Market Commentary: Finding Our Way Out and Up at Mid-Year

While The Year of the Rat was doomed from the start according to some Eastern astrologers, we all root for a reversal in the second half of 2020 as we mourn the more than 545,000 lives lost to Covid-19 worldwide, including 131,500 in the U.S., at this writing. Needless to say, we are also still counting the toll taken on many of our neighborhood businesses: barber shops, restaurants, dry cleaners, and hotels. Many national names that became local favorites as well have filed for bankruptcy: Hertz, Gold’s Gym, GNC, Neiman Marcus, Brooks Brothers. One hometown, Fairfield, Alabama itself filed for Chapter 9 in May; its financial troubles date back to the closures of a U.S. Steel mill and Walmart Supercenter five years ago but this pandemic proved to be the last straw.

The first two quarters of the year are in the rearview mirror now. Many unknowns lie ahead: the availability of a vaccine, where we are in the lifecycle of SARS-CoV-2, election outcomes less than four months away. We cling to assurances from our central bank that rates will remain at near zero, likely through 2022, and that the Fed together with the U.S. Treasury stand ready to quickly iron out the major wrinkles and puckers that afflict the fabric of our economy. The cost is enormous and will be born by this and future generations. Our national debt exceeds $26.4 trillion. The Fed balance sheet has expanded to $7 trillion; more than $2 trillion of Treasuries and mortgage-backed securities have been purchased with no limit on future buys, and no less than 11 emergency facilities have been rolled out to prop up wobbling markets, including municipal and corporate bonds. The scope and scale of these programs, we are assured, will be magically increased as necessary.

The new decade started out on such a good roll. There had been predictions of an imminent recession for several years, but the U.S. economy was firing on all cylinders and nearly every financial market sector was rallying in an expansion that would last an astonishing 128 months. Six months ago, no one would have believed that the entire world could be simultaneously toppled. We could not imagine that our tightly packed subways and buses in New York City would be virtually empty for months with ridership now down 53% at this writing. It was impossible to think that our children would all be home-schooled, that chemotherapy treatments would be canceled, that almost every Mom and Pop shop on Main Street would close, that our skyscrapers and trading floors would be vacated. Whole new words, phrases, and behaviors have entered our vocabulary: zoonosis, aerosolized droplets, N-95 mask, co-morbidity, face shields, nitrile gloves, superspreaders, viral shedding, social distancing, contact tracing, liquidity facility, yield curve control.

Debates will rage for years over the approaches taken by local, state and federal officials during this pandemic. The permanent damage from the disease as well as some governmental policies cannot be assessed yet. We are still trying to collect data we never knew we needed. But green shoots as well as superstars have emerged. New entrepreneurs have sprouted, new business models crafted. Population shifts are underway. We are finding our way out and up.

On Saturday, we celebrated the 244th anniversary of American independence while recognizing just how dependent we are – on information technology, on our hospitals and doctors, researchers, public safety officials, life care providers, pharmacists, manufacturers, truckers, and grocery stockers, to name a few. But we Americans prove time and time again how resilient we are. Nonfarm payroll data is coming in well above expectations. Pending home sales were up a record 44% in May. Consumer confidence saw its biggest jump since late 2011. U.S. manufacturing just hit a 14-month high.

Summer is now upon us. We are weary of our lockdowns, worried about the new strain of H1N1 swine flu virus appearing in China or another black swan event, and anxious for a break, a pause, some respite, a vacation. There is pressure on Congress to act on another stimulus before they take their next recess. There is little agreement among economists on the shape and timing of this recovery and what measures are still needed. A number of proposals are circulating: infrastructure, direct aid, business liability limits, the restoration of advance refundings, and Build America Bonds. But as we head deeply into campaign season, most everything has become politicized and issues long bubbling below the surface have boiled over. The threat of a second Covid phase this fall or winter also looms large; a number of states are already seeing new outbreaks among younger populations. Some re-openings are being pushed back or reversed. State and local leaders are struggling with issues attendant to re-opening schools, protecting frail elders; hospitals are seeing new cases, and some patients are reluctant to resume the elective surgeries that generate the revenue that keeps health care systems running.

In the municipal market, muni bond funds have seen inflows for eight straight weeks after experiencing after experiencing record-setting outflows this past Spring. Muni mutual fund assets stand at $771.4 billion down from $814.1 billion at the start of the year. Muni ETF assets total $54.1 billion, up from $49.1 billion in January. The primary calendar is almost back to normal although taxable issuance, including munis issued with corporate CUSIPs, have taken over 25% of the calendar. The slate is dominated by colleges, hospitals, and state general obligation bonds. Note issuance is up 28% over last year and total issuance is at $193.6 billion is 15% higher than last year at this time. We are in the midst of peak redemption season so redemptions, maturing and called bonds will bring in $17 billion more in cash than available supply. The same is true for August, so that bodes well for prices and the reception for new issues through Labor Day.

Some investors have ventured far out on the risk scale, believing that there is an implicit backstop from Washington for just about everything. Others see markets behaving in a manner entirely inconsistent with the economy and sit idle while admitting to a fear of missing out. Money market funds received more than $1.2 trillion of new money between March and May, as investors liquidated some holdings and parked cash from dividend, coupon, maturing and called bonds.

Among the best performers at halftime, gold is up 17% year-to-date, convertible bonds are up 13.13% , the Nasdaq has gained 12.74%, AAA-rated corporate bonds are up 9.42%, U.S. Treasuries 9.02%, and taxable munis 8.13%. In the corporate high yield sector, food and retail is up 5%.

At the close on June 30, the 2-year AAA municipal general obligation bond yield stood at 0.27% versus the comparable U.S. Treasury at 0.14%. The 10-year muni yield was 0.90% while the 10-year Treasury yielded 0.65%. The 30-year tax-exempt benchmark yield was 1.63% versus the long Treasury bond at 1.41%. During the first half of the year, tax-exempt yields declined an average of 59 basis points across the curve. Treasury yields have dropped an average of 122 basis points. Ten-year BAA corporate bond yields have fallen by 31 basis points. The Dow Industrials fell 9.55% during the first half of the year to close at 25,812. The S&P 500 finished at 3,100, down 4% from January. The Nasdaq topped 10,000 for the first time ever. The Russell 2000 fell nearly 14% to 1,441. Oil prices have climbed back after a dramatic fall into negative territory, but were still down 36% on the year at June 30 to $39.27. Gold prices climbed by $261 an ounce to $1,783.

Some industry professionals encourage investors to place cash in ETFs until there is more clarity on the path of the pandemic, the impact that it had on second quarter performance, and prospects for the second half of this unforgettable year. For those investors with low rate fatigue who are focused on generating income but wary of the risk in equities and certain credits, we encourage you to contact your HJ Sims advisor to review your portfolio and make recommendations on some of the many individual bonds that we underwrite or trade, analyze and surveil, that could be better suited to your investment needs and risk tolerance. For those looking to enter the market to take advantage of this low rate environment and wide range of financing and refinancing options, we invite you to contact our investment banking team.