Market Commentary: The Flavivirus of 1793

Toward the end of the 18th century as the new, permanent capital of the United States was being designed and built in the District of Columbia, attention was still focused on Philadelphia. It was the temporary capital after the Constitution was ratified, the hub of the new nation boasting 50,000 citizens, the largest city in the country and the second largest in the English-speaking world. But in the dry, hot summer of 1793, refugees arriving at America’s busiest port from the Caribbean islands brought with them a deadly scourge. The epidemic of yellow fever first attacked those who lived and worked on the waterfront and swiftly spread, carried and transferred by mosquitoes ravaging the city during the summer and fall, eventually claiming one in ten lives. President Washington, his Cabinet, Members of Congress and 20,000 others who could leave fled to the countryside. Those in other cities fearful of contracting the disease boycotted the entire area. The flavivirus was said to have originated in Africa and first came through the West Indies to North America in the late 17th century. Outbreaks afflicted those trading with the Caribbean for the next hundred years. But it was not until the deadly contagion hit Philadelphia that year when the cause and potential means of controlling it were debated. The city established a Board of Health to enforce sanitary regulations, but these met with little success. The federal government had no authority to act, the governor fell ill, the state legislature skedaddled, and so it was left to the mayor and a ragtag committee to try and save the citizens of the city. Little respite was had for more than three months until the winter frost came and put a temporary end to both the mosquitoes and the fever. The pestilence returned seven times in the next 12 years, producing familiar patterns of finger-pointing, evacuation, and isolation, eventually relegating what would late become known as the City of Brotherly Love to second tier status as a port. For many years, the cause and means of transmission were not known and there was no vaccine or treatment, although bleeding, purging, cleaning, blistering, vinegar camphor, mercury and jalap, opium, wine and quarantines were all prescribed.

Fast forward 227 years when the nation’s capital — and every great American city — has been hit by plague again. The novel coronavirus has effectively shut down the nation for 34 days and counting. This time, there is no safe place to escape. Although the cause and source are said to be known this time, the cure remains elusive and fear has spread alongside the disease. A second wave is possible but the prospect of annual recurrences for the next decade is unthinkable. Instead of boycotts, there are lock-downs that have shuttered schools and non-essential businesses. Social distancing, handwashing, gloves and masks, online learning, telemedicine, and home deliveries will be with us for a long while. The toll COVID-19 is taking will be measured in precious lives, once proud businesses, and a legacy of debt. Debates will continue for years if not generations as to when to impose and how to remove quarantines, whether policy cures are worse than the disease, what we need to do to prepare properly for the next one. Massive central bank action in close coordination with the Treasury has again set new standards for intervention in free markets and municipalities that have long treasured independence and self-reliance. It will prove difficult to not to look to them again when the next sniffle occurs or the next proverbial ship with a cargo of pestilence limps into a U.S. port.

Our nation’s healthcare leaders note that America is still on the upward slope of The Curve with a short way to go before case counts, hospitalizations and death rates slow. It was only seven months ago that we were laser-focused on another curve, the Treasury yield curve, when it inverted during a very different liquidity crisis last September. Since the President declared a national emergency on March 13, the markets have experienced extreme volatility as fear and uncertainty gripped the world. During the flights between safety and risk, the S&P 500 has risen 50 points to 2,761, the Nasdaq is up 317 points to 8,192, and the Russell 500 has gained about 2 points to stand at 1,212. Gold prices are up $184 an ounce to $1,714. Oil, primarily due to the Saudi-Russia production dispute has fallen nearly 30% to $22.41 a barrel. On the bond side, the U.S. 2-year Treasury yield has fallen 25 basis points to 0.24%, the 10-year is down 19 basis points to 0.77% and the 30-year has decreased 12 basis points to 1.40%. Ten-year Baa corporate bond yields have risen 83 basis points to 4.51%. More than $35 billion has been withdrawn from municipal bond funds but the 2-year AAA municipal general obligation bond yield is down 25 basis points to 0.87%, the 10-year has fallen 51 basis points to 1.10% and the 30-year tax-exempt benchmark has dropped 39 basis points to 1.93%.

Corporate bond issuance has been extremely heavy on both the investment grade and high yield sides as firms tap markets and bank lines of credit for as much cash cushion as they can get. Investors concerned with the ability of state, local and nonprofit borrowers to withstand the financial pressures stemming from the pandemic have effectively frozen the calendar for many new municipal issues although higher rated health care, higher education, utility and general obligation borrowers have consistently been able to enter the market. There is a $14 billion pipeline of deals on day-to-day status as investors await fresh disclosure on the status of projects previously financed. How have people and operations been impacted? Is there sufficient cash to meet all day-to-day needs for the next 6 months and pay debt service in full and on time? Buyers heavy with cash from April 1 redemptions are scouring an array of solid credits at attractive prices in the secondary market, including hospital, airport, mass transit, and utility bonds being tarred with the same brush regardless of liquidity position and debt service coverage. Operating under more stringent regulatory structures imposed after the 2008 recession, the major credit rating agencies are revising all sector outlooks as negative and swiftly downgrading those who are slipping below certain trigger points, no matter the cause or expected duration, adding to investor worry and uncertainty. Those who lived in Philadelphia in the late 18th century faced much darker days and more uncertain times. In the case of COVID-19, we do not yet have all the answers but we have a staggering array of federal, state, local, private, and central bank aid to help us handle this crisis and recover. Please continue to count on your HJ Sims representative as a valuable resource and trusted partner throughout this process.