Market Commentary: Have We Got This Handled?

The open prairies, sandstone quarries, and coal mines gracing the land halfway between the cities of Seattle and Portland in Washington attracted many American settlers back in the 1860s and the Town of Tenino became a popular whistle stop on the Northern Pacific Railroad route. The Town’s fifteen minutes of fame came some seventy years later during the Great Depression when the Citizens Bank closed, all bank accounts were frozen, and cash became very scarce. In December 1931, the local chamber of commerce came up with the idea of issuing Tenino Wooden Dollars to restore confidence and spur commerce. The scrip was printed in one-dollar denominations and was redeemable in Thurston County stores during the month it was issued. The alternative currency circulated for two years. Ninety years later, the community decided to break out those old wooden presses again to help workers who have lost income due to the pandemic. Residents are eligible for up to $300 a month to spend for necessities and services from local providers. The bills are made of wood veneer, issued in $25 denominations, and engraved with the Latin phrase Habemus autem sub potestate, translated as “We’ve Got This Handled.”

Communities with less than 2,000 people like Tenino, as well as cities with more than 1.5 million across the country and around the world have been taking maximum advantage of state, federal and private aid but have also been coming up with their own creative solutions to handle a wide range of individual needs as the pandemic rages. A focus on the health and safety of neighbors, customers and employees is in fact contributing to the demise of coin and currency usage. Cashless, contactless transactions have been increasing as case counts have surged. At this writing, there are more than 3.4 million confirmed cases in the U.S. and there have been 136,463 deaths. The Centers for Disease Control reports an overall cumulative Covid-19 hospitalization rate at 107.2 per 100,000, and the median cost of each stay is $45,000. The number of employed workers has fallen to 137.8 million, down 14.7 million from the 152.5 million reported in February. More than 32.9 million Americans were receiving some type of unemployment assistance as of June 20. At the end of the month we will have the first estimate of second quarter growth but it is estimated to show a drop of at least 30%.

U.S. financial markets appear convinced that there is a fall safety net beneath them, fashioned with the shock absorbing synthetic mesh of the Federal Reserve and the U.S. Treasury. Many investors feel certain that a worsening of the pandemic will only produce more stimulus, making COVID-19 in the words of one trader “inversely related” to market performance. But the massive social and economic disruptions and mitigation response that have produced a $2.7 trillion U.S. budget deficit and $7 trillion Fed balance sheet nine months into the fiscal year seem destined to create at least a few market bubbles.

For five months now, we have been relying on government officials to handle decisions affecting just about every waking hour of our lives. They exercise unprecedented control over our whereabouts and activities and, in the process, we have lost so many of our most pleasant summer distractions. Vacations are being postponed, barbecues limited, beaches closed. We miss seeing our favorite seasonal competitions for baseball’s all-star MVP, the Tour de France’s yellow jersey, the British Open’s Claret Jug, and Wimbledon’s trophies. Instead, we listen to the field chatter of central bank officials, follow the wrestling matches involving teachers’ unions and epidemiologists and parents over fall school openings, make wagers on the changing names of professional football teams, and cheer or boo some of the more unusual alliances formed in recent U.S. Supreme Court opinions. In one such ruling last week, the Court decided that nearly half of Oklahoma is Native American reservation land allocated under an 1866 treaty, suddenly raising a host of new tax, zoning, and law enforcement issues for 39 counties.

This week, taxpayers are scrambling to finish 2019 returns after a three-month blanket extension granted for state and federal filers. Traders are watching the first reports of second quarter corporate earnings, assuming that the worst of the coronavirus impact will be reflected therein, more interested in the forward guidance offered by chief executives and progress on vaccine trials. It is hard to say at this point whether the markets have baked in some of the uglier possible scenarios. The S&P 500 is currently trading at 25 times estimated earnings, the highest point since the era of the dot-coms. It has risen 42% since its low point in March 23. A record $184 billion was raised in U.S. equity capital markets in the second quarter according to Refinitiv IFR data. Investors are also fueling rallies in the bond markets. The $1.2 trillion of investment grade corporate bond issuance in the first half of the year is the highest on record. Municipal bond mutual fund and ETF flows have been positive for 10 consecutive weeks, and the ICE BoAML tax-exempt muni index has seen 10 straight weeks of positive returns.

The municipal bond calendar may total as much as $14 billion this week, with nearly $5 billion coming as federally taxable bonds, led by hospital, college, port and airport deals. The 30-day visible supply exceeds $19.1 billion, a high reached only on seven other occasions according to Municipal Market Advisors. On the corporate bond side, investment grade issuance is expected to come in at $20 billion, bringing us closer to a July total of $100 billion. The high yield corporate calendar changes daily; so far this year, new issue volume adds up to more than $219 billion. At this writing, the 10-year Baa corporate bond yield stands at 3.28%, 11 basis points lower on the month. The 2-year AAA rated municipal general obligation bond yield at 0.24% is down 3 basis points on the month while the 2-year Treasury yield is basically flat at 0.15%. The 10-year muni benchmark yield at 0.81% has fallen 9 basis points, outperforming the Treasury 10-year counterpart, nearly flat at 0.64%. The 30-year muni benchmark yield at 1.53% is 10 basis points lower as compared to the 30-year Treasury at 1.33%, which is down 8 basis points in July. The long muni has not seen a 2-handle or 2% yield since May 7; the long bond has not seen a 2-handle since February 19.