Key Private Bank Investment Brief
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, 4/12/21
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.
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
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.
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
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.
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.
See all of our insights and updates in our archive.