daily. It will take only another three months to vaccinate 75% of the US population at this pace.

The bad news: globally, the pace of vaccine adoption is much slower due to an uneven rollout. Poorer countries are being disproportionately affected.

As we’ve been noting for many months now, both fiscal and monetary stimulus remain at historically high levels. These funds are supporting the private sector, where US domestic consumer activity is surging. Corporate balance sheets have also been bolstered, leading to higher CEO confidence.

Federal Reserve (Fed) Chairman Jerome Powell was on 60 Minutes last night to discuss the Fed’s outlook for the economy and continued stimulus. Powell presented a generally bullish outlook and reiterated that the Fed has no plans to raise rates in 2021.

Over the near term, the Fed expects the economy to strengthen. Inflation is likely to move above the Fed’s long-term target of 2%, but this event alone will not be enough to trigger a rate hike. Powell stated that the Fed does not plan on raising rates until the labor market is back to maximum employment, and inflation is on track to move above 2% for “some time.”

Powell’s comments on 60 Minutes generally mirrored recent Fed talking points. The Fed is now providing “outcome-based guidance” and is looking for “substantial further progress” in the economy. The Fed plans to leave accommodative policies in place until achieving its goals.

Debate on President Biden’s new infrastructure plan is just beginning, with many influential senators and representatives staking out their initial positioning. It will likely take months of negotiating before a final compromise is reached.

Equity Takeaways:

Stocks dipped slightly in early trading on Monday. The S&P 500 dropped about 0.15%, while the Nasdaq dropped about 0.7%. Small caps were also slightly lower, down 0.3%.

Last week was one of the strongest weeks for the S&P 500 since the November 2020 presidential election week. The S&P 500 rose 2.75% for its third consecutive week of gains. Technology shares led the market, with the Nasdaq rising almost 4%. Small caps lagged, dipping 0.4% on the week.

Underlying stock market breadth is confirming the move higher. 76% of stocks advanced last week, which brought the cumulative advance/decline line to an all-time high. This type of price action is positive on a technical basis.

Going back to the second quarter of 2020, equity analysts have consistently underestimated corporate earnings power. In other words, most earnings surprises have been to the upside since the 2020 trough. The first quarter 2021 earnings season is set to begin in earnest this week, and we expect continued strength.

One possible risk to the outlook is supply shortages across various industries. Shortages in semiconductors and lubricants are two notable examples. We expect input price increases to be passed through to consumers eventually.

Fixed Income Takeaways:

The 10-year Treasury yield has settled into a range between 1.60% and 1.75%, last trading at 1.66% on Monday morning.

According to a recent ISI survey, about 90% of respondents expect the next 25 basis point move in the 10-year Treasury yield to be higher. This week, this sentiment will be tested, as the US Treasury will be auctioning several different tenors of Treasuries.

Corporate spreads continue to contract. CCC-rated debt, the riskiest segment of the market, now trades with an option-adjusted spread of 632 basis points (bps), its lowest level since before the Great Financial Crisis of 2008. BBB-rated bond spreads have also contracted significantly, and at 117 bps, are also approaching all-time lows.

Borrowers continue to take advantage of these historically low spreads. We expect a large amount of activity over the next few weeks, as many companies will announce new debt deals in conjunction with earnings reports.

Friday, 4/9/21

General Takeaways:

Key Private Bank’s health care analyst recently met with the leadership of a large vaccine maker. Some general color on their progress is below.

This company is currently applying for full FDA approval for their COVID-19 vaccine. In 2021, the company expects to deliver 300M doses of their vaccine in the US alone. After some initial difficulties, the rollout is proceeding smoothly, especially in the US.

The company is concluding trials in various booster shots to combat additional COVID-19 variants. The company is studying various methods to combat these variants, including a cocktail of vaccines. We should expect additional news on this front over the summer.

National digital currencies would facilitate much faster cross-border currency transactions. China is the first mover in the digital currency space, which uses blockchain technology at its core. China’s newest 5-year plan stresses self-sufficiency/research & development of new technologies.

China recently announced that their goal is to become carbon-neutral by 2060. Chinese and European leaders are combining to determine a framework for environmentally sustainable technologies/initiatives.

Equity Takeaways:

US stocks were essentially flat in early Friday trading. The S&P 500 rose about 0.10%, while small caps dipped about 0.3%. Over the past five sessions before Friday, the S&P 500 was up 3.2%.

Over the past week, technology shares have rediscovered some of their lost luster. The Nasdaq has been rising about 5% over the past five sessions. The outperformance of cyclicals was significant in the fourth quarter of 2020 and continued into the first quarter of 2021, so it’s not surprising to see some level of mean reversion within the underlying market leadership. The recent stabilization of long-term treasury yields has also provided some near-term support to technology shares.

First Quarter 2021 earnings season is set to begin soon. Expectations for earnings growth are high. As we’ve stated in the past, continued earnings growth will be necessary for the stock market to continue its strong performance in 2021.

International shares also had a nice week, led by the United Kingdom and Australia. The STOXX 600 (a broad European index) closed at an all-time high yesterday, highlighting the strength of global equities.

One notable exception remains Asia, where Chinese shares continued their recent underperformance. Chinese shares outperformed much of 2020 but have run into headwinds as the rest of the world has begun to reopen.

Fixed Income Takeaways:

The 10-year Treasury note has traded in a tight range this week, with yields oscillating between 1.62% and 1.70%. With front-end yields pegged near 0% by the Federal Reserve (Fed), the 2-year / 10-year curve remains steep, at about 150 basis points (bps).

The Fed released minutes from their March meeting. They expect that inflation will increase in mid-2021 before normalizing in 2022. They remain committed to outcome-based guidance – in other words, the Fed is in no rush to remove stimulus, preferring to wait for continued improvement in the labor market.

In public comments yesterday, Fed Chairman Powell reiterated plans for ongoing stimulus. In general, recent messaging from the Fed has been consistently dovish.

High-yield spreads continue to grind tighter and are only 2 basis points from their 14-year low of 290 bps. Yesterday, high-yield borrowers raised about $7 billion, which is the busiest day for high-yield issuance in about two months.

Within the investment-grade (IG) market, supply remains robust, although off the highest issuance levels of last year. About $25 billion of new supply is expected to hit the market next week.

The story is similar within the municipal bond market. Yields continue to grind tighter. Municipal bond funds continue to see strong inflows, a tailwind for the asset class for most of 2021.

Expectations for future tax increases to fund Biden’s infrastructure plan remain one factor driving additional interest in municipal bonds. With the narrow margin in the Senate, future compromise on the underlying components of the plan seems likely.

Monday, 4/5/21

General Takeaways:

We have received lots of questions regarding Bitcoin, so we thought we’d cover it briefly here. The price of Bitcoin (BTC) continues to rise. BTC is one of over 1,200 decentralized cryptocurrencies. It is often described as “digital gold,” but it is unclear if BTC can serve as a storer of value due to its high volatility.

BTC is also akin to fine art in many ways – value is in the eye of the beholder with no fundamental framework for the value of the asset.

Another similarity with gold - Bitcoin has also served as a medium of exchange, but both asset classes have limitations in that regard. There is also significant uncertainty concerning the regulation of BTC and other crypto assets.

In general, the blockchain technology that underpins Bitcoin and other cryptocurrencies is extremely promising. From an investment perspective, specialized managers with domain expertise in the technology ecosystem may be the most effective way to access this space.

Key Private Bank continues to research all aspects of blockchain and cryptocurrency, and we will have more to say on these topics in the coming weeks.

COVID-19 cases have once again begun to inflect higher, and we are starting to hear increased chatter of a fourth global wave. That said, mobility continues to increase in the US as the vaccination supply expands.

Non-farm payrolls were reported last Friday, and the data was impressive. Including revisions, just under 1 million jobs were added last month. The US unemployment rate last checked in at about 6%. If the current pace of job gains continues for the next nine months and assuming some partial recovery in the labor force participation rate, the unemployment rate could drop to 3.5% by the end of this year.

Despite these strong headline numbers, the healing in the labor market has been uneven. Certain sectors, such as leisure and hospitality, remain depressed. The Federal Reserve (Fed) is likely looking at this dispersion underneath the surface of the headline data to help inform their forward outlook. Put another way, the Fed is unlikely to raise rates until the labor market's recovery broadens out.

Equity Takeaways:

Stocks opened higher on Monday in response to Friday’s strong employment data. The S&P 500 and Nasdaq both rose close to 1% in early trading. Small caps rose about 0.25%.

The book is closed on the first quarter of 2021. Global equity returns were strong, while fixed income had a tough quarter. Global equities rose 4.8%, while global bonds dropped 5.3%. US equities rose 6.4% during the quarter, while the global ex-US index rose about 3%.

Within the US, equity returns were paced by small caps, which rose over 12% during the quarter. US large caps rose 5.9%. Value stocks significantly outperformed growth stocks, with energy and financials the two strongest sectors.

Given that the economy continues to reopen, we expect cyclicals to continue their strong relative performance as we head into the second quarter. Technology shares continue to trade more akin to defensives.

Shares in high quality companies have significantly underperformed shares in low quality companies over the past several months. Low quality companies tend to be more economically sensitive than high quality companies – low quality tends to outperform coming out of cycle troughs as a result.

In general, we continue to believe that high quality companies outperform low quality companies over a full cycle.

Fixed Income Takeaways:

Treasuries are selling off slightly after Friday’s strong jobs report. The treasury curve continues to steepen, with the 10-year note currently trading around 1.73%.

In the first quarter, the selloff in Treasuries led to a 3.4% loss for the US taxable bond index.

Supported by fiscal stimulus, municipal bonds fared better, dropping about 0.4% in the first quarter.

Given the sharp rise in rates in the first quarter, it would not surprise us if treasury yields remain in their current range for some time. That said, we expect 10-year treasury rates to drift towards 2% as we go through the year.

Last week had a “risk on” tone. Investment-grade (IG) spreads tightened by 6 basis points on the week and are now back to post-COVID tights. High-yield spreads tightened by 18 basis points last week, a significant move.

Within IG debt, new issuance volumes remain robust but are down about 9% year-over-year compared to last year’s record levels. In general, a greater share of new deal proceeds are being used for acquisition financing, as the environment for mergers and acquisitions has become increasingly robust.

March 2021

Monday, 3/29/21

General Takeaways:

COVID-19 cases remain well off the peak levels we saw over the winter but nevertheless have inflected higher over the past week. Hospitalizations have also begun to tick higher.

That said, the US is currently administering about 2.5 million vaccinations per day, and business optimism is returning. Expectations around both retail sales and future employment have turned decidedly positive.

Highlighting a point that we made in our Friday commentary, the next phase in President Biden’s fiscal stimulus plan will revolve around infrastructure. The plan has two portions: “traditional” infrastructure as well as “human” infrastructure.

Traditional infrastructure investment would upgrade the nation’s aging railroads, public transit, utilities, pipelines, and water transportation. This portion of the bill also includes investments in climate infrastructure, housing, schools, and expanded broadband.

Human infrastructure investments would include expanded paid leave, an extension of the Child Tax Credit (CTC), national child care, universal pre-K, and free community college.

On a related note, the Suez Canal situation highlights the fragility of global supply chains, along with the lack of global infrastructure investment over the past several decades. Commodity prices are ramping up in expectation of increased capital expenditures, but it will take years to improve the global supply situation.

Stretched supply chains will only exacerbate inflation expectations, which continue to tick higher.

We see price pressures in both goods and services. Recent purchasing manager index (PMI) data indicates sharp increases in output prices over the past several months. That said, upward pressure on wages remains muted.

Equity markets will be closed this Friday in observance of the Good Friday holiday. Non-farm payrolls will be released on Friday, and market participants are expecting very strong job growth.

Equity Takeaways:

US stocks opened mixed on Monday. Large caps dropped by about 0.25%, while small caps rose about 0.50%.

Last week, a hedge fund was sent into forced liquidation, which caused wild trading in certain Asian technology stocks as well as certain US communication services companies. It is not clear whether this liquidation is complete– this uncertainty could put some pressure on the market early this week.

In a reversal of recent trends, large cap stocks significantly outperformed small caps last week. Large caps rose almost 3%, while small caps fell nearly 2%. Even so, small caps have risen more than 12% year-to-date (YTD). The S&P 500 is up about 6.2% YTD, while the Barclays Aggregate bond index is down about 3.3% over the same timeframe.

Since mid-January, some of the frothiest technology stocks have begun to underperform vs. “quality” technology companies. Indeed, many investors suffered losses in certain high-profile speculative trading stocks, call option volumes are declining, and “spec-tech” euphoria may be losing steam.

In general, Key Private Bank continues to promote a quality bias with respect to individual stock selection. Quality companies tend to underperform low-quality companies coming out of a cycle trough but should outperform over a full cycle.

Fixed Income Takeaways:

Treasuries are rallying Monday morning in response to the hedge fund liquidation news referenced above. The 10-year Treasury yield remains between 1.60% and 1.70%, recently trading around 1.65%.

Despite turbulence in the stock market, credit spreads were well behaved last week, with both investment-grade (IG) and high-yield bond spreads tightening on Friday. In general, spreads were unchanged on the week.

Month-to-date, we’ve seen about $180 billion of IG corporate bond issuance, and we are poised to cross the $200 billion mark this week for total supply in March. Corporations continue to issue new debt at a furious pace.

Demand for short-dated commercial paper remains extremely strong. Yields continue to contract, and liquidity is strong.

Friday, 3/26/21

General Takeaways:

President Biden’s infrastructure plan is beginning to take shape. The plan adds about $3.7 trillion in new spending, focusing on “traditional” infrastructure as well as “human” infrastructure. It also contemplates increased taxes of approximately $2.7 trillion over ten years, which loom as a potential future headwind to the stock market.

Traditional infrastructure investment would upgrade the nation’s aging railroads, public transit, utilities, pipelines, and water transportation. This portion of the bill also includes investments in climate infrastructure, housing, schools, and expanded broadband.

Human infrastructure investments would include expanded paid leave, an extension of the Child Tax Credit (CTC), national child care, universal pre-K, and free community college.

More details on the bill are likely next week. Actual legislation will likely be written over the August recess for September release. Most Republicans will likely oppose the bill.

The March US Markit Services Purchasing Manager Index (PMI) rose to 60.0%, its highest level since June 2014. In addition, the future output index jumped 72.7, to its highest level on record.

The continued improvement in the economy is driving unemployment claims lower. Initial claims were 684,000 for the week ending March 20th, the lowest reading since the March 2020 surge. Pandemic Unemployment Assistance Claims also fell.

The Suez Canal, a vital trade route, remains blocked by a large stranded vessel. Approximately 50 ships per day pass through the canal, accounting for as much as 12% of the world’s seaborne trade. Even before the blockage of the canal, supply constraints were already beginning to push consumer prices higher.

That said, even as near-term inflation expectations are rising, future inflation expectations are beginning to moderate. We may get a temporary spike of inflationary pressures, followed by a return to more normal levels. In fact, this scenario appears to be the Federal Reserve’s base case.

Equity Takeaways:

Stocks rose in early trading on Friday. Large caps rose about 0.5%, while small caps rose about 1.5%.

Yesterday, a weak auction of 7-year notes caused a midday blip higher in Treasury yields, which ignited a rally in cyclical assets. Small caps, financials, industrials, and materials all outperformed the broader market on Thursday.

Over the week prior to yesterday, the relative outperformance of cyclical assets had seemingly stalled. We will continue to monitor the dynamics underneath the surface of the market closely.

International markets bounced back on Friday after a tough week. Chinese equities rose over 2%, while Japanese equities rose over 1%.

European stocks continue to remain under pressure from shutdowns tied to COVID-19.

Fixed Income Takeaways:

Treasuries have begun to settle into a range. After hitting yields as high as 1.75% last week, the 10-year Treasury note yield has stabilized in a range between 1.60% and 1.70%.

Federal Reserve (Fed) speakers continue to present a dovish picture on interest rates. This guidance has been supportive of the front-end of the curve, where yields remain very low. Overall, the Treasury curve remains steep.

We see predictions of 2.00% to 2.25% for the 10-year Treasury yield by the end of 2021. An orderly move higher in yields would likely signal a strong economy - a bullish sign for equities. That said, if the move in yields is disorderly, markets would likely face headwinds.

Corporate bond issuance continues to be supported by the Fed. Investment-grade (IG) corporate bond issuance continues apace, and high-yield spreads have stabilized along with treasuries.

The municipal bond market also continues to trade well. Year-to-date (YTD), the asset class has seen over $30 billion of cumulative inflows, despite the low level of absolute rates.

As we discussed in a recent Key Questions article, the direct aid to state and local governments provided in Biden’s COVID-19 bill has been a significant tailwind to municipal bonds over the past month. Direct municipal support is being received very favorably by investors, driving spreads tighter and yields lower.

Monday, 3/22/21

General Takeaways:

Vaccinations continue to rise. COVID-19 vaccine makers are expected to produce 132 million doses this month, nearly triple last month’s pace.

On aggregate, over 22% of the broad US population has received at least one dose, but over 2/3 of the 65+ population has received at least one dose. In response, nursing home deaths are down almost 90% from peak levels.

Both anecdotal and company survey data indicate that a surge of pent-up demand is hitting the economy.

Evercore ISI retailer sales survey data hit an all-time high last week, and airports are having their busiest days since March 2020.

The reopening remains uneven. Florida restaurant dining has almost fully recovered, while dining in California is still over 40% below the peak, and activity in New York is more than 70% below the peak.

The US Federal Reserve (Fed) has responded to this bump in activity by increasing its forecasts for growth and inflation. That said, the Fed did not increase their expectations for future interest rates, which, as we noted last week, is a clear change in the Fed’s long-term reaction function.

As we wrote last Friday, the Fed would often pre-emptively tighten policy to control inflation in the past. Ever since the middle of 2020, the Fed has been consistent by stating that economic growth is their priority and that they will tolerate a transitory bout of inflation above their 2% long-term target.

Also, the Fed is very mindful of the uneven recovery in the labor market and wants to see total employment broaden out. Leisure and hospitality sector activity is still depressed, with total employment in that sector about 20% below the prior peak.

According to ISI, the current situation is unprecedented in recent history. We have never experienced a recovery from this type of pandemic recession. We have not seen this level of fiscal stimulus in a non-wartime environment. We have never seen the Fed use this type of policy framework.

Equity Takeaways:

US equity markets were mixed in early trading on Monday. The S&P 500 rose about 0.4%, while small caps fell a similar amount.

International markets were flat to slightly higher.

The S&P 500 index fell about 0.75% last week, not surprising given the strength off the March lows. The index is about 5% above its March 4 low and about 2.5% off its recent all-time high.

Large caps significantly outperformed small caps last week, reversing a recent trend. Since the March 2020 lows, relative weakness in small caps has been bought aggressively by market participants.

Part of the weakness in equities over the past week was driven by hedge fund selling. In aggregate, hedge funds remain bullish on the long-term outlook for equities and the economy, but on a short-term basis, hedge funds seem to have adopted a more defensive posture last week.

On Monday morning, two large railroads announced a merger, with the acquisition target being purchased at a 25% premium to its Friday closing price. The terms of this merger seem to indicate long-term confidence in the economic outlook by the acquiring party.

Compared to US equities, emerging market (EM) stocks have shown relative weakness in March.

Headline risk will always be a part of this sector (see recent news in Turkey and Iran), and recent strength in the US dollar has also contributed to recent EM weakness.

Fixed Income Takeaways:

The yield curve continued to steepen last week, with 10-year Treasury yields touching 1.75%. Monday morning, we saw a slight rally in Treasuries of 3-4 basis points (bps) in the intermediate and long-dated sections of the curve.

This week, Fed officials have more than 20 speaking engagements scheduled. Recently, Fed governors have generally projected a consistent message (low rates for longer) across their various speeches.

