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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, 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.

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