The 1993 box office hit starring Bill Murray portrayed a TV weatherman from Pittsburgh sent with his producer to cover the annual shadow-no shadow show in Punxsutawney, Pennsylvania which, for 120 years, has produced legendary forecasts of early spring or extended winter. He soon becomes trapped in a time loop nightmare that causes him to relive the events of February 2 with the townies over and over and over again. The movie, which was actually filmed in Woodstock and Cary, Illinois with an unknown woodchuck, became one of the most popular romantic comedies of all time and “groundhog day” became our new term for being stuck in a job or life that is mind-numbingly repetitive and unpleasant.
Groundhog Day is the cycle that many of us find ourselves in for five going on six months now. On the personal front, we smack the same alarm button every morning not knowing if is in fact Wednesday or Sunday, April or August. We are mostly limited to our homes, in mostly small spaces, often with family but sometimes alone, and venture out at our risk with mask and gloves to work, shop, or just get some air. Like the character Phil Connors, some of us try counseling, take side jobs, reach out to help others in need, learn to play the piano, fall in love. Others eat and drink too much, lash out, spend unwisely, take crazy gambles. On the work front, our lives are mostly inextricably linked with the very same spaces, people, events and risks. In many ways, our days are as Yogi Berra once said, “déjà vu all over again”. And try as we might to find humor in our daily routines, exercise, socialize with our family and friends, or make plans for the future, these efforts, once so normal and natural, have become a tiresome chore amid restrictions that were tolerable for 15 or 30 or 60 days but now seem quite permanent. We suddenly long for the good old days, no matter how lousy they may have seemed back a mere six months ago, pre-Covid.
The financial markets have generally loved the Groundhog Day cycle since late March, in the same way they have loved all the vaccines administered by the Federal Reserve for the past 11 years. They have saved us from inflation, depression, and most undesirable losses. While federal and state pandemic control-related policies have devastated small businesses and caused communities to split over what to do about schools, prisons, churches, nursing homes, taxes and the kind of government we want after November 3, as investors we have been reliving a reel of rallies.
Last week, as Fitch Ratings lowered the outlook of the United States of America to “Negative” from “Stable,” the 10-year Treasury yield fell to its lowest level not in decades but in centuries — 234 years to be exact — at 0.52% and the $20 trillion market saw volatility fall to a record low. During July, the benchmark yield dropped 13 basis points, the 2-year sank 4 basis points to 0.10% and the 30-year plunged 22 basis points to 1.19%. At this writing, there is speculation that the entire Treasury yield curve will soon be under 1%.
The Nasdaq, just having hit its 30th record high in 2020, added more than 686 points in July, closing at 10,745. The Dow gained 615 points to finish at 26,428. The S&P 500 ended up 5.5% at 3,271. The Russell 2000 climbed 39 points to 1,480. Reuters recently reported that the average holding period for U.S. shares has dropped to 5.5 months versus 8.5 months in December; this is a new record low, beating the turnover seen during 2008 crisis and reflecting investor fear of missing out juxtaposed against the terror of owning overpriced stocks in illiquid market. Oil prices rose $1 a barrel to $40.27. Gold prices spiked 10.8% to $1,975 an ounce and has since crossed the historic $2,000 mark. Gold is up 35% this year, making it one of the best performing assets so far alongside silver which at $26.80 is up more than 50%.
Despite weakening state and local credit fundamentals resulting from the Covid-depressed economy, the municipal bond market is soaring higher based on technical factors that include light tax-exempt supply, strong demand, buyers significantly outnumbering sellers since march 17, lots of excess cash from summer bond calls, coupons and maturities, light dealer inventories, and a steady stream of inflows for 12 consecutive weeks into muni bond ETFs and mutual funds. In July, $7.5 billion was added to mutual funds and the muni rally continued. July issuance was actually the highest in 34 years at $42.6 billion but 35% of the total came in the form of taxable bonds. Year-to-date issuance of corporate bonds by non-profits is twelve times higher than it was last year. The general market was up 1.3% with strong performances by zero coupon bonds. The high yield sector gained 1.2%, and taxable munis outperformed with returns of 2.3%. During the month, the 2-year tax-exempt AAA municipal general obligation bond yield went from 0.27% to 0.13%, the 10-year from 0.90% to 0.65% and the 30-year from 1.63% to 1.37%. The 10-year muni-Treasury ratio currently stands at 124.8%.
In the muni primary market last week, the Public Finance Authority sold $18.4 million of BB-minus rated charter school revenue bonds for Founders Academy of Las Vegas that came with a 2055 maturity priced at 5.00% to 4.59%. In the high yield corporate market, Seaworld Entertainment had a 5-year non-call deal, upsized from $400 to $500 million, with more than $2 billion of orders that priced at par to yield 9.50%. In the corporate bond sector, investment grade bonds gained 2.9% in July while high yield climbed 3.9% and more than half of high yield borrowers had total returns that higher than that, up to 24.8%. Higher rated issuance slowed to $65 billion and high yield deal volume totaled only $25 billion. This week, investors will see 20% of the companies in the S&P 500 index report quarterly earnings. There are approximately $30 billion of investment grade deals on the calendar and $13 billion of high yield deals have priced already as of Wednesday morning. The muni slate totals approximately $7.3 billion.
U.S. markets are not reflecting the condition of an economy that posted gross domestic product of negative 32.9% in the second quarter and is still struggling with how to track and contain the SARS-CoV-2 virus. But performance must be viewed in a global context where negative yielding debt totals $14.3 trillion and there is a worldwide hunt for any yield. In addition, the Fed is suppressing rates at zero, extending its crisis lending through December, and pledging to do whatever else it takes to overcome a downturn characterized by the Chair as the most severe in our lifetimes. The Fed’s balance sheet has expanded to $7 trillion and may well grow to $11 trillion by year-end. There is no agreement between the House, Senate and White House on the terms of the next stimulus, but this has long been expected to wrap up by Friday when the Senate recess is scheduled to begin. The good news will help to reduce fallout from the weak July jobs numbers also expected on that day and the damage wrought by Hurricane Isaias up and down the East Coast.