Both investment-grade (IG) and high-yield corporate credit continue to trade in an orderly fashion, despite a softer overall environment for spread products. High-yield spreads widened about 11 bps last week, while IG spreads were essentially flat.

Corporations continue to issue new debt aggressively. The high-yield corporate bond market has already seen its second-busiest quarter on record for total issuance, and we still have almost two weeks remaining until the end of March.

Friday, 3/19/21

General Takeaways:

US and Chinese officials met today in Alaska. The initial tone of the conference was tense suggesting tensions between the world’s two largest economies persist. July 2021 marks the 100th anniversary of the communist party in China, so we expect public rhetoric to remain strained over the next several months as China attempts to project a strong image.

According to Deutsche Bank, the US is making faster progress in COVID-19 vaccinations than the rest of the world. Vaccine attitudes are improving globally, and the US and Europe could hit 70-80% herd immunity thresholds by late summer.

Congress has turned its attention to the next round of planned fiscal stimulus, this time focusing on infrastructure. Biden administration priorities include transportation, green energy, improved efficiency, expanded broadband access, and tax incentives. This plan will likely be funded in part by increased taxes.

The US Federal Reserve (Fed) significantly increased growth expectations for 2021. Their projection for 2021 US GDP growth is now 6.5%, versus projections for 4.2% growth as recently as December. Expectations for inflation in 2021 were also increased. This is a significant shift in a short three-month period.

Despite ratcheting up predictions for growth and inflation, and reducing their projection for future unemployment, the Fed did not change its projections for future interest rates.

In effect, the Fed has changed its reaction function. In the past, the Fed would often pre-emptively tighten policy to control inflation. Ever since the middle of 2020, the Fed has been consistent by stating that economic growth is their priority, and that they will tolerate a transitory bout of inflation above their 2% long-term target.

In addition, the Fed is very cognizant of the uneven recovery in the labor market and wants to see total employment broaden out. Leisure and hospitality sector activity is still depressed, with total employment in that sector about 20% below the prior peak.

Equity Takeaways:

US markets were mixed in early trading on Friday. The tech-heavy Nasdaq rose slightly in early trading, while the S&P 500 dropped about 0.5%. Small caps also fell about 0.5%.

Today’s stabilization in technology stocks follows a sharp selloff yesterday that saw the sector fall about 3%. This drop was caused by another sharp rise in Treasury yields. Technology shares tend to be disproportionately affected by rising yields due to the long-dated nature of their future expected cashflows.

The spike in Treasury yields is causing a major rotation within the equity markets. Over the past several months, financials, which benefit from a steeper yield curve, have significantly outperformed the broader market. That trend continued yesterday, with financials the only major S&P sector in the green.

Significant funds have begun to flow into value ETFs as investors have begun to reposition their portfolios towards financials and cyclicals. On a short-term trading basis, value ETFs have gotten a bit extended relative to the broader market.

Fixed Income Takeaways:

The past week was a very busy one in the fixed income markets. The Fed increased core PCE estimates for 4Q:2021 to 2.2%, above their 2% long-term target for inflation. The core PCE is the Fed’s preferred gauge of inflation. Essentially, the Fed has baked in an overshoot on inflation into current policy estimates.

During his press conference, Fed Chairman Powell was steadfast. According to Powell, the Fed has no plans to raise rates anytime soon in reaction to higher Treasury yields and believes much of the higher inflation projected for 2021 will be transitory.

Initially after Powell’s Wednesday press conference, short and intermediate-term yields dropped. On Thursday, yields across the curve reversed higher, with the 10yr hitting 1.70%.

The Fed did not announce any actions on Yield Curve Control (YCC), which disappointed some market participants. The Fed is not concerned about the absolute level of long-term rates, and in some ways, the market is doing the Fed’s job by raising long-term rates.

With the choppiness in yields, much of the planned supply in the new-issue investment-grade (IG) corporate bond market was delayed this week. That said, IG spreads have remained stable even as yields have drifted higher.

Conversely, high-yield bond prices continue to show moderate weakness. Year-to-date returns in the asset class are now slightly negative after another 5 basis points of spread widening yesterday.

Monday, 3/15/21

General Takeaways:

Progress continues concerning the rollout of COVID-19 vaccines. Over 107 million doses have been administered in the United States. Overall, the US accounts for about 1/3 of total worldwide vaccine doses administered.

Germany, France, and Italy suspended the use of AstraZeneca’s COVID-19 vaccine. This act could be a short-term headwind for European markets.

Significant global economic stimulus continues. Evercore ISI data notes that some lagging sectors (airlines, restaurants) appear to be inflecting higher. The purchase of the Extended Stay hotel brand dovetails with this improving data.

ISI has also observed that US bank total loans have risen for the past four weeks. Bank loans had been declining throughout the crisis.

Moreover, the recent increase in US Consumer Net Worth is estimated to rise 20% year-over-year (YOY) in the first quarter of 2021 or $1.3 trillion unprecedented and provides significant purchasing power.

Finally, there is debate over debts and deficits. Some observers note that high government deficits go hand in hand with high personal savings rates and increased corporate profits. Government spending during the crisis supported corporate profits and allowed corporate balance sheets to remain stable. Modern Monetary Theory (MMT) can help explain this dynamic.

Equity Takeaways:

The stock market has been focused on the impact of continued stimulus on corporate earnings – earnings growth should be a significant tailwind for the market and, at least to this point, has outweighed expectations for higher future taxes.

Fixed Income Takeaways:

Bond investors will be hanging on every word during this week’s Federal Reserve (Fed) meeting. Any updates to the Fed’s future interest rate projections, or expectations for future inflation, could have a significant market impact.

Key Private Bank expects that interest rates will likely continue to drift higher, all else equal.

Friday, 3/12/21

General Takeaways:

Stimulus, Stimulus, Stimulus. In 2021 dollars, the 2020-2021 “CARES” fiscal stimulus has hit approximately $5 trillion, or 23% of GDP. This program compares with $1 trillion for the 2009 Recovery Act, which was about 6% of GDP.

The last time the US saw non-wartime fiscal stimulus on this order of magnitude was the 1933-1939 New Deal, which at $780 billion accounted for 40% of GDP.

One result has been a jump in the US Personal Saving Rate, which has spiked to multi-year highs.

Much of this increased savings has flowed into the markets and is having a direct impact on stock prices. Other coincident indicators, such as the EVRISI Trucking Survey, are also spiking to multi-year highs after massive falls in 2020.

Positive momentum is building in the job market as well. The US unemployment rate, which approached 15% in 2020, has dropped to 6.2%. Some forecasters are predicting a drop in unemployment back below 4% as early as 2022.

Despite an increasingly strong economic outlook in the United States, central banks around the world (including the US Federal Reserve) continue to provide abundant liquidity. For example, yesterday, the European Central Bank (ECB) announced an increase in monthly bond purchases to help control borrowing costs. The ECB will also further tap into an emergency $1.8 trillion pandemic liquidity program.

Recent party initiatives out of China include:

  • Increased digitization (including a digital currency).
  • Less reliance on the US for technology.
  • An increased maritime presence.

China currently has the largest Navy in the world.

Pfizer released updated vaccine efficacy data yesterday, which showed extremely promising results from their studies in Israel. According to CNBC, Pfizer’s vaccine was at least 97% effective against symptomatic COVID-19 cases while blocking 94% of asymptomatic cases.

Equity Takeaways:

US markets were mixed in early trading on Friday. The tech-heavy Nasdaq fell about 1.5% in response to rising bond yields. The S&P 500 fell about 0.25%, while small caps rose a similar amount. Cyclical sectors, such as financials, industrials, and energy, continued their recent pattern of outperformance.

Year-to-date (YTD) performance divergences continue. The large cap Russell 1000 growth index is essentially flat for the year, while the Russell 1000 value index is up about 10% YTD.

Within smaller companies, the Russell 2000 growth index is up more than 11% YTD, while the Russell 2000 value index is up by more than 27% YTD. These divergences highlight the difficulties tech stocks have faced in 2021 after strong outperformance in 2020.

On the international front, developed market stocks outperformed emerging markets this week, with Chinese equities under pressure. YTD, the China Shanghai Composite is down about 1%, while the FTSE developed ex-US benchmark is up 4.5%, and the FTSE emerging market benchmark is up 6.6%.

Fund flows for stocks have turned decidedly positive, with more than $30 billion flowing into the asset class this week. Conversely, flows for both bonds and gold were negative over the past week.

Fixed Income Takeaways:

Treasuries are under pressure once again this morning after waves of selling in the futures market during the Asian session. The 10-year Treasury yield has reached 1.60%, close to the highest year-to-date print of 1.62%.

We expect continued fiscal stimulus to pressure yields higher. Corporations seem to feel the same, as they are rushing to issue new debt before rates rise further. Through Thursday, over $50 billion of new investment-grade (IG) deals had priced on the week.

Overall, the tone in the credit markets remains firm, with high-quality deals still receiving strong demand despite the rise in treasury yields. IG corporate bond funds saw over $3 billion of inflows last week.

Conversely, high-yield bond funds saw $5.3 billion in outflows, their largest weekly cash outflow since July and the fifth largest on record. This asset class has performed well recently, so these flows could simply be profit-taking.

During the second half of February, municipal bonds came under pressure, but the weakness was short-lived. Beginning March 1st, municipal bond yields began dropping again, even in the face of rising treasury yields. Municipal bonds are once again expensive relative to treasuries, especially in the 5-10-year part of the curve.

Investors are reacting to the large amount of direct aid to state and local governments included in the recent federal fiscal stimulus bill. $350 billion of assistance will go to state and local governments, with more than $150 billion of aid to schools.

This type of federal support provides a large safety net for municipalities and should cover lost revenue from 2020. Municipal bond spreads are tightening as a result.

Monday, 3/8/21

General Takeaways:

Over the weekend, Iranian-backed Houthi rebels targeted a key point of Saudi Arabian oil infrastructure, while Microsoft endured a massive cyberattack. Brent crude prices spiked over $70 / barrel over the weekend in response to the rebel attack, but prices have since reversed and are now below Friday’s trading levels.

Despite these reminders that the world will always remain an uncertain and volatile place, there is plenty of good news to celebrate as well. Significant progress is being made on the vaccination front, and COVID-19 case growth has materially slowed. According to USA Today, cases of COVID-19 within nursing homes are down 89% and the number of Americans vaccinated now exceeds the number of people who have contracted the virus.

The expectation is for this positive momentum to continue. President Biden recently commented that the US should have enough supply to vaccinate all adults by the end of May. This timeline is significantly ahead of the expectations of just a month ago.

In response, states around the country are beginning to reopen further. The Dallas Fed economic mobility index (MEI) is designed to correlate with current activity. This indicator spiked up last week to levels last seen in March 2020, indicating that more and more Americans are comfortable being out and about.

The Senate officially passed President Biden’s “American Rescue Plan” over the weekend. This plan amounts to more than $1.9 trillion and is the first phase of Biden’s “Rescue and Recovery” plan. The package funds additional direct payments to households, expands unemployment insurance, and provides significant aid for state and local governments, education, health care, and small businesses.

Later this year, we expect additional fiscal stimulus to the tune of over $1.5 trillion, primarily targeted towards long-term investments in infrastructure, clean energy, healthcare, social safety net programs, and business competitiveness.

The Federal Reserve (Fed) also continues to provide significant monetary stimulus to the economy.

The Fed’s internal projections estimate that their initial rate hike will occur in 2024. Market expectations for interest rate hikes project the first hike in 2023, about a full year earlier than the Fed’s internal estimates.

Equity Takeaways:

Last week, despite weakness in some more prominent names, we saw about 70% of the issues in the S&P 500 trade higher on the week. Weakness was concentrated in larger technology names. Energy, financials, industrials, and materials all continued to show strong relative strength.

Over the past several weeks, we have seen a quick and violent rotation away from growth/momentum stocks into value / cyclical stocks. Momentum stocks have underperformed the broader market by over 10% during this timeframe.

Despite the recent rotation, value stocks are still very cheap compared to the broader market on a Price/Earnings basis, and growth stocks have enjoyed years of outperformance relative to value stocks. We will continue to closely monitor the relative performance of growth vs. value to inform our broader asset allocation recommendations.

Fixed Income Takeaways:

As of March 5th, major fixed income regulators made the final decision to fully retire the London Interbank Offered Rate (LIBOR). The phaseout of many tenors will conclude by the end of 2021. The more common 1-month, 3-month, and 6-month tenors will remain in use into 2022-23. Provisions will be made to produce a synthetic LIBOR rate used to accommodate existing issues with maturities in 2023 and beyond.

The 10-year US Treasury yield continues to climb and is now moving towards 1.60%, with a strong jobs report on Friday adding fuel to the fire. Strong economic growth and additional fiscal stimulus are two factors that could continue to put pressure on treasuries as we move into 2021.

In sympathy with rising Treasury yields, investment-grade (IG) corporate bond spreads were wider by 4 basis points (bps) on Friday and 6 bps on the week. High-yield corporate spreads were about 9 bps wider last week.

It has been quite some time since we saw this level of widening in the IG market.

Last week, despite widening spreads, it was a busy one for new IG corporate bond issuance, with over $65 billion of deals pricing. We are expecting another $40-$45 billion of new issuance this week.

Corporations continue to anticipate rising rates and are quickly moving to issue new debt as a result.

Monday, 3/1/21

General Takeaways:

Despite recent volatility, global equities rose 2.6% in February. US equities rose 3.1%, while global ex-US equities rose about 1.9%.

Conversely, global bonds fell about 1.3% in February and are now down 1.9% year-to-date (YTD). US taxable bonds are down about 2.2% YTD, while US municipals are down about 1% YTD.

Underneath the surface of the stock market, we saw significant divergences in performance by sector and style. Small companies outperformed large companies, while value outperformed growth.

Cyclicals significantly outperformed the broader market.

Energy was the best sector, up over 22% in February and over 27% YTD. Financials were next, up more than 11% on the month and 9% YTD.

Previous leadership has stagnated, with technology shares essentially flat YTD.

On a 1-year trailing basis (February to February), global equities are up about 23%. US equities are up 24.5% during this timeframe, with non-US developed market equities up 13.6%. Non-US emerging market equities (including Chinese shares) are up 28.4% during this timeframe.

According to the Wall St Journal, COVID-19 vaccines are yielding breakthroughs in the long-term fight against infectious diseases. Gene-based technology has many possible uses in the years to come.

COVID-19 case growth inflected higher once again last week. Mobility data is also beginning to improve, suggesting that more people are “out and about” as spring begins to arrive.

More fiscal stimulus is on the way from the federal government. The $1.9 trillion COVID-19 relief bill is currently moving through Congress, with a mid-March approval seemingly on track. Among many things, this bill includes additional direct household stimulus, flexible state and local aid, and the extension of unemployment insurance through September 30th.

Equity Takeaways:

US stocks opened sharply higher on Monday. Both the S&P 500 and Nasdaq rose approximately 1.5% in early trading. Small caps rose close to 2%. International shares also generally rose between 1-2%.

Over the weekend, news that Australia's central bank is expanding bond purchases seemed to spark equity market futures. The signal that central banks are once again ready to step in with asset purchases seemed to calm nervous sentiment.

Quote from strategist Jim Bianco (Bianco Research) over the weekend: “when central bankers panic, you don’t have to.” The implication is that increased central bank asset purchases are generally positive for equity markets.

The momentum index made an all-time high in mid-February but has fallen about 10% since. As noted above, the past month saw a dramatic rotation towards cyclicals at the expense of momentum-driven areas of the market (growth, etc.).

On a related note, the broad S&P 500 hit an all-time high of 3950 on February 16th but traded very choppily towards the end of February as long-term interest rates rose sharply. The index was trading at 3880 in early trading this morning, so we are still just a few percentage points from an all-time high.

Fixed Income Takeaways:

In February, US Treasuries posted their biggest monthly loss in four years. Yields are drifting higher once again this morning after a short-lived rally towards the end of last week.

The Federal Reserve (Fed) is likely more concerned about rising short-term rates than rising long-term rates. Last week, certain measures of market interest rates were pricing in rate hikes as soon as the third quarter of 2022. This market behavior contrasts with recent commentary from the Fed and will likely draw Fed governors' attention if it persists.

In corporate bonds, recent trading has been orderly despite the uncertainty generated by rising rates.

Friday was a busy day for new issuance, with some borrowers likely pulling forward new deals in anticipation of higher rates.

The high-yield bond index hit an all-time low yield of about 3.90% in February. Recently, yields on high-yield bonds had risen towards 4.25%.

Despite rising longer-dated yields, the yields on very short assets (commercial paper, T-bills, etc.) are approaching negative territory due to several technical factors in the market. We think this dynamic should clear up by the second half of the year.

January 2021

Friday, 2/26/21

General Takeaways:

An economic boom appears to be materializing. Forecasts for 2021 GDP growth continue to increase. The official average estimate is about 4.9%, but we have seen some estimates as high as 8%.

Industrial production, retail sales, and personal savings have all recovered sharply over the past twelve months. Certain measures of economic activity, such as the US ISM supplier deliveries and ISM backlog of orders indices, indicate further possible inflationary pressures.

In anticipation of this economic boom and amidst rising inflation expectations, Treasury bond yields rose sharply yesterday. As we’ve been discussing over the past several months, a rising rate environment has significant implications for many different asset classes. We continue to believe that real assets can provide significant portfolio diversification in this type of environment.

Commercial real estate prices have stabilized amidst the recent economic recovery. Early anecdotal reports around the recent Texas cold snap indicate that most of the damage in the area was minor. Real estate is one type of asset class that can provide income while protecting against inflation.

Equity Takeaways:

US stocks opened flat to slightly higher this morning after selling off sharply yesterday. International shares are generally lower today in sympathy with yesterday’s weakness in the US.

During yesterday’s selloff, growth stocks were down about 3.1%, while value stocks dropped just shy of 2%. Decliners outnumbered advancers by a factor of 7:1.

The S&P 500 is down just over 2% on the week, with the Nasdaq down over 5%. A change is afoot underneath the surface. Even after yesterday’s selloff, the energy sector was up more than 8% over the past five sessions, with financials and industrials each up 2% over that timeframe. Rotation towards cyclicals appears to be picking up steam.

Large growth stocks with very strong earnings in 2020 will begin running into tough year-over-year comparisons as we move through 2021. The top 6 stocks in the S&P 500 all have a growth/technology slant and still account for about 23% of that index's total market capitalization.

Earnings season is winding down and has seen companies broadly beat estimates. The highest beat rate has been in the energy patch, with the average company beating estimates by more than 50% in that sector.

Implied volatility (VIX) spiked to almost 30 yesterday. This morning, the VIX is slightly lower at 28.1 in early trading. The VIX has remained elevated relative to pre-COVID levels throughout the past year.

Fixed Income Takeaways:

Yields spiked sharply higher yesterday. The yield on the 5-year Treasury note jumped 20 basis points (bps) to about 0.80%, while the yield on the 10-year note jumped 13 basis points to close over 1.50%. The 20 bps jump in yields is the largest one-day move in the 5-year note since 2013.

Despite the higher yields, high-yield bond spreads narrowed by 5 bps yesterday, suggesting that the selloff is not likely to become a mass contagion event.

Earlier in the week, Federal Reserve (Fed) Chairman Jay Powell suggested that the Fed will continue to wait on raising rates. Powell noted that the economy is a long way from its long-term goals, with some estimates still pegging unemployment as high as 10%.

With Powell’s comments underpinning short-duration treasuries, the 2-year and 10-year Treasury curve continues to steepen. At 140 bps, this curve is now at its steepest level in five years. Going forward, the Fed could implement Yield Curve Control (YCC) by extending the duration of their Treasury purchase program to control longer-dated yields.

The investment-grade (IG) bond index is down about 3.2% year-to-date (YTD), yet fund flows remain positive in this asset class. High-yield bonds continue to see small outflows.

Due to their floating-rate nature and short duration, leveraged loans are beginning to see interest once again, with the asset class seeing substantial inflows last week.

