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The global spread of COVID-19 has caused significant market movements and uncertainty among investors.

Your investment brief houses our experts' latest analysis and strategies for navigating the turbulence created by the outbreak—keeping you updated on our thinking and how these changes might impact your portfolio.

Key Private Bank Investment Briefing Notes

Monday, 9/28/20

General Takeaways:

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

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

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

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

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

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

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

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

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

Equity Takeaways:

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

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

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

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

Fixed Income Takeaways:

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

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

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

Friday, 9/25/20

General Takeaways:

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

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

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

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

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

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

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

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

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

Equity Takeaways:

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

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

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

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

Fixed Income Takeaways:

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

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

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

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

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

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

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

Monday, 9/21/20

General Takeaways:

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

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

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

Meanwhile according to 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.

Tuesday, 9/8/20

General Takeaways:

Keeping it simple – three things underlying the market backdrop:

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

Three things that could undermine the market backdrop:

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

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

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

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

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

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

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

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

Equity Takeaways:

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

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

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

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

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

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

Fixed Income Takeaways:

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

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

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

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

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

Friday, 9/4/20

General Takeaways:

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

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

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

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

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

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

Equity Takeaways:

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

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

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

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

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

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

Fixed Income Takeaways:

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

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

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

Wednesday, 9/2/20

General Takeaways:

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

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

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

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

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

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

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

Equity Takeaways:

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

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

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

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

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

Fixed Income Takeaways:

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

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

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

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

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