In the past five days, municipal bonds have cheapened significantly to treasuries. Additional new issue supply, slowing mutual fund flows, and arbitrage selling contributed to the pressure on municipals.

Municipal bonds move in sympathy with treasuries, but the asset classes do not move in lockstep. With municipal bond demand seeming to dry up this week, we will be watching closely for signs of stabilization in the coming weeks.

Monday, 2/22/21

General Takeaways:

COVID-19 trends are moving in the right direction. Daily new cases, hospitalizations, and fatalities are all falling. Vaccinations are being administered to the tune of more than 1.6 million doses per day. About 16% of US adults have received at least one dose, with more than 6% having received two doses.

In addition, recent data out of Israel indicates that the Pfizer COVID-19 vaccine has high efficacy and could also help prevent the virus's asymptomatic spread. A reduction in the spread from asymptomatic carriers would be a significant positive.

We can also see positive sentiment in the boardroom, where US CEO confidence recently hit a 15+ year high. This data bodes well for both future job growth and capital expenditures.

According to a recent survey at ISI, investors are becoming less worried about COVID-19, and more worried about possible tax increases and/or a less favorable regulatory environment. Rising inflation is also supplanting COVID-19 as a top concern, an issue we foreshadowed in our 2021 Outlook.

Treasury Secretary Janet Yellen gave a roadmap for the new $1.9T COVID-19 relief bill, which is on track to pass Congress by mid-March. COVID-19 relief will come first, followed by infrastructure spending. Yellen did imply that higher taxes are likely to be slowly implemented as well.

Bitcoin can best be viewed as a speculative asset, comparable to digital gold or perhaps high-priced art. Bitcoin has significantly more volatility than gold. Increased institutional adoption of bitcoin is a tailwind for future usage. For greater insights into our thinking regarding Bitcoin, please refer back to the January edition of our Key Investment Perspectives.

Equity Takeaways:

US stocks opened lower this morning. The S&P 500 fell 0.5% in early trading, with the tech-heavy Nasdaq down over 1%. Small caps were flat.

The market has had a nice run recently and is pulling back a bit off the top end of a rising trend channel. A consolidation/pullback towards the lower end of this trend channel would not be surprising. This pattern has been in place for several months.

Also, investors seem to be becoming more worried about rising interest rates/inflation. A faster, more substantial recovery, driven by stimulus, could spark pockets of inflation, which could trigger a change in stock market leadership. Indeed, the economy's manufacturing sector has recovered strongly and is even seeing some supply constraints, while the services sector has lagged.

Small caps, energy, financials, materials, and industrials continue to show notable outperformance versus the rest of the S&P 500, highlighting this potential change in leadership. This outperformance reflects a rotation towards economically sensitive cyclical sectors that we have been discussing for several months now.

Fixed Income Takeaways:

Treasury yields continue to rise. The 5-year / 30-year spread hit its steepest level in over five years. The 10-year Treasury yield touched 1.39% before pulling back to its recent level of 1.34%.

Despite this rise in yields, the Federal Reserve (Fed) remains focused on full employment for all American workers. On Friday, NY Fed president Williams told CNBC that he is not concerned about the recent increase in yields.

Williams’ comments are consistent with the notion that the Fed is more focused on the composition of the move in yields and the drivers of that move, rather than just the 10-year yield itself.

The selloff in longer-dated debt has now spilled over into the corporate bond market. Longer-term corporate bonds have come under pressure, and corporate bond new issuance has slowed down over the past few weeks in sympathy with rising yields.

We expect investment-grade (IG) new issuance to pick up strongly this week – we will be watching carefully to see how this supply is absorbed in a rising rate environment.

Last week, municipal bond yields rose for the first time in many weeks. Two-year municipal yields rose 4 basis points (bps) on the week, while 5-30-year municipal yields rose 15-18 basis points.

Sentiment in the new issue municipal bond market also weakened in sympathy with rising yields. This weakening is forcing dealers to cut prices/increase yields to attract demand.

The new $1.9 trillion federal fiscal stimulus bill contains about $350B in additional state and local aid. We expect a vote in the House as early as the end of this week, with final passage in the Senate anticipated in mid-March.

Friday, 2/19/21

General Takeaways:

Massive global stimulus continues. For example, the size of the balance sheet of the US Federal Reserve (Fed) is up 80% year-over-year. The size of the European Central Bank’s balance sheet is up a similar percentage.

This stimulus has manifested itself in several ways – higher stock prices, rising inflation expectations, higher home prices, and higher energy/commodity prices.

The recent strong price action in various markets begs the question – are we currently in a bubble, and if so, what would cause that bubble to pop? Bubbles are very hard to identify in real-time. However, one common theme over the years is that bubbles typically burst when financial conditions are tightening. We explore this topic in greater detail in this week's edition of Key Questions, titled, "What Causes Bubbles to Burst."

As noted above, financial conditions are currently very accommodative, and the personal savings rate is increasing. When financial conditions tighten, the Treasury yield curve tends to invert. Recently, the yield curve has steepened, with long-term rates rising as short-term rates remain stable. These moves in rates are not indicative of tightening financial conditions.

Many areas of the economy continue to perform well, with US real retail sales, industrial production, and house prices showing considerable strength since the mid-2020 trough. The hospitality and leisure segment remains under extreme pressure, however.

With daily new COVID-19 cases continuing to fall, it seems reasonable to expect mobility trends to improve once the weather thaws. However, recent events in Texas will likely have a ripple effect throughout the US economy for the next several months.

Equity Takeaways:

US stocks opened higher this morning, bolstered by positive overnight economic news on the international front. The S&P 500 rose about 0.3% in early trading, with small caps up about 1%.

Rising interest rates seemed to weigh on investors’ minds this week, as the market chopped sideways to lower over the past several days. Over the last five trading sessions through Thursday, the S&P 500 was essentially flat, with small caps down between 1-2%.

The S&P 500 has been rising in a trend channel over the past four months. Investors seem to be hedging more when the S&P 500 reaches the top end of this channel and vice versa.

Earnings season is beginning to wrap up. As we’ve noted on recent calls, results have generally beaten expectations, but the market reaction has been muted. As long as earnings continue to improve, the S&P 500 should have a strong tailwind despite modestly rising interest rates.

The strength in Asia, especially Japan and China, is driving recent international stock markets. Conversely, European shares have been weak as the region has struggled with ongoing COVID-19 outbreaks.

Fixed Income Takeaways:

Long-term interest rates continue to inch higher. The 10-year Treasury yield began the week at 1.21% and recently moved above 1.30%. The curve's front-end remains pegged at a very low level, with the 2-year Treasury yielding about 0.11%.

The Federal Reserve (Fed) does not seem overly concerned with this recent move higher in rates. Multiple Fed members have stressed recently that the Fed remains focused on weakness in employment.

The rising rate environment has crimped new issue supply in the investment-grade (IG) corporate bond market. That said, new deals continue to be very well received. This week, the typical order book was about 5x oversubscribed, which is well above average.

IG corporate bond funds continue to see significant inflows – investors seem to have an insatiable appetite for credit funds even as rates have begun to rise. High-yield bond funds, which have performed very well recently, saw slight outflows.

Municipal bonds have continued to richen vs. treasuries and other types of fixed income over the last six weeks. Money continues to pour into municipal bond funds, and supply is down almost 20% year-over-year, leading to a supply-demand mismatch.

On Wednesday and Thursday, we finally saw a move higher in long-term municipal bond rates, with yields rising about 15 basis points (bps) across the two sessions. The tone in the municipal bond market on Friday morning is soft, extending the past few sessions' weakness.

Even after the move higher in yields of the past several days, municipal bonds remain expensive relative to treasuries.

Friday, 2/12/21

General Takeaways:

In a recent speech, Federal Reserve Chairman Jay Powell said that the employment picture is "a long way" from where it needs to be. Powell noted that the actual unemployment rate is probably closer to 10% and said that the Fed needs to stay focused on its "broad and inclusive" employment goal.

Powell’s comments underscore the fact that the Federal Reserve (Fed) is nowhere close to pivoting on policy, despite increasing optimism about the growth outlook associated with vaccinations and fiscal support. Massive, unprecedented fiscal and monetary stimulus will continue throughout 2021.

A big question for the coming year is whether the continued stimulus will stoke increased inflation. Market expectations for inflation in the back half of 2021 are rising, but actual Consumer Price Index (CPI) readings remain moderate.

Mobility trends have remained muted over the past several weeks, even as COVID-19 cases have dropped significantly. As the weather warms up and vaccinations continue, it seems reasonable to expect mobility to increase, which would be positive for the economy in general.

Equity Takeaways:

With most Asian stock markets closed today for their lunar new year holiday, US equities opened flat to slightly lower on Friday morning. International shares were also essentially flat.

Over the prior five trading sessions, the S&P rose about 1.2%, with small caps up about 4.5% during that period. On a year-to-date basis, the S&P 500 is up about 4.5% through Thursday, while small caps are up close to 16%, reflecting continued optimism about economic recovery through 2021.

Many investors are worried about an imminent stock market top. For comparative purposes, at the end of the 1990s bull market (March 2000), earnings growth was rolling over, the price/earnings ratio of the market was over 30x, and the Fed Funds Rate was 6%. The Fed would tighten rates further, to 6.50%, even after stocks peaked.

In contrast with March 2000, earnings growth remains strong, and both fiscal and monetary policy remains remarkably accommodative. As long as earnings growth continues and credit conditions remain favorable, the stock market will have a strong tailwind.

Coming into the 4th quarter of 2020, aggregate S&P 500 earnings were expected to decline by about 8%. With nearly 80% of companies reporting, actual performance has been much better than expected, with earnings growth in the 2-3% range.

As we’ve noted over the past few weeks, market reaction to earnings has been muted. Companies that beat their 2020 4th quarter estimates are not being rewarded as much as usual, while companies that missed 4Q estimates are not being punished as much as expected.

Fixed Income Takeaways:

The treasury curve continues to steepen. The 2-year treasury note yield hit an all-time low of 0.09% several days ago, while the 10-year treasury bond yield hit a post-COVID high of 1.19% on the same day.

The corporate bond new issue calendar was relatively quiet this week. That said, investment-grade (IG) spreads remain stable at their recent level of 92 basis points (bps) relative to treasuries. IG fund flows remain positive, and investors are favoring BBB-rated paper relative to single-A rated paper.

As measured by a widely followed index, high-yield bond yields fell below 4.00% for the first time this week. Even as yields fell, high-yield mutual funds saw slight outflows last week.

The weakest portion of the high-yield index (CCC-rated paper) continues to see increased demand and currently trades with a spread of 550 bps. The all-time low spread for CCC-rated paper is 510 bps.

Italian 10-year bonds yielded over 2% several months ago – they now yield 0.45%.

These examples of declining yields are all linked. Bond market participants across the globe are betting on continued monetary support, as well as low-to-moderate inflation.

The story remains the same in the municipal bond market. Money continues to pour into the sector, and with light-to-moderate supply expected, spreads will likely remain tight over the near-term as investors chase a limited supply of bonds.

Monday, 2/8/21

General Takeaways:

News sentiment towards the COVID-19 vaccine has declined significantly over the past month. Expectations for the vaccine are currently low. If optimism around the vaccine begins to increase once again, we could see another tailwind for the economy.

Reported new daily COVID-19 cases are down 19% in the past week and 48% since peaking last month. Hospitalizations are down 15% in the past week and about 33% since the peak. Fatalities typically lag cases by about three weeks and appear to be in the process of peaking.

According to a study from the Brown University School of Health, about 75,000 people have been vaccinated in COVID-19 trials. Out of those 75,000 trial participants, none have died from COVID-19, which seems to indicate that the various vaccines have high efficacy against the virus.

Several factions seem to be brewing within the Democratic party itself surrounding the ultimate size of the next stimulus package. Prominent economist Larry Summers is concerned that another large-scale fiscal package could touch off significant inflation. On the other hand, Biden administration officials, such as Treasury Secretary Janet Yellen, are pushing for large additional fiscal stimulus. The Biden Administration has suggested that additional stimulus should be enacted by mid-March, but based on these rising tensions, this deadline could prove optimistic.

Meanwhile, reflective of Summers’ comments, inflation expectations have risen over the past several weeks and long-term interest rates have begun to follow suit. Higher interest rates would not necessarily be negative for stocks, however, quick, sharp moves higher in rates have historically been a headwind for the stock market.

Equity Takeaways:

US stocks rose on Monday morning. The S&P 500 was about 0.5% higher, with small caps up about 1.5%. International stocks also traded fractionally higher.

Markets across the globe are acting as if they expect continued economic recovery throughout 2021. Risky assets, such as stocks and commodities, continue to perform well. The technical picture remains favorable.

Last week, the S&P 500 rose over 4%, made an all-time high, and rose each of the five trading sessions. Since 2010, the market has risen over 4% in a single week on 16 different occasions. The market was higher the subsequent week on 10 of those occasions, however, the average move was slightly lower.

After such a sharp move higher, we expect some backing and filling to allow time for investors to digest the recent stock market strength.

4Q:2020 earnings season is nearing a close and was generally positive. Earnings estimates for 2021 continue to increase. If this trend continues, increasing earnings estimates will be a strong tailwind for equities in 2021.

Fixed Income Takeaways:

Treasuries remain under pressure, with long-term interest rates continuing to move higher. The 30yr treasury yield recently exceeded 2% for this first time in also a year. The 10yr yield is currently about 1.19% and has moved higher for eight consecutive trading sessions.

Midweek auctions of treasury securities could give us another clue into investor sentiment surrounding interest rates and inflation.

As treasury rates rose last week, demand for corporate bonds has remained strong. Spreads tightened in both investment-grade (IG) and high-yield credit last week.

As we’ve noted over the past several weeks, municipal bonds remain rich across the curve. Absolute municipal bond yields are approaching the all-time lows last seen in August 2020.

Out of the approximate $9B of municipal bond supply expected this week, almost $4B is expected to be taxable issuance. This type of dynamic makes it difficult to find supply in true tax-exempt paper, driving overall spreads tighter.

Friday, 2/5/21

General Takeaways:

Despite high current valuations and bubble-like behavior in certain areas of the stock market, vaccine adoption progress will likely drive the broader market over the coming months. If the reopening of the economy is faster-than-expected, the stock market should benefit, especially cyclical sectors that are more leveraged to a reopening.

The last few weeks have brought progress on this front, with COVID-19 case growth falling as vaccinations steadily rise. Hospitalizations are also steadily decreasing.

On Tuesday, February 9th at 3 pm ET, Key Private Bank will be holding a special national client call with Dr. Stephen J. Thomas, MD. Dr. Thomas is the Chief of the Division of Infectious Diseases and Director of the Institute for Global Health and Translational Science at SUNY Upstate Medical University.

Dr. Thomas was directly involved in the development of the Pfizer COVID-19 vaccine.

Monthly non-farm payrolls were reported on Friday morning, and despite headline growth of 49,000, serious weakness persists in the hospitality and leisure sectors. The headline unemployment rate fell to 6.3%, led by strong job growth in business and professional services.

Despite continued progress in reducing unemployment, the labor participation rate fell once again, which implies some underlying weakness in the labor market that is likely not captured by the headline numbers.

Equity Takeaways:

The S&P 500 finished at another record high yesterday and is looking to finish up the best week since November. The S&P 500 was up about 4.2% on the week through Thursday, with the Nasdaq up over 5% during that timeframe.

This morning, the positive trend continued, with the S&P 500 rising another 0.3% in early trading. Small caps fared slightly better, rising 0.7%. International shares were also marginally higher.

The stock market seems to have shaken off the Reddit-driven volatility of last week, with several prominent brokerage firms reducing trading restrictions on Friday. Last week’s overall stock market correction was in the 4-5% range – we’ve seen several similar bouts of volatility since the March 2020 lows.

4Q:2020 earnings season is approaching a close, and it was a strong one, with over 80% of companies beating analyst estimates. That said, the market reaction to this good news has muted – it remains a "sell-the-news" quarter.

Many companies remain reluctant to provide full-year 2021 guidance given the uncertain forward outlook. Investors are rewarding companies that have been able to provide more clarity.

We continue to favor US stocks and non-US emerging market stocks vs. developed market international equities based on our internal asset allocation models.

Fixed Income Takeaways:

The 10-year treasury yield drifted higher throughout the week, beginning the week at 1.06% and rising to its current level of 1.18% on Friday morning.

With front-end treasury yields anchored by stable Federal Reserve policy, the yield curve continues to steepen as long-end yields rise. The yield difference between 5yr treasuries and longer-dated treasuries is at its widest level since 2015. A steepening yield curve is a positive for financial stocks, which have shown notable outperformance over the past week.

Within the new issue corporate bond market, we continue to see strong demand for environmentally and socially conscious (ESG) fixed income securities and strong demand for corporate bonds with a 20yr tenor.

Despite the selloff in treasury prices this week, municipal bond prices did not budge. As a result, the ratio of municipal bond yields to treasury yields has continued to compress. Within longer-dated securities, these ratios are at all-time lows, implying that certain municipal bonds are historically expensive relative to treasuries of similar duration.

Democrats are proposing another round of fiscal stimulus in the amount of approximately $1.9 trillion, while Republicans have countered with a plan about 1/3 the size. The Democratic proposal contains significant additional support for state and local governments, while the Republican plan includes no additional direct aid for municipalities.

Monday, 2/1/21

General Takeaways:

Special Guest: Oscar Sloterbeck – Senior Managing Director, leader of Evercore ISI’s Company Surveys Team.

As head of the Company Surveys Team, Mr. Sloterbeck oversees proprietary surveys of companies, investors, US states, as well as teens and young adults. These surveys provide unique insights into the economy and market sentiment.

Daily new COVID-19 cases are down 36% in the US since peaking 17 days ago. The daily change in hospitalizations is down 21% from the peak, and the death rate also appears to be peaking.

Evercore ISI compiles weekly data from corporations to get a pulse on the economy. Over 350 companies in 29 different industries participate in Evercore’s surveys, which provide a real-time, bottom-up pulse on how the economy is doing. Survey data goes back to 1993.

The correlation between Evercore’s data and government-reported GDP growth and Purchasing Manager Index (PMI) data is solid. Current Evercore ISI Company Survey data is consistent with about 3-4% GDP growth for 2021. Evercore is projecting a strong 1H:2021 as the economy reopens.

Evercore ISI Company Surveys Diffusion Index: overall data did weaken in November and December as COVID-19 spread, but the data has strengthened again over the past month. Retailers and restaurants both showed improving sales in January.

On the other hand, Evercore’s consumer comfort index clearly weakened from mid-October to mid-January as the COVID-19 outbreak worsened.

In general, companies are reporting that the reopening and sales recovery is happening faster than expected, resulting in lower-than-normal inventories. Commercial real estate remains one area of notable weakness, along with airlines.

Equity Takeaways:

January 2021 was essentially a flat month for global equities. US stocks dropped -0.4% during the month, with global equities ex-US up 0.2%.

Within the US, small caps rose about 5% in January, while large caps dropped 1%. Overseas, emerging market stocks rose 3% on the month, while developed international stocks fell 1.1%.

January effect: going back to 1928, when January is positive, the full year is positive about 80% of the time. When January is negative, the whole year is positive a little less than 50% of the time.

"Retail favorite" stocks continue to power higher and have significantly outperformed the broader market since the March 2020 trough despite facing significant business challenges. Heavily shorted stocks have also outperformed considerably in recent days.

Implied volatility (VIX) has moved higher with the recent market volatility, with the VIX trading around 32.50 this morning. This indicator had settled into the low 20s throughout much of December and January.

Fixed Income Takeaways:

Key Private Bank has consistently noted the strong link between the corporate credit markets and the equity market, so continued strength in credit would be a favorable tailwind for equities as we go through 2021.

Inflation is a hot topic among Evercore’s customer base. Across many sectors, expectations of inflation and interest rates have increased, most notably within the real estate and industrial sectors.

As noted above, pressure on supply chains contributes to increasing inflationary pressures in the industrial sector.

January 2021

Friday, 1/29/21

General Takeaways:

As evidenced by the wild trading activity in certain individual stocks this week, markets have become more fragile. The conditions exist for isolated bubbles, something we profiled at the beginning of the week in our Key Questions article. Ultra-accommodative monetary policy, fiscal policy that has created an increase in disposable income, reduced trading frictions, and the rise of passive investing have all contributed to the current situation.

Overall, Key Private Bank believes the overall impact of this week’s activity should be limited, as the combined market capitalization of the stocks in focus represents a tiny portion of the overall market. Much of the activity has been concentrated in heavily shorted companies as well as those that are unprofitable.

One takeaway for the broader market is that coming into this week’s episode, overall sentiment was very stretched. Retail trading volume was spiking even before this week, and a low put-call ratio has also been indicating complacency.

Despite the headline volatility, credit markets have remained calm throughout the week, which is a positive signal in that we have not seen contagion into other asset classes.

On Tuesday, February 9th at 3 pm ET, Key Private Bank will be hosting a national client call with infectious diseases physician and Pfizer vaccine coordinating principal investigator, Dr. Stephen Thomas().

Equity Takeaways:

After a bit of a snapback rally yesterday, US large caps are opening about 1% lower this morning. Small caps, however, are slightly higher. Overall, it has been a tough week, with most major US indices falling about 2%.

The weakness has been especially pronounced in cyclical sectors like financials, materials, and energy. All of these sectors have dropped between 3-4% over the past five trading sessions. Defensives, such as consumer staples and utilities, are essentially flat over the same timeframe.

International markets have also had a tough week, with most major indices falling 2-4% – increased lockdowns have depressed estimates for near-term economic expansion.

Thus far, about 50% of the S&P 500 has reported 2020 4th quarter earnings, with about 80% beating street estimates. The reaction to earnings has been negative for the most part – it remains a "sell the news" earnings season. International markets have also seen similar activity, with investors more focused on the forward outlook.

The S&P 500 remains in an uptrend; however, this week’s price action has likely kicked off a consolidation phase that could take some time to work, though.

Fixed Income Takeaways:

This week’s Federal Reserve (Fed) meeting did not result in any major changes to policy. Fed Chairman Jerome Powell does not seem concerned about future inflation, characterizing any possible return of inflation as "transitory."

Rather than worrying about inflation, the Fed seems more concerned about the economic recovery falling short of expectations. The Fed is looking for a deep, broad, and sustained recovery to include as many of the country’s workers as possible.

Due to stock market volatility, the early portion of this week was quiet in the new issue investment-grade (IG) market. That said, as noted above, spreads have remained firm, and investors continue to pour money into the asset class.

The high-yield bond market tends to be more correlated with equities than the IG bond market – high-yield bond funds experienced outflows over the past week, but spreads have not widened much.

Municipal bond yield ratios relative to treasuries continue to drift lower (municipals continue to richen relative to treasuries). The asset class continues to experience a supply/demand mismatch, with strong investor demand chasing a small supply of bonds.

Monday, 1/25/21

General Takeaways:

Merck announced they are discontinuing two COVID-19 vaccine candidates due to comparatively weak immune responses highlighting some of the complexities involved with vaccine development. Despite this setback, a cumulative 17.5 million total vaccine doses have already been administered in the United States.

On the positive front, the growth of COVID-19 cases and hospitalizations has inflected lower, and the data continues to improve. Cases are down 24% since peaking ten days ago, while hospitalizations are down 7% vs. a week ago.

At the same time, fiscal and monetary stimulus continues to flow through the economy, further bolstered by the bills passed in late 2020. A combined $11.3 trillion of fiscal and monetary stimulus has been injected into the US economy since February 2020 (over 52% of GDP). On a global basis, more than $29 trillion of stimulus has been injected during this timeframe (almost 34% of global GDP).

This stimulus reflects in the M2 money supply, which has surged more than $500 billion in the last two weeks alone (27% year/year). The M2 money supply includes cash and checking deposits, short-term bank time deposits, and certain money-market funds.

On a global basis, we’re seeing stimulus dollars impact a wide variety of markets. The US housing market remains extremely strong, while even the depressed oil & gas sector has seen its rig count inflect higher. Across the globe, 4Q Chinese retail sales surged 24% quarter/quarter to all-time highs.

Inflation expectations have also reacted to these massive stimulus programs, with one broad measure of inflation recently moving towards 2.2%, its highest reading in several years. In general, goods inflation is ticking higher, while services inflation remains muted.

One example of goods inflation: the "Input Prices" component of the US Markit Composite PMI recently spiked to its highest level in many years. This reading indicates that corporations are beginning to feel the impact of higher commodity prices.

Equity Takeaways:

US equities opened mixed this morning. Large caps opened about 0.4% higher, with small caps up about 1%. The technology sector continued its strong performance from last week, up over 1%, while cyclicals lagged, down about 0.5%.

Last week, the S&P 500 was higher for the third week out of four. Each of these gains was between 1.5% and 2%. Overall, the market remains pinned to the upper end of a trading channel, which is a positive technical pattern.

As we’ve noted recently, frothy investor behavior is on the rise. Trading in highly valued stocks with negative earnings has surged, margin debt continues to rise, and broad-market valuations are on the high side relative to history.

Despite these warning signs, the economic and interest rate backdrop is significantly different now than in 2000. Back in the late 1990s, the Federal Reserve (Fed) was in the process of raising interest rates to combat inflation. Today, the Fed policy remains very accommodative, interest rates are low, and corporate operating margins remain strong.

Key Private Bank continues to believe that a pause in the ongoing rally is possible to allow for time to work off some of the excesses listed above. Still, we continue to caution against becoming too bearish.

35% of the S&P 500 reports earnings this week, including many notable names. It has been a "sell the news" quarter – companies that have exceeded both revenue and earnings expectations have underperformed the broader market, which is very unusual.

Fixed Income Takeaways:

With a slight risk-off tone, treasury yields opened about 2-3 basis points (bps) lower on Monday. The 10-year yield was 1.06%, at the lower end of its recent channel.

The Fed meets again this week. Market participants are not expecting any dramatic policy changes and are likely to be reassured that no changes to forward guidance are imminent.

The US high-yield bond market has seen a banner month for new issuance. Currently, the high-yield market is about $1.2 billion shy of its busiest month for new issuance on record. We see similar activity in the municipal bond market as the thirst for yield continues.

AAA-rated municipal bonds remain very expensive on a historical basis relative to treasuries. Year-to-date, $11 billion has moved into the municipal bond market in the form of positive fund flows, while only $12-$13 billion of new deals have priced. Currently, there is not enough new issuance to soak up all the demand.

With the quest for yield, private core real estate / private credit funds look relatively attractive compared to certain areas of the fixed income markets.

Friday, 1/22/21

General Takeaways:

This week, President Biden announced his new economic recovery plan, which comprises fiscal stimulus approximating 5% of GDP in 2021, remaining in place until 2025. Tax increases would then be implemented.

President Biden also released a comprehensive COVID-19 response plan that will hopefully continue the building momentum in the fight against the disease. Even before this plan, the pace of the vaccine rollout was increasing. Over 16 million Americans have received a COVID-19 vaccine, with almost 10 million vaccinations occurring in the last ten days alone.

Encouragingly, as vaccinations have increased, COVID-19 case growth is turning lower, with total daily hospitalizations also inflecting lower over the past several weeks. The improvement has been broad-based around the United States and the world.

Despite this positive news regarding COVID, economic data in the Eurozone has weakened over the last several months due to increased lockdowns. A double-dip recession in Europe is now possible, although analysts are also expecting a quick rebound as the vaccine rollout expands.

In the United States, the employment market remains stagnant, with over 900,000 workers filing initial unemployment claims last week. Despite this fact, the stock and housing markets' strength has bolstered overall consumer net worth to record levels. In many ways, the US situation remains a tale of two economies.

Equity Takeaways:

US stocks drifted lower Friday morning. The S&P 500 was down about 0.25%, with small caps down about 0.50%. Over the past several days, the tech-heavy Nasdaq has taken the lead, with more economically sensitive areas of the market pausing on a relative basis.

After several months of outperformance, cyclicals and small caps both underperformed large-cap growth stocks this week. Cyclicals and small caps would likely both be disproportionate beneficiaries of any sizeable fiscal stimulus package, so their relative performance could somewhat link to government policy over the next several months.

Despite mutual fund data showing negative flows into equities since 2018, significant positive flows continue into certain individual US stocks. As noted in the past, signs of complacency and even excessive optimism emerged in certain stock market areas over the past several months.

Due to this excessive optimism, a pause in the current rally would not surprise us. However, we would caution against becoming overly bearish. Instead, we would closely scrutinize current portfolio positioning and look to add additional sources of diversification.

The 2020 Fourth Quarter earnings season is off to a strong start, with over 90% of reporting companies beating earnings estimates and over 60% of companies beating revenue estimates. The reaction to earnings has been mixed, with investors much more focused on each company's forward outlook.

Year-to-date (YTD), developed international stock markets have outperformed the S&P 500 by about 0.80%, and emerging market equities have performed even better on a relative basis. The S&P 500 is up about 2.7% YTD, while developed ex-US markets are up 3.5% and emerging markets are up 8.8%.

Fixed Income Takeaways:

Despite rising inflation expectations, the Federal Reserve continues to signal a willingness to be ultra-patient with respect to rate increases. This stance continues to support risky assets as well as inflation expectations.

The 10-year treasury yield has traded in a tight range of 1.06% to 1.14% this week. As longer-dated yields have risen in response to increasing inflation expectations, the spread between 5-year and 30-year treasury yields has widened to about 140 basis points (bps).

The CCC-rated debt index recently hit an all-time low yield of about 6.42%. CCC-rated debt has rallied for 20 straight sessions and represents the riskiest portion of the high-yield debt market. Investors are clearly reaching for yield.

The investment-grade (IG) corporate bond market is also showing continued strength. New deal flow is solid, spreads are grinding tighter, and money continues to flow into the sector.

The story is similar in the municipal bond market. Despite expensive pricing relative to treasuries, investors continue to move funds into municipal bonds, perhaps anticipating increased federal aid from the Biden administration.

Friday, 1/15/21

General Takeaways:

President Donald Trump was impeached for the second time this week, with 10 Republicans supporting the indictment. The charge is "incitement of insurrection." From the markets’ perspective, the move is being viewed as largely symbolic but could crowd the new administration’s agenda during the early days of Joe Biden’s presidency.

Recent COVID-19 trends are mixed. Deaths hit another recent high yesterday. However, net new hospitalizations have begun to decrease. Hopefully, increased vaccinations will lead to a sustained decline in hospitalizations, but there is some concern that cases remain elevated.

Progress on the vaccine front appears to be accelerating. As of Monday, roughly 6 million Americans had been vaccinated. By week’s end, that number increased to over 11 million.

Real-time economic data has cooled in response to the latest spike in COVID-19 cases but has not collapsed. The Dallas Federal Reserve collects information on mobility using anonymous cell phone data, and while the data has undoubtedly weakened over the last few months, it remains well above March-April 2020 levels.

The US Chamber of Commerce describes the current economic rebound as a "K-shaped" recovery, where certain companies exposed to digitization have benefitted from the pandemic. At the same time, other sectors, such as leisure and hospitality, remain under severe stress. Further reflective of this, the leisure and hospitality sector accounts for nearly half of post-COVID total job losses. On the other hand, other industries have suffered less, and some have even strengthened (i.e., e-commerce).

Inflation is beginning to pick up. The headline Consumer Price Index (CPI) rose 4% year/year, while US core personal consumption expenditures (PCE) data is approaching 2% year/year growth. The Federal Reserve (Fed) watches core PCE data closely.

Despite the recent higher readings on inflation, the Fed used cautious language this week to assure markets that no tightening of policy is imminent. The Fed seems more focused on weak economic growth in certain areas of the economy.

On the fiscal side, President-elect Biden released the details of his first proposed economic stimulus plan yesterday. Interestingly, the plan contains no tax hikes. Biden’s team signaled that a second plan is imminent, which will address infrastructure. Indeed, continued global stimulus should be a tailwind for both the economy and markets as we enter 2021.

Equity Takeaways:

Stock markets opened slightly lower in early trading on Friday. The S&P 500 dropped about 0.30%, with small caps down about 1.2%. The tech-heavy Nasdaq was marginally positive.

Investors could be "selling the news" of Biden’s new stimulus package and were possibly hoping for a slightly larger package overall. Retail sales were also weaker-than-expected this morning, which could be another contributor to this morning’s soft opening.

After much of 2020’s performance was driven by a narrow group of stocks, the recent rally has broadened out to include more sectors and styles. The increased relative performance of cyclical sectors and small caps indicates improved confidence in the economic outlook and is a healthy sign for the overall stock market.

Indeed, in 2020, the five largest components in the S&P 500 (all big tech names) delivered 63% of the total return of the entire index. These five large companies account for about 21% of the index’s market capitalization.

Fixed Income Takeaways:

The treasury yield curve continued to steepen for much of the week. Earlier this week, the treasury held auctions in both the 10-year and 30-year tenors, and both were met with strong demand.

As noted above, Fed Chairman Jerome Powell remains focused on the labor market and is not publicly worried about the recent pickup of inflation. We expect Fed policy to remain extremely accommodative in 2021.

Supply in the corporate bond market continues its strong pace, although we expect modest issuance on Friday due to the weak equity opening. The market's general dynamic remains unchanged, with spreads continuing to grind tighter in both investment-grade and high-yield paper.

The municipal bond market has a pronounced "January effect," where a large amount of cash usually enters the market due to December maturities and coupon payments. New issue supply is currently sparse, and reinvestment demand continues to drive spreads tighter.

The typical yield ratio for a high-quality 10-year municipal to the 10-year treasury is about 85-90%. The current ratio is about 71%, which is very low by historical standards, indicating that municipals are currently expensive relative to treasuries.

Biden’s proposed stimulus package includes $350 billion for state and local governments, $170 billion for colleges and schools, and $20 billion for mass transit.

Monday, 1/11/21

General Takeaways:

COVID-19 cases spiked over the last week, with cases surpassing the pre-Christmas peak after a 1-week lull. The South and West continue to be the most significant hotspots, while case growth continues to decline in the Midwest. Hospitalizations also continue to increase steadily.

Despite the negative headlines surrounding the COVID-19 situation, the incoming Biden administration seems intent on releasing as many vaccine doses as possible. Moderna’s output capacity is increasing, as is public trust in vaccine safety. Progress will not be a straight line (see new restrictions in China). Hopefully, virus cases, hospitalizations, and deaths will begin to trend lower later this quarter as the vaccine rollout expands.

According to The Wall Street Journal (WSJ), job losses in 2020 were the worst since 1939. The leisure and hospitality sectors account for nearly half of the losses. That said, specific sectors such as construction are nearing full recovery.

As the economy recovers, the WSJ reports that 2021 could be the best year on record for job growth. The consensus forecast is for the unemployment rate to fall to 4.6% by December 2021, from its current level of 6.7%. The unemployment rate was under 4% before the crisis.

A tale of two economies has re-emerged, with college-educated workers aged 25+ showing an unemployment rate of only 3.8%, vs. 7.8% unemployment for workers aged 25+ with a high school degree. College-educated workers may have an easier time working from home.

Equity Takeaways:

The S&P 500 rose 1.9% last week and hit all-time highs on three separate trading days. It was a "risk on" week, with cyclical sectors such as energy and materials leading the advance. The Democratic victory in the Georgia Senate elections has investors pricing in additional fiscal stimulus, which should support the more economically sensitive sectors of the market.

The S&P 500 has moved towards the top of its rising trend channel, and sentiment remains frothy in certain areas of the market. A pause in the ongoing rally would not be a surprise.

The pause in the rally may have begun this morning, as the S&P 500 dropped about 0.75% in early trading, while the Nasdaq dropped about 1.25%. Defensive sectors, such as healthcare, consumer staples, and utilities, fared the best in early trading.

Retail investor activity in single stock options surged once again in November – December 2020. This type of activity is one sign of ebullient investor sentiment.

Fixed Income Takeaways:

Longer-dated treasury yields increased by 20 basis points (bps) last week. Both the 10-year and 30-year treasuries are trading at their highest yields since March 2020. The 5-year is also trading at its highest yield since June. The 30-year treasury bond last traded at 1.90%, with the 10-year at 1.13% and the 5-year at 0.49%.

Improved prospects for additional fiscal stimulus (and the resultant higher deficits/inflation) are driving longer-dated yields higher. The yield curve continues to steepen as a result.

Last week saw $55 billion of new investment-grade (IG) corporate bond supply. About $37 billion of those deals came from financial companies. As treasury yields have risen, investors continue to pour money into the asset class – spreads continue to tighten as a result.

Last week, municipal bonds outperformed treasuries. The ratio of AAA municipal yields to treasury yields in the 5-year, 10-year, and 30-year tenors is at a historic low (municipals are expensive relative to treasuries).

Municipals are in high demand, and in recent weeks, there has been a dearth of new issuance. This supply/demand imbalance has driven spreads tighter.

Friday, 1/8/21

General Takeaways:

The 25th Amendment provides a framework for the transfer of power to the Vice President if the President of the United States is temporarily unable to fulfill his duties.

If the President is unable or unwilling to voluntarily transfer power, the vice president and a majority of Cabinet officials or "such other body as Congress may by law provide" could initiate proceedings on their own.

The chances of President Trump being removed by the 25th Amendment over the next few weeks seem slim, as do the prospects for another round of impeachment hearings.

The next Congress is set, but the margins are very narrow. With a narrow margin, Democrats can still control floor time and committee chairmanships, confirm Biden’s nominees and reverse Trump’s regulations. Democrats will have a tough time eliminating the filibuster and are thus unlikely to pass very progressive policies.

Main points of the Democratic agenda:

  • Fiscal stimulus (direct payments to taxpayers)
  • Infrastructure spending
  • Drug pricing reform
  • Expansion of the Affordable Care Act (ACA)
  • Expansion of minimum wages
  • Modest tax reform (likely via hikes on wealthy individuals and corporations)
  • The expectation is for Monetary policy to stay very accommodative

The US employment situation is stalling– 140,000 jobs were shed in December (vs. expectations for a gain of 50,000), ending seven months of job growth. The unemployment rate is currently 6.7%. The leisure and hospitality sector remains under siege, shedding almost 500,000 jobs in December alone.

Chinese defense companies (and companies linked to them) are coming under scrutiny from US investors due to a recent US presidential executive order banning their purchase in the US. These events could increase volatility around Chinese companies in the future.

Equity Takeaways:

US equities briefly faltered after this morning’s weaker-than-expected employment report but recovered to open slightly higher. Both large and small cap US equities were up fractionally this morning. International stocks fared better and were generally 1.5% to 2% higher.

Small cap stocks have advanced in 8 out of the last nine weeks. In the last four trading days, small caps have risen 6% and have increased more than 30% over the previous six months. After such a strong short-term rally, a pause seems likely in this asset class.

Defensive industries, such as consumer staples and utilities, have lagged during the small cap rally. Expectations for strong earnings growth in 2021 are leading investors to look for more cyclical exposure.

Most of the strong stock price performance in 2020 was driven by P/E multiple expansion rather than earnings growth. We expect earnings growth to be the significant driver of stock price performance in 2021.

Fixed Income Takeaways:

Long-term treasury rates continue their slow move higher. The 10-year yield is currently trading around 1.09%, vs. 0.93% last week. The 30-year treasury yield is also moving higher, last trading at 1.86%. With short-term rates still anchored by the Federal Reserve, the curve continues to steepen.

The 10-year Treasury Inflation-Protected Security (TIPS) breakeven, a measure of expected inflation, also hit a recent interim high at 2.10%. TIPS are a form of US treasuries that investors can use to protect portfolios against higher-than-expected inflation.

The strong equity backdrop and improved fiscal stimulus prospects have continued to support heavy investment-grade (IG) corporate bond issuance. We had expected $40 billion of new issuance this week – through Thursday. We’d already seen $50 billion of deals hit the market.

Travel and leisure industry companies continue to price new deals despite continued severe pressure on their underlying businesses. This dichotomy highlights very easy existing financial conditions, where even stressed borrowers have access to the credit markets.

Short-term funding markets are also functioning well. Even with the recent political unrest, we saw very little stress in the commercial paper markets over the past week.

The recent Democratic victory in the Senate is likely a positive for municipal bonds, as the prospects for direct federal aid to state and local governments are higher under a Democratic regime.

Short-term municipal bonds remain expensive relative to treasuries. There is currently a lot of money chasing a limited bond supply.

Monday, 1/4/21

General Takeaways:

The US death toll from COVID-19 surpassed 350,000 last week, the same day, nearly 300,000 new cases were reported – the highest number of cases reported for a single day in the US. A new, rapidly spreading variant of the virus is adding to the problem. Hospitalizations are also at a record level.

Slow vaccine rollouts have been an issue – as/of Saturday, January 2nd, only about 4.2 million Americans have been vaccinated, vs. initial goals of about 20 million by the end of December. Vaccination distribution needs to ramp up quickly.

It took ten months to reach 10 million total cases in the US, but less than two additional months to reach 20 million.

That said, case growth in the Midwest peaked in November and has inflected lower. Discouragingly, case growth in the West and South appear to be turning higher once again after a Christmas lull.

Elections in Georgia will determine control of the Senate tomorrow (Tuesday, January 5). If the Democrats win both open seats, the Senate will be split 50/50, and the Democrats will effectively gain control.

On the economic front, record amounts of both fiscal and monetary stimulus have bolstered stock prices and consumer balance sheets around the world. In the fourth quarter of 2020, global equities rose over 15%, while global bonds rose over 5%.

Equity Takeaways:

US equities opened flat to slightly higher this morning. Last week, the S&P 500 rose about 1.5%. Typically, a strong finish to December results in a positive early January.

While the calendar may have flipped, the drivers of the equity market remain the same. Credit conditions remain favorable, as do momentum and trend.

The two-year return of the S&P 500 (2019-2020) was more than 49%, the most substantial two-year return since 1998-1999. Historically, the market has risen at least 40% over a two-year period on 11 occasions. In the following year after these increases, 5 out of 11 years saw negative returns.

The fourth quarter saw dramatic divergences. For example, US small cap stocks rose over 31% during the fourth quarter alone, while US large caps rose about 12% during the same timeframe. Value sectors, such as energy and financials, also put in a strong performance in the fourth quarter but remained severe laggards for the full-year 2020.

The biggest question in the future is whether the fourth-quarter outperformance of value stocks and more economically sensitive sectors will continue. Stronger-than-expected economic growth and/or higher interest rates will tend to favor these areas of the market.

Implied volatility (VIX) continues to grind lower, with the VIX last trading around 24. Declining implied volatility is a short to intermediate-term tailwind for the market, as certain types of mechanical trading strategies tend to add equities as volatility declines.

Fixed Income Takeaways:

Investment grade (IG) corporate bond credit spreads have tightened back to pre-COVID levels, indicating that stress within the funding markets has mostly abated. High-yield bond spreads have also compressed significantly.

IG issuance is opening 2021 with a bang. We expect about $40 billion of issuance this week. In total, more than $1.7 trillion of IG corporate debt was issued in 2020, a record. For 2021, about $1.2 - $1.3 trillion of issuance is expected.

The yield curve steepened in 2020 as inflation expectations have risen. The yield curve's front-end is very sensitive to Fed rate policy, while the longer-end is more sensitive to inflation.

The recent federal fiscal stimulus package did not feature direct stimulus to state and local governments. However, municipalities will benefit indirectly, as $82 billion is earmarked for schools and $45 billion for public transportation.

The Federal Reserve’s $500 billion municipal credit facility expired on December 31, 2020. Only two borrowers tapped this facility, to the tune of $6 billion, so its direct effect on the markets was limited (although the facility certainly provided psychological support during a time of stress).

Municipal bond issuance is expected to be light this week as market participants await the Georgia Senate election results.

2020 Key Private Bank Investment Briefing Notes

December 2020

Monday, 12/14/20

General Takeaways:

Pfizer began shipping the first doses of its COVID-19 vaccine this week. The timeline for creating this vaccine was historically short and is a testament to human ingenuity, a theme we have been emphasizing for much of 2020.

According to a Gallup poll from late November, assuming zero cost, about 2/3 of Americans will agree to be vaccinated. This number has increased from a 50/50 split back in mid-September.

December 14th is Voting Day all over again – electors will meet in their respective states and cast their ballots for President / Vice President. On January 6th, the votes will be counted in Congress. Early January will be busy, as Georgia holds its two Senate elections on January 5th – polling in both of those races remains very tight.

Massive monetary and fiscal stimulus continues. Since March 2020, the Federal Reserve has added almost $4 trillion of assets to its balance sheet. The goal of these purchases is to drive interest rates lower across various types of fixed income.

The Federal Reserve (Fed) is not alone in its quantitative easing endeavor. Central banks throughout the world have driven yields on about 27% of the Global Aggregate Bond Index into negative territory. This type of activity continues to force investors into riskier assets to meet their return goals.

According to Cornerstone Macro, US Real GDP could be back on trend by the end of 2021, with unemployment dipping back to around 4.0% during the same timeframe. Despite this positive intermediate-term outlook, near-term challenges remain. For example, Germany will enter a full lockdown on Wednesday, which will likely have a negative short-term impact on European economic growth.

Negotiations continue between the United Kingdom and the EU regarding Brexit. These Brexit negotiations are occurring around the clock, and the timeframe for a resolution continues to shrink. Three major issues include fishing rights, competition regulation to ensure corporate fair play on both sides, and governance issues (enforcement of sanctions).

Equity Takeaways:

The S&P 500 was down slightly last week. However, small caps had another positive week and have risen for six consecutive weeks. Breadth has generally been positive throughout the recent strong run.

Underneath the surface, value stocks slightly underperformed growth/momentum last week. Value stocks were down about 1.5%, with momentum down fractionally. The tech-heavy Nasdaq made a new all-time high last week before pulling back slightly.

Monday morning, US stocks were rising once again. 10/11 major sectors were higher, with only energy fractionally negative. Large caps rose by about 0.75%, with small caps up 1.25%.

As noted above, we see increased risk-taking in various pockets of the stock market. The median price-to-sales ratio of recent technology initial public offerings (IPOs) hit a recent high of over 20x, which is the highest level since the late 1990s. For context, this metric approached 50x towards the end of the tech bubble.

It’s yet another "Merger Monday," with a larger pharmaceutical deal and a large bank merger taking center stage. Generally, this type of merger activity signals corporate CEOs' confidence in the future.

Fixed Income Takeaways:

The Fed meets Tuesday and Wednesday of this week (12/15 and 12/16). We are not expecting any significant policy changes this week.

Last week, investment-grade (IG) corporate bond spreads widened about 5 basis points (bps) but are reversing tighter this morning to the tune of 2-4 bps. High-yield spreads were about 9 bps wider last week.

Municipal bond yields dropped about 1-4 bps across the curve last week but lagged similar-maturity treasuries, where yields dropped 2-7 basis points.

This week, we’re expecting over $10 billion of new municipal bond deals, including about $4 billion of taxable municipal issuance. Taxable issuance remains elevated relative to history.

Dealer inventories remain sparse, and due to maturities, net supply in the municipal market expects to decline in December. Lean inventories, combined with negative net supply, sets up a favorable dynamic for spreads.

Friday, 12/11/20

General Takeaways:

COVID-19 cases continue to accelerate in all areas of the US. The Northeast and West are catching up to the Midwest in terms of daily new cases.

Hoping to stem the tide, an FDA committee voted yesterday to recommend the approval of Pfizer’s COVID-19 vaccine. We expect the organization to ratify the committee’s recommendation quickly.

This continued spread of the virus is causing the economy to slow down again. US TSA Checkpoint traveler throughput is rolling over, as is OpenTable US Seated Diner data. These two series are calculated in real-time and suggest that broader economic data may soften over the next several weeks.

Jobless claims also jumped sharply on December 4th, although some of the increase is attributed to a seasonal quirk. Nevertheless, 46/50 states reported increases in jobless claims, which is the highest number of states since March.

Polling in both of Georgia’s January 5th Senate elections has tightened, suggesting that both races are toss-ups. The betting markets (Predictit.org) still expect the Republicans to win at least one of those two races to maintain control of the Senate, however.

Over the next two weeks, we expect continued negotiations on a new fiscal stimulus package in the US. Sticking points are liability shields and the amount of aid to state and local governments. We will also be watching negotiations between the UK and EU surrounding Brexit, which remain contentious.

Equity Takeaways:

US equities opened slightly lower on Friday. Large caps dropped about 0.5%, with small caps down a similar amount. International stocks were mixed to slightly lower.

In an unusual combination, yesterday’s outperforming sectors were energy, financials, and technology. Overall, the market was slightly lower yesterday. This morning, 10/11 sectors were modestly lower.

In a sign of exuberance, retail equity trading volumes have exploded. Daily Average Revenue Trading volume and call option activity are both approaching their highest levels on record. Also, several high-profile Initial Public Offerings (IPOs) rocketed higher this week in initial trading.

The ratio of the Russell 2000 (small caps) relative to the S&P 500 (large caps) is quite extended compared to its historical average. Small caps shot higher last month and, based on this ratio, are likely due for a near-term pullback relative to large caps.

We generally remain constructive on equities but expect some modest near-term weakness to work off the overly bullish sentiment referenced above.

Fixed Income Takeaways:

The tone in the corporate bond market was a bit weak on Friday morning, and as a result, we are not expecting any new issuance on Friday. Investment-grade (IG) corporate bond spreads opened about 2 basis points (bps) wider this morning, somewhat reversing some modest tightening we saw earlier in the week.

In a typical calendar year, about $1 trillion of IG corporate bonds are issued. This year, we are likely to see about $1.7 trillion of new issuance. High-yield corporate debt volumes have also remained elevated, with even CCC-rated borrowers accessing the new issue markets.

At the next Federal Reserve meeting scheduled for December 15-16, we do not expect the expansion of long-term treasury purchases, aka another "operation twist." We anticipate the Fed to essentially stay the course with their current policies. The first "operation twist" was initiated in 2011 to push down longer-dated treasury yields.

The removal of the London Interbank Offered Rate (LIBOR) as a floating-rate benchmark has been delayed for two years, to June 2023. We recently published a detailed note on the expanded timeline for transition – please contact your Key Private Bank Advisor if you would like a copy of the report.

The municipal bond market is functioning well. Continued demand has driven municipal bond yields lower relative to treasuries. The 10-year high-quality municipals now yield about 0.70%, vs. about 0.90% for the 10-year treasury note.

Monday, 12/7/20

General Takeaways:

Friday’s jobs report was slightly weaker than expected and may spur both Congress and the Federal Reserve (Fed) to further action. The number of permanently displaced workers is rising, especially in stressed sectors such as leisure and hospitality. If another fiscal stimulus bill is in the cards for 2020, it will likely pass this week.

COVID-19 cases are still rising at an accelerating rate, with deaths and hospitalizations also increasing sharply on a lagged basis. Due to the recent progress on vaccine technology, the financial markets seem to be looking forward towards an improved 2021 – negative virus headlines are no longer impacting the markets.

Moving into 2021, in the aftermath of the post-COVID shock, it seems that the future has arrived early. In our 2020 outlook, we discussed several long-term themes, such as a "new productivity paradigm" led by the growth of artificial intelligence, cloud computing, and e-commerce. Indeed, companies in these sectors have been disproportionate beneficiaries from the pandemic.

Conversely, as a vaccine becomes widely available, those companies impacted most negatively by COVID-19 should benefit more by a return to normal. Some of the largest beneficiaries from the crisis, such as the large technology companies mentioned above, could face headwinds.

Our 2020 outlook also envisaged a possible "new economic paradigm," in which monetary policy has reached its limit, leading to an increase in fiscal deficits and a government spending surge. Increased government spending generally leads to increased inflation over the medium-term. Indeed, market expectations for future inflation have increased over the past few months.

As we move into 2021, we will continue to watch for rising inflation and a weakening US dollar. This type of environment heightens the need to incorporate new investment tools to protect the overall portfolio.

Equity Takeaways:

Last week was another solid week in the stock market. Monday marked the weekly nadir, with the rest of the week showing strength – Friday’s close was the highest close of the week. The market has risen four of the last five weeks.

This morning, large cap US equities were essentially flat in early trading. Small caps dipped lower by about 0.75%. International shares were also slightly lower.

The markets' internal dynamics remain positive – breadth remains strong, with many sectors participating in the recent rally. Small caps had another strong week, but growth stock performance was also solid – both sectors were up over 2% on the week.

Near-term risks to our generally constructive outlook on equities include the January 5th Senate runoff elections, as well as elevated near-term bullish sentiment (many investors are currently euphoric).

Several international trade concerns remain on our radar – the US is preparing additional sanctions on China, and the United Kingdom continues to wrangle with Europe in Brexit negotiations.

Fixed Income Takeaways:

The credit markets are shaping up for another busy week. Last week, about 75% of new corporate bond deals traded higher in price after initial closing, which is yet another sign of continued strong demand.

Investment grade (IG) corporate bond spreads were about 4 basis points (bps) tighter last week. High-yield spreads were 35 bps tighter on the week, with the high-yield index again plumbing new all-time lows in terms of yield.

Benchmark municipal bond yields were unchanged last week. Ratios of municipal bond yields to treasury yields have compressed due to recent investor demand for municipals, as well as a sell-off in long-term treasuries.

Despite about $10 billion of expected new issuance, the municipal bond market's net supply is expected to be negative $5 billion this month. Many issues are scheduled to mature this month, which will force investors to reinvest into lower-yielding securities.

We don’t expect the passage of a new stimulus bill to be a market-mover for municipals, as some type of deal has already been priced in by market participants.

Friday, 12/4/20

General Takeaways:

As the stock market climbs to new all-time highs, we believe that the market remains focused on the strong earnings recovery that is unfolding. As long as forward earnings estimates continue to rise, we think that path of least resistance for stocks is higher, notwithstanding an occasional pullback along the way.

Earnings are supported by a global economic recovery that continues to gain steam. Purchasing Manager Index (PMI) data out of China and the broader Asian region continues to impress. At the same time, recent data out of the United States and parts of Europe has also been very strong.

This economic recovery has continued despite continued worrisome news surrounding COVID-19 in the United States. Cases have inflected lower in the Midwest but remain well above their prior peak and continue to move higher in other areas of the country. Due to extensive travel on Thanksgiving, the numbers are likely to get worse before they get better. A vaccine can’t arrive soon enough.

Yesterday morning, monthly jobless claim data was released and was a bit softer than expected. Continuing claims remain elevated as certain areas of the economy remain in distress. This morning, a smaller-than-expected number of jobs were added in November while the unemployment rate fell to 6.7%. Several days ago, we began to hear increased chatter surrounding an additional bipartisan fiscal stimulus package before the end of 2020. Today’s employment data likely supports the case for further action.

Despite this discouraging employment data, the recent massive fiscal and monetary stimulus has filtered down to all types of asset classes worldwide. Driven by strength in housing and global stock markets, US consumer net worth is estimated to have spiked over 18% in the fourth quarter of 2020 alone.

Wild card: according to Predict.org, both Senate runoff races in Georgia are tightening. Recall that these special elections are set to occur on January 5th and will determine control of the Senate. Republicans need to win one of these two seats to maintain a majority. To this point, we believe that the stock market is still pricing in a Republican victory in at least one of these races, and investors have positively adopted the "gridlock is good" mantra.

Equity Takeaways:

US equity markets opened slightly higher this morning after a flat session yesterday. International markets are also trading higher today.

Optimism around the emergence of several COVID-19 vaccines, as well as a continued global fiscal and monetary stimulus, continues to drive stocks higher. As noted above, corporate earnings are supported by this stimulus and continue to improve, which is a strong tailwind for stock prices.

Sentiment remains elevated, with many investors increasingly bullish after the strong run of the past few months. These optimistic investors continue to bid up the price of bullish short-dated call options relative to bearish put options.

Environmentally and socially conscious (ESG) investing continues to gain market share, with assets-under-management in these types of strategies rising at a very fast rate. Key Private Bank has several ESG solutions available on our platform for clients interested in these strategies.

Fixed Income Takeaways:

The treasury curve continues to steepen, with longer-dated yields rising relative to the short-end of the curve. This steepening has increased ever since December 1st, which was the date that we began to hear increased chatter around a new fiscal stimulus package.

The new issue corporate bond calendar remains robust and continues to be met with strong demand. This is a dynamic that has been in place for over six months now.

Credit spreads continue to compress in the face of this high supply are investors continue to search for yield. High-yield corporate bond spreads have performed exceptionally well over the past few weeks, with yields in the space decreasing to levels not seen since mid-2014.

Municipal bonds also continue to see heavy demand. As money pours into the space, municipal bond yield ratios relative to treasuries are beginning to look expensive.

Municipal bond investors are grasping for extra income, driving yields down on higher-yielding municipals, despite continued weak fundamentals in many of the underlying credits.

November 2020

Monday, 11/30/20

General Takeaways:

Last week, the Dow Jones Industrial Average crossed 30,000 for the first time. Indeed, the general theme of the previous few weeks has been broader market participation.

For example, small cap US equities are up about 23% quarter-to-date (QTD), far outpacing the S&P 500’s 8.5% rise during the same period. On a year-to-date (YTD) basis, the S&P 500 is up about 14.5%, with small caps up about 12.5%.

During the recent rally, signs of speculation, such as leveraged ETFs, are gaining in popularity once again. Some of these funds use leverage to double or triple daily returns and are not appropriate for buy and hold/long-term investors. Notably, many of the larger ETF providers have steered clear. Buyer beware.

COVID-19 cases are showing no sign of letting up. Despite the continuing surge in cases, mobility data continues to hold steady. According to AAA, about 50 million people were expected to make a journey of more than 50 miles on Thanksgiving. This number is down only about 10% from last year’s record number.

Online spending on Black Friday surged 22% from a year ago, while foot traffic at retail stores dropped by about 50%.

Online vs. in-store spending is a microcosm for the rest of the economy, with the pandemic creating clear winners and losers. As public transit agencies slash services and certain large leisure-focused companies must cut headcount, several large technology M&A deals were announced over the weekend.

Details on President-Elect Biden’s cabinet are beginning to emerge. Biden’s pick for treasury secretary will be Janet Yellen, former chair of the Federal Reserve and the first woman Secretary of the Treasury if confirmed. Yellen is generally pro-stimulus but sensitive to deficits – she is less known for her deal-making and generally viewed as a sound choice.

China continues to liberalize both it's bond and stock markets by gradually allowing greater access to foreign investors. Within emerging market stock indices, China accounts for 40-50% of exposure, showing its importance to the global investor community. Capital flows into onshore Chinese assets will likely increase as government restrictions are removed.

Equity Takeaways:

This morning, equity markets traded slightly lower in early trading. The S&P 500 shed about 0.25%, with small caps down about 1%. The tech-heavy Nasdaq was flat.

There are 23 trading days left in 2020. Last week, the S&P 500 posted its 3rd weekly increase of greater than 2% during November. The S&P 500 is over 11% higher month-to-date (MTD) and broke to another all-time high on Friday.

December's typical pattern is some backing-and-filling for the first two weeks, followed by a "Santa Claus" rally going into the end of the year. Market sentiment remains stretched, supporting the case for a near-term pullback.

The energy sector was up over 9% last week and continues to surge higher post-election. Even the downtrodden financial sector is beginning to show some relative strength. Energy and financials are both considered "value" sectors.

Reflecting this recent outperformance, large value stocks are up about 13% QTD, vs. about 6% for large growth stocks. That said, large growth stocks are still up 32% YTD, while large value stocks are flat YTD.

Fixed Income Takeaways:

Investment-grade (IG) corporate bond spreads remain well bid, with high-yield spreads also continuing to perform well. We expect a pickup in new issuance this week after a slow holiday week.

New deals continue to be well received and are receiving solid execution. In the last 33 weeks, 32/33 of those weeks have seen inflows into IG corporate bond funds.

Municipal bond yields were virtually unchanged last week, slightly outperforming treasuries. As with the corporate bond market, we continue to see positive fund flows into municipal bonds, and new deal execution remains solid.

The municipal market is on pace for $450 billion of new deals in 2020, which would surpass the record issuance we saw in 2016.

Monday, 11/23/20

General Takeaways:

COVID-19 cases, hospitalizations, and deaths have all inflected higher over the past several weeks. Deaths and hospitalizations are still lower than last spring/summer, and we’re starting to see some leveling of cases in the Upper Midwest, but this situation remains concerning.

At the same time, signs of action and progress are also emerging. According to ISI and Carnegie Mellon, mask usage is increasing throughout most areas of the country. On Monday, we also saw strong efficacy data reported from yet another vaccine trial, this time from the University of Oxford / AstraZeneca Plc. This vaccine is also cheaper and easier to store than the Pfizer / Moderna candidates.

Despite the concerning case count data, mobility data is mixed. The Dallas Fed mobility and engagement index (MEI) is designed to correlate with economic activity directly. MEI data indicates that the recent slowdown in mobility has a much smaller economic impact than we saw over the spring.

A counterbalancing force on the economy has been both fiscal and monetary stimulus. Copper, cyclical assets, and home prices have all reacted favorably to this massive tailwind. This stimulus seems likely to continue into 2021.

Signs of future strength – while house prices have been very strong, inventories remain low, which should bode well for the sector. Housing is an integral part of consumer net worth, so continuing strength in this sector will have significant knock-on effects for the rest of the economy.

Equity Takeaways:

Equity prices chopped sideways last week as investors continued to digest the substantial gains from early November. This morning, equity prices are higher on the positive Oxford / AstraZeneca vaccine news noted above. The S&P 500 rose about 0.5% in early trading, with small caps about 1% higher.

Value stocks and small caps continue to show relative outperformance versus the broader S&P 500. Ongoing improvement in the economy would provide a tailwind towards these more cyclical-oriented factors. Within value stocks, KPB tends to de-emphasize rate-sensitive stocks, such as financials, due to the current low absolute level of interest rates.

According to Renaissance Macro, US equity investors are showing levels of elevated optimism last seen in late 2017 / early 2018. High investor bullishness is often a harbinger of a short-term pause, but this metric is not a great long-term forecasting tool.

Corporate earnings continue to recover – if this trend continues, equity markets should have a tailwind going into 2021. Equity market returns in 2021 will likely be driven by earnings growth, not multiple expansion.

Another tailwind to equities is declining volatility. The VIX spiked up to around 40 in late October but dropped just as quickly in early November. The current level of the VIX is about 23. As volatility declines, equity investors typically become emboldened to add more risk, as do certain types of model-driven trading strategies.

Fixed Income Takeaways:

We expect muted new issuance in the corporate bond market this week. Demand remains high, so this declining supply could help spreads grind tighter going into year-end.

The news that Treasury Secretary Mnuchin plans to end several credit-support programs caused the market to widen slightly on Friday, but that widening has reversed this morning.

Due to very low bond yields, the diversification benefit from holding bonds has declined over the past several months. Over the late summer, stocks fell about 7%, but bond prices didn’t react. Typically bond prices rally during equity market selloffs. This dynamic has important implications for portfolio construction.

Municipal benchmark yields dropped across the curve last week, slightly outperforming treasuries. As with corporate bonds, we are expecting a light new issue calendar this week.

Last week, a large state issued over $3.5 billion of COVID-19 recovery bonds to fill a funding gap. The deal saw over $13 billion of orders, and after pricing, the market yield on the bonds dropped over 40 basis points (bps) in secondary trading. This deal highlights the ongoing demand for yield, even from issuers that are under stress.

Friday, 11/20/20

General Takeaways:

It has been a big week for Elon Musk. In addition to the successful SpaceX launch earlier this week, it was announced that Tesla would be added to the S&P 500 in several weeks. Also, Tesla will comprise about 2% of the index’s market capitalization.

A committee determines the composition of the S&P 500. Companies with monopolistic characteristics continue to garner a larger share of S&P 500 market capitalization. As passive investing gains a greater and greater percentage of overall investment share, the S&P 500 committee's decisions will only increase in importance.

Pandemic Emergency Unemployment Compensation (PEUC) is a new category of continuing unemployment claim. Even as we’ve seen traditional continuing claims data improve, PEUC claims have skyrocketed over the past few months. This data point is a sober reminder that the labor market remains fractured in many ways.

Retail sales ex-autos have weakened over the past six months after peaking in May. On the other hand, home renovation spending continues to show great strength, and homebuilder sales and sentiment remain strong as well.

COVID-19 cases continue to spike higher. According to the Wall Street Journal, cases have risen over 250% on a seven-day rolling average. Hospitalizations have risen over 100% on the same metric, with deaths more than 50% higher. Mobility trends have begun to react negatively to this data, but not nearly to the extent that we saw in March.

The stock market seems to be looking through these numbers based on the strong early efficacy data from both the Pfizer and Moderna vaccine trials. Both vaccines appear to be effective, and we are just months away from the start of distribution. Indeed, Pfizer expects to apply for emergency use authorization for their vaccine on Friday.

Equity Takeaways:

After the strong post-election move higher in equities, we’ve seen a pause as investors attempt to balance negative COVID-19 headlines with positive vaccine data over the past few days. The S&P 500 was up about 0.4% yesterday, with small caps up about 0.7%.

The breadth of the market continues to improve as more sectors join the rally. Small caps are up about 5.5% over the past five trading sessions compared with a rise of 1.3% for the S&P 500 over that time. It is generally a healthy sign to see broader participation.

Despite improving underlying dynamics in the market, stocks have risen quickly over a short period of time and may be due for a pause. The technical landscape suggests a period of consolidation before the typical Santa Claus Rally into year-end. Investor sentiment is optimistic, which also often augers a short-term pause.

Third-quarter 2020 earnings season is wrapping up – the theme is that companies generally exceeded lowered expectations on both the top and bottom lines.

Fixed Income Takeaways:

The New York Fed’s weekly index of economic activity suggests possible upward pressure on long-term treasury yields. The 10-year treasury yield has indeed risen from its summer lows of around 0.50% to its current level of approximately 0.85%.

Despite the slight tick higher in yields, safe yields remain very low. It is important not to chase yield with investment funds earmarked for safe investments, as chasing yield invariably involves taking a higher risk. Key Private Bank does recommend a variety of higher-yielding investments, but only in the context of a diversified portfolio.

Treasury Secretary Steven Mnuchin has asked the Federal Reserve (Fed) to return unused funds from several credit support programs. The move comes a day after Fed Chairman Jerome Powell said it is too early to end these programs.

Corporate bond market participants were a bit surprised by this news. The Fed backstop has provided crucial psychological support to the market. Spreads are widening slightly on Friday as a result, but any widening will probably be perceived as a buying opportunity.

On the municipal bond side, the Fed’s credit programs generally received very little use (less than 5% of total capacity), but this type of headline could weigh on market sentiment.

Despite the low yields available in the market, both corporate and municipal bond funds continue to receive inflows. Yields dropped by about 12 basis points (bps) in longer-dated municipals this week – corporate spreads remain firm as well.

Monday, 11/16/20

General Takeaways:

Building on the momentum from Pfizer’s recent positive vaccine data, Moderna reported over 90% effectiveness in early trials of their prospective vaccine. As we noted last week, there are 20+ vaccine candidates in development. This positive news is resonating through financial markets.

For example, small cap stocks are beginning to power higher as market participants anticipate a broader economic reopening. On a quarter-to-date (QTD) basis, small caps are up about 16% but are only up about 6% on a year-to-date (YTD) basis. Conversely, large caps are up about 7% on a QTD basis but 13% on a YTD basis. In general, smaller companies are more economically sensitive than larger companies.

Despite positive vaccine news, the prolific spread of COVID-19 continues. 48 US states are showing increasing cases on a week-over-week basis. Hospitalizations tend to lag cases by about a week, and deaths tend to lag cases by about three weeks. Both are also (unfortunately) beginning to turn higher.

The economic impact of this increasing caseload remains unknown. As we noted recently, US mobility data is holding up better than it did during March-April, but localized lockdowns are increasing. Purchasing Manager Index (PMI) data will provide us with important clues about whether the economy is getting better or worse over the next few months.

Despite these concerning virus trends, a dreaded "double dip" recession seems unlikely. The reason is simple – recent global fiscal stimulus numbers are truly massive/unprecedented. Also, the credit markets are not telegraphing a recession – spreads remain narrow and are not signaling stress.

Outside of the coronavirus, one of Biden’s first geopolitical tests will revolve around trade with Asia. This week, 15 Asia-Pacific countries signed a major trade pact called the Regional Comprehensive Economic Partnership (RCEP). The members of this partnership include China, India, Japan, Indonesia, and Australia. According to the Wall St Journal, RCEP countries cover half the world’s population and 27% of global trade.

In another hat tip to human ingenuity, SpaceX launched four astronauts into orbit on a NASA mission. The Falcon 9 was the first commercial launch of a manned space vehicle in many years and marks a new era in space travel for our country.

Equity Takeaways:

During the overnight session, the S&P 500 was up as much as 1.5% but retraced some of those gains before the market opened. The S&P 500 rose about 0.75% in early trading, with small caps up about 1.8%. International markets were also higher.

Last week, the S&P 500 rose about 2% after rising nearly 7% during election week. Not counting overlapping periods, since 1970, the market has risen at least 9% over two weeks on 16 different occasions. Of the prior 15, the S&P 500 was higher the next week 13 times (87% win rate), with an average gain of 1.6%.

The leadership of the market has seemingly begun to change. As noted above, smaller companies have started to outperform, and breadth continues to broaden as an increasing number of companies participate in the rally.

Value stocks outperformed relative to momentum last week. Value stocks tend to fall into two distinct buckets – cyclicals (industrials/materials) vs. rate-sensitive stocks (financials). Key Private Bank tends to favor cyclicals over rate-sensitive stocks.

Conversely, large technology/growth stocks have been struggling on a relative basis for the past few weeks. Hedge funds have been actively selling growth and momentum stocks to rotate into other areas of the market. One or two weeks do not make a trend, but we continue to watch this relative price action closely.

Fixed Income Takeaways:

Longer-dated treasury yields are rising once again in response to continued positive vaccine news. With yields on shorter-dated treasuries anchored by Federal Reserve (Fed) policy, the treasury curve continues to steepen.

Last week turned out to be a busy one for investment-grade (IG) corporate bond issuance, with about $40 billion of deals pricing. We expect $25 billion of issuance this week. In general, corporate bond spreads tightened significantly early last week before giving up some of those gains later in the week.

Municipal bonds held up well last week. As treasury yields rose, municipal yields stayed flat, tightening spreads. The new issue supply calendar is also building once again – we expect $11 billion to price this week.

High-yield municipals (airports, etc.) also caught a bid post-election. Market participants have been buoyed by optimism surrounding the re-opening of state economies and encouraging data regarding tax receipts. Through the end of September, the average decline in state sales tax receipts on a year-over-year basis is only 1%, while personal income tax receipts are essentially flat. These numbers are much better than some of the dire projections we saw earlier in the year.

Friday, 11/13/20

General Takeaways:

COVID-19 trends continue to worsen in the United States, especially in terms of case counts and hospitalizations. Certain hospitals are beginning to postpone elective procedures once again. The fatality rate has also started to tick slightly higher but has not yet moved up significantly.

Despite these concerning trends, US Apple Mobility Data indicates that mobility as a percentage of the peak has indeed declined, but not nearly as significantly as it declined earlier this year. Perhaps people are beginning to get used to living with the disease?

Certain states and localities have initiated stricter restrictions on travel and gatherings. The lack of a national response policy is likely hampering the coordination of these efforts.

Despite these negative headlines, the calvary is coming. There are at least 20 vaccine candidates in development. Logistics and distribution will be challenging, but improving news on this front should support the economy/stock market.

Two Senate runoff elections are scheduled for January 5, 2021, in Georgia. If the Republicans win at least one of these two runoffs, they will maintain control of the Senate. Currently, the Republicans appear to be favored in both races.

Equity Takeaways:

US stock markets opened higher on Friday. The S&P 500 rose by about 0.75%, with small caps up about 1.75%. Markets are currently attempting to digest a strong post-election rally, and a near-term pause looks likely.

2021 equity performance will likely be determined by the future course of earnings rather than multiple expansion. This dynamic contrasts with the last several years, where positive stock performance has been driven by multiple expansion, not by increased earnings.

Asian stock markets are showing strength. In contrast with Europe, which is struggling with COVID-19 induced lockdowns, Japan’s Nikkei 225 hit a 29-year high on November 11th. Japan’s new Prime Minister, Yoshihide Suga, has considered his predecessor’s aggressive economic stimulus.

China’s real GDP is at an all-time high and has supported emerging market equities. The country’s economic recovery from COVID-19 has been broad-based. Also, Chinese exports to the US have picked up dramatically over the past few months.

Fixed Income Takeaways:

The credit markets remain relatively calm, although spreads did widen slightly yesterday compared to weaker stock prices on Thursday. New issue investment-grade (IG) corporate bond supply was a robust $43 billion this week.

The 10-year treasury yield approached the critical 1.00% level earlier this week on optimism surrounding a vaccine-driven economic recovery. The 10-year yields have since dropped back down into the 0.88% area.

High-yield bonds, which tend to move closely with stocks, took in over $4 billion of inflows over the past week. During the prior week, these funds shed $2 billion of assets. Price action has been a bit choppy as market participants attempt to digest the latest news, but not disorderly.

Municipal new issue supply has slackened post-election. During the six-weeks before the election, the weekly new supply was about $12 billion – it has dropped to about $2 billion /week post-election.

Lighter new issue supply in conjunction with limited dealer inventories has caused municipal bond spreads to tighten relative to treasuries. Demand remains solid.

Monday, 11/9/20

General Takeaways:

Special Guest: Phil Orlando, CFA. Phil is the Chief Equity Market Strategist and Head of Client Portfolio Management at Federated Hermes. Federated Hermes is a global asset manager with over $600 billion in assets under management.

Positive news out of a Pfizer-led COVID-19 trial is sending stocks higher this morning. The S&P 500 opened higher by a whopping 4%. Cyclical sectors rose even more, with industrials up over 6% and financials up over 7% in early trading. Small caps are also up over 6%.

Nasdaq gains are more muted at about 1%, as many technology companies have been perceived as beneficiaries of the pandemic. On the other hand, movie theater, airline, cruise ship, and hospitality stocks are all up sharply, to the tune of 10%+.

The timing of this vaccine news is welcome, as COVID-19 daily case counts have surpassed prior peaks in various parts of the country. Hospitalizations are also moving higher. Fatalities have remained relatively calm compared to the spring peak, as existing treatments' efficacy seems to have improved.

As/of the time of this writing, Joe Biden is the President-Elect with at least 290 electoral votes. The consensus among Super Forecasters is that President Trump will likely concede by inauguration day.

Phil Orlando’s conclusions from the election:

The popular polls were wrong once again. The election was very close, and we will likely see litigation that continues over the next several weeks. Phil believes that most of President Trump’s claims around contesting the election results fall into the "noise" category and that the election results will likely stand.

The Democratic majority in the House of Representatives shrunk by 30 seats to 10-15 seats (again contrary to consensus expectations). The "blue wave" that many pundits predicted did not materialize. Phil believes that the American people wanted House Speaker Nancy Pelosi to compromise before the election on a new stimulus package. Pelosi’s delay on new stimulus hurt the Democrats in the House elections.

Two Georgia runoff elections will likely decide the Senate majority in early January. The current confirmed count is 48 Democratic senators and 48 Republicans. The contested North Carolina and Alaska seats will also likely go to Republicans (votes are still being finalized). Thus, the current split is likely 50 Republicans vs. 48 Democrats.

If the Democrats win both runoff elections in Georgia, the Senate will be tied at 50 Republicans and 50 Democrats. In a tie scenario, the Senate's deciding vote is cast by the Vice President, which will likely be Kamala Harris, a Democrat. However, Phil believes that the Republicans are likely to win at least one of the vacant Georgia seats, which would give them the narrowest majority in the Senate.

According to Phil, the election results are the best possible outcome for the markets in some ways. If the Republicans win at least one seat in Georgia, we should see a divided government (Democratic president / Republican Senate), which is generally positive for markets.

Reasons the market is rallying, according to Phil:

1) Divided government preserves the Trump tax cuts as well as his regulatory/pro-business regime. At the same time, it lowers uncertainty over trade policy.

2) The prospects for additional COVID-19 relief fiscal stimulus remain high, and Phil believes we will likely get increased infrastructure spending during Biden’s term. Phil believes that Nancy Pelosi is likely to compromise on a new stimulus package early in 2021. President-elect Biden is also in favor of increased infrastructure spending.

Phil’s thoughts on the vaccine/economy:

Two vaccines are approaching FDA approval. This morning, a Pfizer-led study indicated about 90% efficacy in early results. Another company, Moderna, has shown similar results in the early results of their vaccine study.

With this vaccine news, the longer-term COVID-19 situation seems to be improving. We could see an inflection point to hopefully get the virus under control by mid-2021 – a combination of increasing herd immunity and a vaccine. Still, much is unknown.

The news around the economy is also continuing to improve, as indicated by last week’s non-farm payroll numbers reported on Friday. The data showed better-than-expected employment growth despite some seasonal headwinds.

Friday, 11/6/20

General Takeaways:

The stock market bounced sharply this week as the election results began to roll in as the prospects of a divided government seemed most comforting to investors.

According to Predictit.org, there was about a 40% chance that the Republicans maintained the Senate before the election. Those odds are currently about 80%. There will be two separate runoffs in Georgia for two vacant Senate seats. If the Republicans perform well in those runoffs, they will likely maintain a majority in the Senate.

COVID-19 cases are rising sharply across the country, with recent daily case counts coming in at over 100,000. These rising case counts are beginning to impact consumer behavior. OpenTable restaurant activity appears to be weakening over the past several weeks, as is airline traffic.

This morning, November non-farm payrolls came in strongly, with 638,000 jobs added last month. Expectations were for 538,000 additions. The unemployment rate ticked down from 7.9% to 6.9%. The job market continues to gradually heal, fueling hopes that long-term damage to the economy will not prove as severe as many had feared.

In another sign of gradual labor market healing, continuing unemployment claims fell to about 7.3 million. This metric peaked at around 25 million earlier this year.

Equity Takeaways:

Futures were lower in the overnight session but cut their losses after this morning’s positive employment report. The S&P 500 dropped about 0.5% in early trading, with small caps essentially flat.

Prior to today, the S&P 500 was up about 7% on the week, putting us on track for the best week since April. The market has begun to price in a gridlock scenario, with Biden beginning to pull ahead in the presidential race. Historically, the stock market has performed well with a Democratic president and one Republican branch of Congress.

Value stocks, cyclical stocks, and small caps underperformed the broad market early in the week, likely due to diminished prospects for a near-term large fiscal stimulus package. On Thursday, we saw a strong rally across all sectors as market participation broadened out.

Cyclical stocks such as industrials and materials typically perform well early in an economic cycle. The unusual nature of this year’s recession and ensuing recovery has resulted in market performance that diverges from historical patterns. We believe that some additional fiscal support will likely be necessary to move the recovery forward, which should eventually support cyclical shares.

Third-quarter 2020 earnings continue to come in strong relative to expectations. Over 80% of companies reporting have beat earnings estimates, and over 75% have exceeded estimates on revenue.

Fixed Income Takeaways:

The yield on the 10-year treasury yield fell sharply earlier this week, as prospects for a Democratic sweep (and ensuing substantial fiscal package) have seemingly faded. The current 10-year yield is about 0.79%, about 10 basis points (bps) lower on the week.

The Federal Reserve Open Market Committee (FOMC) met this week. There were no major surprises from Chairman Jerome Powell’s statement or the ensuing Q&A period. The Fed policy remains incredibly supportive for asset prices.

High-yield spreads tightened over 60 bps this week, are now back to post-COVID crisis lows. There was a strong "risk on" tone in the credit markets this week.

As stocks wobbled in the week before the election, we saw significant outflows from corporate bond mutual funds and ETFs into treasuries. Those flows likely reversed this week as sentiment has improved.

New issuance in both the corporate and municipal bond markets was very light this week. There was only one corporate deal priced all week and just a smattering of municipal bond deals.

Prospects for large-scale relief for state and local governments have dimmed somewhat based on the current results of the Senate elections. We won’t know the Senate's full composition until the results of the Georgia runoffs in early January.

Monday, 11/2/20

October Capital Market Returns:

Last month, small caps outperformed the broader indices while international markets underperformed. US small cap stocks were up 2.1% for the month, while US large cap stocks were down about 2.4% for the month. Developed international stocks fell about 4% in October, while emerging market equities fell about 1%.

On a year-to-date (YTD) basis, emerging market stocks are up 6%, US large cap stocks are up 3.8%, US small cap stocks are down 6.8%, and developed international stocks are down 12.8%. Recall that the emerging market indices have a large weighting in Chinese shares. China’s more effective control of the virus has likely bolstered their equity market on a relative basis.

Bond prices fell between 0.5% and 1.0% in October. Bond prices fell less than stock prices in general, however, the diversification benefits of fixed income have been lessened due to extremely low current yields.

Current Events:

In a late-October 1980 nationally televised presidential debate, candidate Ronald Reagan famously asked the American people: "are you better off now than you were four years ago?" According to a Gallup survey poll, 56% of Americans are currently answering "yes" to that question, which is a high number and has been a harbinger for incumbent re-election in the past.

Updates on a few important races: Florida appears to be swinging toward Trump in late polling, while Pennsylvania is leaning toward Biden. The Democrats also remain slightly favored to take control of the Senate.

Uncertainty during election season certainly impacts the stock market, however, the post-election impact is often unpredictable. For example, in 2016, many prognosticators expected a pronounced drop in the stock market after a Trump victory. In addition, many thought that a Trump presidency would be positive for both energy and financial shares. Neither of those predictions was even close to accurate.

The spread of COVID-19 continues. The United Kingdom has imposed a new stay-at-home order. As we noted on Friday, while cases in the US are rising rapidly, fatalities in the US have not yet begun to inflect higher. No matter what happens in the election, COVID-19 news will continue to have a large impact on the markets in the coming weeks / months.

That said, COVID-19 is not the only issue that will impact markets over the coming months. According to ISI, three major issues will drive market returns as we look towards 2021:

  1. The spread of COVID-19.
  2. Will the economic recovery become self-sustaining?
  3. Will fiscal and monetary stimulus lift growth enough to offset delayed reopenings or increased lockdowns?

On Thursday, November 5th at 3pm EST, Key Private Bank will be hosting a special national client call to discuss the results of the election. Our special guest will be Steve Pavlick, Head of Policy at Renaissance Macro.

Equity Takeaways:

US stocks rose Monday morning, up about 1.5% across the board. International indices were also 1-1.5% higher. This price actions mirrors recent historical performance of the stock market during the Monday and Tuesday of presidential election weeks, which has tended to be positive since 1980.

This October was the 12th worst October since 1950, but overall the losses were relatively modest at about 2.4%. Over the last 30 years, after a down October, the market tends to bounce higher over the next six months. One factor supporting prices: the stock market is moving from a period of seasonal weakness into a period of seasonal strength.

Last week, European shares were down between 5 – 8% depending on the index. The week’s performance was the weakest for European shares since late March.

With 75% of S&P 500 market cap having reported, about 75% of companies have exceeded earnings expectations. Expectations were for a contraction of 22%, but earnings are now expected to contract about 11% for Q3:2020. In general, earnings releases have had a smaller-than-usual impact on stock prices this quarter (as measured by price changes the day after earnings).

The percentage of retail-driven small lot option trades peaked in late August – there is some circumstantial evidence that some of this activity has moved over into sports gambling.

Fixed Income Takeaways:

Despite the recent weakness in equities, investment-grade (IG) corporate bond spreads were only 2 basis points (bps) wider last week. High-yield spreads fared worse, widening by 26 bps on the week.

There are zero new corporate bond issues scheduled today as we await the results of the presidential election. We expect tomorrow to be a quiet day as well.

The treasury curve steepened by about 3 basis points last week. 10yr yields have been steady to slightly higher even with negative news on the COVID-19 front. Last week’s "risk off" tone was not enough to drive yields lower on the longer end of the treasury curve.

Money-market yields remain pegged very close to zero, with many market participants moving farther out the curve to pick up a tiny bit of yield.

The municipal bond curve flattened last week. Front-end yields rose 2-3 basis points, while longer-dated yields dropped by 2-3 basis points.

About $79 billion of new issue municipal bond supply came to market in October, which was an all-time monthly record. The previous monthly record for supply was $71 billion in December 2017.

As with the corporate bond market, we are expecting very muted new municipal bond supply this week. Secondary dealer inventories also remain low. After October’s bonanza, we are expecting negative net new supply over the next few months.

October 2020

Friday, 10/30/20

General Takeaways:

Global COVID-19 cases have spiked to new daily all-time highs over the past several weeks. Fatalities have not yet begun to inflect higher in the United States, which is encouraging and implies that caregivers have gotten more effective at treating the disease.

That said, hospitalization rates in the US have begun to creep higher, with certain rural communities facing the most significant challenges at this time. Cities such as Chicago, El Paso, and Newark have started to implement increased restrictions.

According to estimates by researchers at UCLA, the spread of the disease in the United States should begin slowing soon. These researchers currently estimate that 40% of US states have Rt values above 1.0, but in about a month, that number should drop to 11% of states with Rt values above 1.0. Recall that an Rt value of 1.0 indicates that each new carrier of the disease infects one additional person. If accurate, this forecast would have massive (likely positive) implications for both the economy and markets.

Enhanced lockdowns in Europe will likely have a severe impact on the fourth-quarter GDP. According to Capital Economics, France’s GDP will now likely contract by about 2.5% in the fourth quarter. Germany’s GDP will probably be flat at best in Q4.

The European Central Bank (ECB) is aware of these issues. It is expected to increase monetary support yet again when they next meet in December (or perhaps even sooner if conditions continue to deteriorate).

Primarily driven by unprecedented fiscal and monetary stimulus levels, US Real GDP bounced back dramatically in the third quarter. 3Q:2020 Real GDP advanced 33.1% (seasonally adjusted annual rate), or 7.4% quarter/quarter. That said, real GDP is still 3.5% below its Q4:2019 peak.

Despite the sizeable third-quarter rebound, the US economy's rate of improvement appears to be slowing. Estimates for fourth-quarter growth have declined. At one point, the median estimate was about 8-9% annualized GDP growth in Q4:2020, but that estimate has dropped to about 4%.

Equity Takeaways:

The stock market has had a tough week, with negative COVID-19 news hurting global risk appetite. Over the past five trading sessions, the S&P 500 is down about 4.1%, with the Nasdaq down about 2.75% over that same timeframe. Small caps are down about 4.4% over the past five sessions.

The selling has been broad-based. European shares have dropped between 5-8% over the past five sessions. Asian shares have been relatively stable during this timeframe. Japan’s Nikkei 225 is down about 0.6% over the past five sessions, while China’s Shanghai Composite is down about 1%.

This morning, US equities are lower once again, led by the technology sector, which is down over 2%. Cyclical sectors such as industrials are faring a bit better, generally down 0.50% to 1%. Small caps are down about 1%.

The consensus view is that over the next few weeks, COVID-19 news will likely get worse before it gets better. The stock market will likely track virus news very closely over the next few weeks and months.

With the recent decline, the S&P 500 currently sits at 3265 and is approaching an important technical level. The 3200 level on the index marks the low end of a trading range that began in May. The 200-day moving average on the index is 3129 and marks another crucial potential support level.

Fixed Income Takeaways:

The 10-year yield moved as high as 0.86% on October 22nd. Yet, increased cases of COVID-19 have driven an increased "risk off" sentiment over the past week. 10-year yields have dropped back into a range between 0.75% and 0.85% as investors seek safety.

Also following a "risk off" tone – credit spreads have blipped higher over the last week, with high-yield spreads wider by 47 basis points (bps). Investment-grade (IG) credit has held up better, but new issue supply has slowed as spreads drift wider.

Despite this weakness in spreads, money continued to flow into the IG credit sector, with $3 billion of inflows marking a 29th consecutive week of positive flows into the sector. High-yield bonds saw outflows of $2.5 billion.

Despite recent articles in Barron’s and the Wall Street Journal that suggest municipal budgets are in dire straits, the municipal bond market continues to function well. With rates at extremely low levels, municipal issuers are taking advantage by retiring higher-coupon debt.

COVID-19 has had the most considerable impact on the weakest credits – higher education, senior living, student housing, and transportation bonds all continue to struggle.

Monday, 10/26/20

Background:

Our guest speaker today was Don Schneider, Director of US Policy Research at Cornerstone Macro. Prior to joining Cornerstone Macro, Don served as the Chief Economist of the House Ways and Means Committee. While at Ways and Means he advised the Chairman on economic issues, tax policy, and budgetary matters, including changes to the debt limit. Before that, he served as an Economist at the House Budget Committee. Don received a Master’s degree in Applied Economics from Johns Hopkins University and a Bachelor’s degree in Economics from the College of Charleston.

Presidential Election Outlook:

According to Cornerstone, Biden is the favorite with approximately a 75% chance of winning the White House. President Trump’s approval rating is 43%, which is the most predictive factor for an incumbent’s re-election. With a low approval rating, an incumbent generally needs both an unpopular opponent and an electoral college advantage to win.

Trump has an electoral college advantage, but Biden is much more popular than Clinton was in 2016. If the polls are off by the same margin they were in 2016, Biden would still win, in Cornerstone’s view.

US Senate Election Outlook:

The base case is a very narrow Democratic majority in the Senate (55%). Generally, the Senate goes as the presidency goes. If Biden achieves a dramatic victory, Democrats could control as many as 53 seats after the election. A close presidential win might result in a very small Democratic majority (50 or 51 seats).

The stock market narrative around a Democratic wave has shifted over the past few weeks. The market is focused on short-term stimulus. Under any plausible set of assumptions, after-tax profits will likely be higher under a Republican-controlled presidency and Senate.

If the polls are wrong and the Republicans hold the presidency and the Senate, taxes will stay lower, and another stimulus package will be likely. The size of the stimulus package will likely be smaller than under a Democratic regime, however.

Three categories of risk surrounding the election results:

1) Will the election results be certified rapidly? There is a difference between final certification and inferring the results of an election. For example, there is no path to the White House for Trump without a win in Florida, and Florida generally counts ballots quickly. We will likely know the winner in Florida on election night.

2) What if we have another delayed result in several states, similar to the 2000 election? As Key Private Bank has previously discussed, the delay in 2000 had a modest negative short-term market impact. We have also noted that monetary policy remains very accommodative today, whereas it was tightening in 2000 and thus a headwind to equity prices.

3) A coup? Cornerstone does not believe that a coup is even a remote possibility.

Budget Outlook:

Biden said in the last debate: "I am not Bernie Sanders." That said, the Democratic party has moved farther to the left over the past few decades.

If the Democrats sweep, we will likely see two reconciliation bills in 2021, with a first bill akin to the HEROES act passed on May 15, 2020. The Democrats will probably pass their first stimulus package in the first quarter of 2021.

In the second half of 2021, Cornerstone believes that the second part of Biden’s agenda will be initiated – tax increases combined with long-term spending increases. Biden’s plan indicates about $1.8 trillion in tax hikes paired with $3.5 trillion in spending increases. His plan moves towards universal health coverage, increases infrastructure spending, shores up state budgets, and supports green energy projects.

Reconciliation allows for policies to be implemented with fewer than 60 votes in the Senate. The process is designed to align existing spending programs with formally approved fiscal budgets. Many past administrations have used reconciliation to advance their respective agendas.

Three main limitations on reconciliation: can’t touch payroll taxes or social security; can’t add to the deficit beyond the 10-year budget window (sunset provisions); can’t make regulatory changes.

Outlook on Long-Term Deficits:

Long-term deficits have both economic and political implications. The Democratic view is that with real rates so low, there is little cost to new debt. Borrowing for public investment or increasing economic fairness is positive in the Democratic view.

Currently, there seems to be little crowding out of private investment (new debt has not been causing interest rates to rise).

Republicans are worried about overall long-term spending levels but are still in favor of lower taxes. Neither side seems to view the deficit as a clear and present danger.

Democrats are still worried about paying for their programs long-term. Democrats are likely to add to the deficit over the near-term, but Biden’s policies are likely to be paid for over the long-term with higher taxes.

Q&A:

Are higher taxes under a Biden administration a foregone conclusion?

In Cornerstone’s view, the answer is "yes." From the Democratic perspective, higher taxes reduce inequality and are, therefore, morally fair. In the Democratic view, capital income should be taxed similarly to labor income. Taxes are not merely a balance of payments issue.

Democrats believe the 2017 corporate tax cut resulted in a windfall primarily used to buy back company stock. They also believe that corporations are engaging in significant profit shifting (moving tangible or intangible profit overseas) to avoid taxes.

Will anything get done before the inauguration?

The moratorium on evictions expires at the end of 2020. We could see a very targeted fiscal stimulus deal between the election and the inauguration to deal with this issue. Extended unemployment insurance and another expansion of the Payroll Protection Program (PPP) are two other pressing issues that may be dealt with before inauguration.

What is the future of the Republican party in a post-Trump world?

Cornerstone believes that future candidates will seek project strength and focus on "America first" issues. Senator Mitt Romney may have been a better voice for conservative values than Trump but was too weak to win an election. While Trump’s leadership style seems to have weakened the party overall, some populist element will likely remain.

What will happen if one of the current candidates for vice president needs to assume power sometime in the next four years?

A shift to Mike Pence from President Trump would lead to calmer, more measured leadership. A change to Kamala Harris from Joe Biden would lead to a more progressive agenda. Biden is a moderate and generally embraces compromise. Harris would likely push for more progressive policies (Medicare for all, etc.).

How do higher taxes affect the stock market?

Higher distortionary taxes on saving and investment to finance consumption would likely put downward pressure on economic growth and corporate profits. That said, historically, there has been no clear relationship between equity market valuations and taxes. Furthermore, as noted before, with interest rates remaining so low today, we don’t envision a significant decline in stock prices, assuming the state of COVID-19 does not materially worsen.

Friday, 10/23/20

General Takeaways:

The Department of Justice filed an antitrust lawsuit against Alphabet, the parent company of Google, earlier this week. Facebook could be facing similar action from the Federal Trade Commission. To this point, neither stock has sold off on this news, but the trend for increased regulation is one we wrote about a year ago.

We will continue to monitor the progress of this lawsuit but do not expect a quick resolution. Still, it will be essential to monitor these events given the sheer size that some of these companies in major stock market indexes.

Two polling firms with a good record in 2016 are showing a very close race. The Investor’s Business Daily IBD-TIPP poll had Biden ahead by about 8.6% about ten days ago, but the gap had narrowed to 2.3% before this week’s presidential debate. Trafalgar (who correctly called for a Trump victory in 2016) is calling for a narrow Trump victory with between 270-280 electoral votes. Other polls, however, foresee a Biden victory by several percentage points.

COVID-19 cases and hospitalizations are increasing once again, especially in the Midwest, but we have yet to see an inflection higher in fatalities. Despite this news, economic activity is slowly increasing in previously hard-hit areas like New York City. Signs of life are returning to airports as well, with gradually increasing TSA checkpoint activity over the past few months.

Employment trends continue to move in the right direction. Continuing claims have dropped by 4M over the past four weeks alone. Combined with continued booming activity in the housing market, improving employment data indicates that the fourth quarter's economic growth should be solid.

The OSIRIS-REx satellite tagged an asteroid called Bennu, collected a small amount of primordial space dust, and will hopefully return to Earth with samples in mid-2023. Another reason to be optimistic about human ingenuity!

Equity Takeaways:

Stocks were mixed yesterday, continuing a series of choppy trading days. The S&P 500 was up about 0.50%, while the Nasdaq was flat. Small caps posted relative strength, rising by 1.50%. Cyclical sectors, such as energy and financials, led the market.

Indeed, the recent price action of small and midcap securities has been improving relative to large caps over the past several weeks/months. As we’ve noted in the past, a broadening economic recovery should favor cyclical companies. Smaller companies tend to be more cyclical than larger companies.

Over the short-term, the market could be surprised by a Trump victory. The current consensus view is a likely Democratic sweep, with a large fiscal stimulus package passed in early 2021 and possibly increasing taxes and regulations down the line. Under a Trump victory, a favorable tax and regulatory environment would be preserved, with higher continued uncertainty surrounding tariffs.

Despite any near-term noise around the election, we continue to advise that clients maintain a long-term time horizon – the market will likely rise over time no matter who wins this election.

Fixed Income Takeaways:

Driven by a selloff in longer-dated securities, the 10-year treasury yield rose this week as the treasury curve steepened. The spread between the yield on the 5-year treasury note and the 30-year treasury bond is at 128 basis points (bps), its widest level since early 2018.

Shorter-dated treasuries, such as 2-year and 5-year notes, are more sensitive to Federal Reserve (Fed) policy than longer-dated treasuries, which are more sensitive to inflation expectations. Inflation expectations have been rising recently, driving yields higher in longer-dated treasuries.

With treasury prices falling / yields rising, activity in the new issue corporate bond market has dropped this week. Spreads remain very stable. Indeed, spreads have been either tighter or flat for the past 18 consecutive trading sessions.

Inflows into investment-grade (IG) bond funds totaled $8 billion last week. Despite significant outflows in March, the cumulative net flows into IG bond funds have now topped $100 billion year-to-date (YTD).

Municipal bond new issue supply continues to flow. Month-to-date, we’ve seen $61 billion of new supply. A typical month would feature about $30-$35 billion of new issuance.

Typically, this type of heavy supply would cause muni spreads to widen, but we haven’t seen that. This year, about 30% of the new issues have been taxable municipal bonds. Taxable municipal bonds are often a substitute for corporate bonds. In this way, strong demand for corporates has been a tailwind to the municipal bond market.

Monday, 10/19/20

General Takeaways:

House Speaker Nancy Pelosi has given the White House 48 hours to reach a coronavirus stimulus deal. We should have more clarity by Monday night. If passed quickly, a new fiscal stimulus deal would be largely accretive to 2021 S&P 500 earnings.

According to the IMF, without China’s 4.9% growth this year, cumulative world economic growth in 2020 would be negative. China is the only major world economy expected to post growth in 2020. The Chinese government has also warned that it may detail Americans in response to the recent prosecution of Chinese scholars.

China is currently reporting 59 cases of COVID-19 per million residents. The US, on the other hand, is reporting over 24K cases per million. Cases have begun to move higher in both the US and Europe – the French have started to institute targeted lockdowns once again.

US nominal retail sales were reported on Friday, surging by 2.2% month over month. This week, we will get a significant amount of data expected to confirm continuing strength in the housing market.

Joe Biden continues to maintain a sizable lead in national presidential polling. That said, polling in swing states such as Florida and North Carolina indicate a very tight race. President Trump has a path to victory but will need to win most of these "toss-up" swing states.

Equity Takeaways:

US equities opened slightly higher on Monday. The S&P 500 rose by about 0.5%, with the Nasdaq higher by about 0.75%. Small caps also rose fractionally, up about 0.3%. Precious metals were also higher.

Last Friday was a directionless session, with the S&P 500 closing flat. Underneath the surface, defensive sectors such as utilities and healthcare outperformed the broader indices on Friday. Cyclical sectors such as industrials also showed relative strength.

Cyclical sectors have done well recently for several reasons. The stock market seems to be pricing in the increased possibility of a unified government (less uncertainty). Market participants are also looking forward to additional near-term stimulus regardless of which candidate wins the election.

If interest rate expectations continue to move higher, it could be another tailwind for more traditional cyclical / value sectors such as industrials, financials, and basic materials, with financials likely benefitting the most from higher rates.

Fixed Income Takeaways:

After a precipitous drop earlier in the year, the 10-year treasury yield has remained in a trading range between 0.50% and 0.95% for the past 3-4 months. We expect this range to hold over the near-term, especially given how low interest rates are overseas.

The pace of investment-grade (IG) corporate bond issuance has slowed somewhat over the past few weeks.

We expect a front-end loaded calendar this week, with 7+ issuers scheduled to price deals on Monday. Spreads remain firm.

Issuers continue to bring environmentally and socially conscious (ESG) corporate debt offerings to the market. On average, these "green" bonds are pricing 7-10 basis points (bps) tighter than comparable non-ESG new issues.

Municipal bonds traded sideways last week, slightly underperforming treasuries. Increased supply continues – this week, we expect about $20 billion of new issuance, which is 4x the weekly average for this time of year. Issuers are attempting to price deals in front of the presidential election.

This increased supply is being met with moderating demand. Municipal bond fund flows continue to be slightly positive, but the rate of change is slowing.

Friday, 10/16/20

General Takeaways:

Uncertainty around a second wave of COVID-19 infections and subsequent lockdowns has been a headwind to the markets this week. Flareups in Spain, France, and the UK are especially notable. Several vaccine trials paused this week, adding to an increasing sense of gloom around the virus.

That said, while the case count is on the rise in the US, the fatality rate has remained relatively muted, and the increase in hospitalizations has been manageable to this point.

Economic reports were mixed this week. Headline initial unemployment claims were 898,000 vs. expectations of 825,000, while continuing claims fell more than expected to 10.02 million.

Despite these dour unemployment numbers, the NFIB US Small Business Optimism Index continues to increase. Small businesses continue to report increased optimism around both spending and hiring plans.

While seemingly incongruent, increased unemployment may be leading to increased new business formation. According to the Census Bureau, applications for business formation had an unprecedented surge in the third quarter. Newly unemployed workers appear to be starting new businesses, perhaps a sign of healthy "creative destruction."

Prices are beginning to move higher. While overall inflation remains muted, inventories currently sit at low levels – tight inventories can lead to future price increases.

President Trump and former Vice President Joe Biden held simultaneous town halls yesterday evening – nothing significant to report. The Supreme Court hearings were also generally uneventful.

The Chinese economy is experiencing a "Super V" recovery, with output poised to exceed pre-January levels soon.

Active equity managers that do not perform portfolio-wide risk management studies on their holdings are at risk of underperforming. Simply picking the "best" 50-60 stocks for a given style is insufficient in terms of risk management. KPB performs detailed attribution analysis for all investments on our platform.

Brexit update: The European Union has begun to ratchet up the pressure on the United Kingdom in Brexit negotiations. While the UK left the EU on January 31, 2020, official exit terms have yet to be finalized. The next ten weeks will feature intense negotiations between the two sides.

Equity Takeaways:

Bolstered by a strong retail sales report, the stock market opened higher on Friday. The S&P 500 rose about 0.4%, with the Nasdaq up about 0.5%. Small caps dipped slightly, down about 0.25%.

Thursday marked the third straight losing session in the S&P 500, with the S&P 500 closing about 0.15% lower. That said, the market put in a strong intraday rally on Thursday from the morning low print of approximately 3440 to close at 3483.

Despite the recent increase in COVID-19 cases, the stock market has been resilient. Even though negotiations between the White House and Democrats appear to have stalled out, the market may be anticipating additional fiscal stimulus in early 2021.

Cyclical sectors such as financials and industrials led yesterday’s intraday recovery. Cyclical sectors are sensitive to economic growth and would likely benefit disproportionately from additional fiscal stimulus.

Fixed Income Takeaways:

This week was a quiet week for new issuance in the investment-grade (IG) corporate bond market. Only five issuers have come to market through Thursday for a total of $5 billion of issuance. This type of low volume is not unusual during earnings season, as many companies cannot issue debt during earnings blackout periods.

Despite moderate new issuance, IG spreads have remained stable this week. Heavy inflows into corporate bond funds have continued, with another $6 billion+ flowing into the asset class this week.

The supply of commercial paper continues to decline, and at the same time, the average maturity of commercial paper has been extending.

1-month Tier 1: 0.10%; 3-month Tier 1: 0.12% - 0.15%.

It was a heavy week of new supply in the municipal bond market. Most deals were well received. As with corporates, municipal bonds continue to be well supported by positive fund flows.

Market participants believe that a Biden victory and a "blue wave" in Congress could be generally positive for state and local government coffers, especially those states that are more reliant on federal aid.

Monday, 10/12/20

General Takeaways:

Betting markets continue to favor a Biden election and a Democratic clean sweep. As we have been commenting over the past few weeks, a decisive outcome could be more critical to the stock market over the near-term than the actual victor.

A decisive win by either candidate would also raise the prospects of reaching a large fiscal agreement after November. Combined with continued strength in housing, negative real rates, and a high personal savings rate, anticipation of additional fiscal stimulus has driven the stock market higher over the past several weeks.

A narrow majority in the Senate seems most likely, regardless of the winning party. With so many closely contested seats in play, neither party is expected to have a supermajority.

Confirmation of Supreme Court nominee Amy Coney Barrett seems likely – hearings begin today. The Republicans appear to have the votes for confirmation in the Senate but expect contentious hearings.

Massive global central bank stimulus continues. Despite this fact, equities ex-buybacks have seen negative cumulative fund flows since 2018, while bond fund flows have been extremely positive during the same period. Eventually, this type of dynamic could indicate a contrarian buy signal for equities.

Economic activity in China has nearly bounced back fully from its early 2020 trough. Chinese growth is expected to slow over the next decade relative to the prior decade, but likely to outpace developed market growth by a significant margin.

Equity Takeaways:

We expect a quiet session on Monday due to the Columbus Day holiday. The S&P 500 opened about 0.7% higher, with Nasdaq up about 1.5%. Small caps opened flat.

The S&P 500 was up 3.8% last week, the strongest week since early July. After declining four consecutive weeks in September, the S&P 500 now has printed two consecutive weeks of positive returns.

Breadth has been strong during the move higher. The stock market now has the momentum to potentially re-test the recent highs (approximately 3600 on the S&P 500).

An interesting dynamic during the recent rally has been the outperformance of cyclicals (industrials / basic materials) versus technology. During the April rally, technology was the clear sector leader. We’re not ready to make a clear call on the rotation trade, but this type of price action is a healthy sign and bears watching.

On aggregate, S&P 500 earnings are expected to fall 20% in the third quarter. Excluding cyclicals, Q3:2020 earnings are set to decline by about 8%. On the other hand, industrial sector earnings are expected to decrease by over 60%. Despite this fact, industrial stocks have been performing well recently, suggesting that investors are pricing in a significant rebound.

Early street expectations for 2021 S&P 500 earnings are about $170 / share, which would be about 10% growth from depressed 2020 levels.

Fixed Income Takeaways:

The bond markets are closed today for the holiday. Treasury rates drifted higher last week, with the 10-year yield closing at about 0.77% (77 basis points). Despite the recent move higher, we expect treasury yields to remain range-bound over the near term.

Last week, heavy supply in the investment-grade (IG) corporate bond market continued. Early expectations were for $15 billion of supply – the actual amount of issuance came in at $26 billion. These new deals have generally been substantially oversubscribed, highlighting the continued demand for corporate paper.

70% of new IG deals last week were in BBB-rated paper. 70% of IG new issuance was in the 10-30-year portion of the curve. Issuers are looking to extend the duration of their liabilities.

Tier-1 and Tier-2 commercial paper rates are at historically low levels. Supply continues to dwindle, as many corporations are meeting their funding needs by issuing longer bonds.

The yield spread between 2-year and 10-year high-quality municipals is 78 basis points (bps) versus the 5-year average spread of 28 bps.

A 10-year municipal bond yields about 0.92% currently, compared to the 10-year treasury yield of 0.77%. Typically, high-quality municipals trade at lower yields than treasuries of similar duration. Despite low absolute yields, municipals look attractive to treasuries on a relative basis.

Friday, 10/9/20

General Takeaways:

Stimulus negotiations continue between the White House and the Democrats. The sticking point seems to be the amount of aid for state and local governments. Early this morning, President Trump once again seemed to offer his willingness to negotiate on a broader compromise.

A tale of two economies: corporate restructurings continue, with several large media companies announcing large layoffs. Simultaneously, M&A activity continues to hum along at a brisk pace, with large deals announced in both the financial services and semiconductor industries this week.

The pace of the economic recovery seems likely to moderate as we move forward. The economy had a sharp snapback in the economy off the March – April lows, but recent data indicates that the pace of improvement is beginning to slow.

According to Predictit.org, the chances for a full Democratic sweep are about 60%. Even if the Democrats do sweep the presidency and both houses of Congress, they are likely to have only a very slight majority in the Senate (not a supermajority).

The ultimate impact of a Democratic sweep on the stock market will depend on the sequence of policies initiated. If the Democrats first focus on additional fiscal stimulus before moving to tax reform, the effect on corporate profits could be quite positive in 2021.

Improving trade relations with China could also bolster growth under a Democratic regime.

Equity Takeaways:

Driven by hopes of additional fiscal stimulus, the stock market continued its strong week by rising in early trading on Friday. The S&P 500 rose by about 0.5%, with small caps up about 1%.

This week’s strength has been led by cyclical sectors such as basic materials and industrials, while technology shares have lagged the move. Over the past five trading sessions, the S&P 500 is up about 2%, but the Dow Jones Transportation Average is up about 5%, and the Nasdaq 100 is essentially flat.

The equal-weighted S&P 500 index recently began to outperform the market-cap-weighted S&P 500 index, continuing this theme of rotation into cyclicals. The equal-weighted S&P 500 index has a larger weight to cyclical sectors than the traditional market-cap-weighted index. As the economic recovery broadens out, we believe this trend of rotation may continue.

Forward corporate earnings estimates continue to rise. Generally, when forward estimates are rising, the stock market does well.

From the stock market’s perspective, a clear winner in the presidential election is more important than which candidate wins. A wide margin of victory by either candidate would likely be perceived as a short-term positive by stock market participants.

A large amount of hedging activity has taken place in the options market in the early-mid November timeframe. This hedging activity will likely reverse once we get a clear winner in the election – the reversal of hedging flows is another factor that could support post-election stock prices.

Fixed Income Takeaways:

Longer treasury yields have blipped higher this week. The yield on the 10-year treasury note has risen to 0.77% after hovering in a range from 0.6% to 0.7% for months. The 30-year bond yield is now about 1.6% after dipping as low as 1% in March and 1.2% in early August.

Longer municipal bond yields rose 7-10 basis points (bps) this week in sympathy with treasuries.

Increased demand met rising yields, with municipal bond funds showing strong inflows of $3 billion over the past week.

Municipal market participants continue to watch negotiations between the White House and Congress closely. A compromise that both sides are comfortable with would likely be a clear positive for municipal bond fundamentals.

The investment-grade (IG) corporate bond market had a busier-than-expected week, with about $20 billion of new issuance pricing. IG funds have seen 27 consecutive weeks of inflows. Spreads were flat yesterday, but before that, had tightened for eight consecutive days.

The yield on the high-yield corporate bond index is about 5.36%, which is once again approaching the all-time low of 4.83% achieved earlier this decade.

Monday, 10/5/20

General Takeaways:

President Trump’s recovery from COVID-19 appears to be continuing, but with his sickness occurring so close to the election, we feel that it's important to understand several possible scenarios that may unfold in the coming weeks and months.

If a president is unable to fulfill their duties, transfers of presidential power are specified under the Constitution with clear lines of succession. Power has been transferred 3 times since the 25th amendment was ratified 53 years ago. For an involuntary transfer, 2/3 of Congress would need to get involved.

If a candidate is unable to finish a campaign, generally, the nominating committee would replace the candidate, but with election day less than 30 days away, changing ballots is now impossible. As a result, state legislatures would likely get involved to determine how state electors may cast their ballots.

The potential messiest scenario: if the November 3rd winner is unable to begin their term after being elected, state legislatures would once again need to get involved to determine how state electors may cast their ballots. We don’t expect Election Day to be postponed.

According to PredictIt.org, election betting markets continue to fluctuate. Recently, Biden’s odds of winning the presidency have increased, and Democrats appear to be picking up momentum to win both sides of Congress.

Despite this data, as noted in a recent Key Question, we expect several key states to determine the outcome of the presidential election in the Electoral College. It is worth noting that other leaders who fell victim to COVID-19 (UK Prime Minister Boris Johnson, Brazilian President Jair Bolsonaro) actually saw their approval ratings rise after contracting the virus.

Globally, COVID-19 cases have begun rising once again, with targeted lockdowns once again contemplated in parts of Europe and Asia. COVID-19 will continue to overhang the global economy throughout the fall / winter.

Optimism around a fourth fiscal stimulus package has increased in recent days. Superforecasters (per goodjudgment.com) now place about a 40% chance on the near-term passage of a new stimulus bill, up from a 20% chance a few weeks ago. Not coincidentally, as the original stimulus packages have waned, overall economic data in the US has weakened over the last 4-6 weeks. Lengthening unemployment duration is driving a need for further stimulus.

Expectations for Q3 2020 GDP continue to improve – the median estimate is for 25.3% GDP growth in the third quarter. On the other hand, expectations for the fourth quarter have been declining. As noted above, fiscal stimulus is beginning to wane, and mobility data has begun to waver. The median estimate for fourth quarter GDP growth is 5.0%, down from 6% in August.

Equity Takeaways:

Major US equity indices rose this morning. The S&P 500 was up by about 1%, with small caps up about 1.5%. Cyclical sectors, such as industrials and basic materials, were among the market leaders, with defensives lagging.

This strength in cyclicals follows an interesting session from last Friday, where cyclical sectors of the market outperformed technology / growth stocks by a large margin. A Biden victory could improve the chances for a large infrastructure bill, which would boost cyclicals. In addition, market participants believe Biden’s corporate tax plan could have a disproportionately large negative effect on large multi-national technology companies.

Last week, the S&P 500 ended its 4-week losing streak, rising 1.5%. Since 2009, we’ve experienced nine 4-week losing streaks. In the majority of those cases, the interim 4-week low marked an intermediate trading bottom. Key support for the S&P 500 lies at the 3230 level.

Many obvious hedges against stock-market volatility, such as treasury bonds, gold, bitcoin and the volatility index (VIX), did not protect portfolios during September’s stock market correction. This type of price action has important ramifications for portfolio diversification, and KPB is actively researching alternative strategies to provide portfolio resilience in this new environment.

Fixed Income Takeaways:

We are expecting about $15B of investment-grade (IG) corporate bond issuance this week, which is a slowing pace, but still healthy supply. Demand for both IG and high-yield bonds remains robust. Even with recent spread widening over the past month, high-yield new issue order books have been 3-4x oversubscribed.

IG corporate spreads a 3 basis points (bps) tighter this morning, as a "risk on" tone seems to be returning with equities higher. High-yield spreads are also opening tighter.

Within treasuries, market participants are expecting a steeper treasury curve in the event of a Trump presidential victory (perhaps due to greater inflation fears in this scenario). A steeper treasury curve implies that longer-term rates will rise more than intermediate-term rates. If Biden wins, the curve is expected to flatten.

Municipal bonds continue to be driven by fund flows and hopes of an additional federal fiscal stimulus package. Fund flows turned slightly negative last week after almost 20 weeks of steady inflows.

The appetite for municipal bonds will be tested this week, with about $17B of new issuance is set to price. This is almost 2x the typical weekly volume – states and local governments are eager to borrow at today’s historically low yields.

Friday, 10/2/20

General Takeaways:

President Trump and the First Lady have both tested positive for COVID-19. This announcement came early Friday morning following news that a senior White House aide was also infected. Vice President Pence has tested negative.

We don’t know the severity of the President’s illness. Joe Biden’s team has not commented, so his health status is unknown. It is also unclear whether the next debate (scheduled for October 15th in Miami) will take place. Implications for the Supreme Court nomination process are also unclear.

If the President’s condition were to worsen, he could temporarily transfer power to the Vice President under Section 3 of the 25th amendment. If the President’s condition were to become so severe that he was unable to personally authorize the transfer of power, there is a provision within the law to allow the Vice President and a majority of Cabinet officials to initiate a temporary transfer of power.

Given this heightened level of uncertainty, markets will be volatile and hopefully a constitutional crisis will be avoided.

As of 9/30/20, year-to-date (YTD) returns asset price returns are mixed. US govt bonds are up about 10% YTD, while US large cap stocks are up 6.4% YTD. Within equities, both US small caps and international stocks continue to significantly underperform US large caps. Commodities have been volatile, with gold up over 24% and crude oil down over 34%.

October pessimism vs. November optimism: during election years, October is typically the worst month of the year in terms of equity returns. Conversely, during those years, November tends to be the best year. The stock market hates uncertainty, and typically rallies once an election outcome has been finalized.

Friday non-farm payrolls were reported this morning and were a bit disappointing. Despite an upward revision of last month’s number, the aggregate combined increase in employment for the past two months has been a bit below expectations.

Equity Takeaways:

Major US indices opened lower this morning on news of the President’s positive COVID-19 test. The S&P 500 fell by about 1%, with the Nasdaq Composite declining by about 1.5%. Small caps were also down about 1%.

Implied volatility (VIX) rose about 2 pts this morning to 28.50 and is creeping back upwards toward the key 30.0 level.

Global listed infrastructure companies (companies that own toll roads, airports, seaports) could be an important source of diversification going forward. The revenues of infrastructure companies are tied to inflation, and these types of companies also generate steady income. In a world where bond yields are very low, sources of steady income will be an important future source of portfolio diversification.

We continue to look for opportunities in areas of the market that have been beaten up by the COVID-19 crisis. At some point in 2021, travel, leisure and hospitality companies could bounce back significantly, but we think it’s too early to initiate positions in those sectors at this time.

Fixed Income Takeaways:

The credit markets are quiet this morning after news of President Trump’s positive COVID-19 test. Investment-grade (IG) corporate bond spreads are about 3 basis points (bps) wider this morning. High-yield spreads have also widened slightly this morning, but there is no sense of panic.

US treasury yields have remained relatively stable throughout the recent period of equity weakness. We haven’t seen a flight to safety like we saw in March, and volatility in the credit markets has been limited during this time period.

Inflows into investment-grade credit continue, with over $2B flowing into the asset class last week. The pace of inflows is slowing, however, and high-yield bonds have actually seen two consecutive weeks of outflows.

Municipal bonds were essentially unchanged this week on light trading. 10yr generic municipal bond yields were 3 bps higher to settle at 85 bps (0.85%).

Fund flows in the municipal bond market turned negative this week after 19 consecutive weeks of inflows. This activity mirrors what we are seeing in the corporate bond markets – a slowing of fund flows, but not a mass exodus.

September 2020

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 PredictIt.org, 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.

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.

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.

August 2020

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.

July 2020

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.

June 2020

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.

May 2020

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.

April 2020

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.

March 2020

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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