Market Commentary: Landslides

by Gayl Mileszko

The year 2020 still has more than two months to go but its dross is already plastered all over the record books. Many of us just want to flip the calendar forward and welcome a happy new year. Some would prefer to turn back the clock. But if we go back 100 years, we would find a time not unlike the current one where the country was battling a deadly pandemic as racial strife flared. As the last troops were returning from World War I, the Spanish flu was still raging in its third year. Membership in the Ku Klux Klan was increasing. Citizens wavered between supporting a future of isolation or globalism. Everyone yearned for normalcy. Provisions of the 131-year-old Constitution were hotly debated at the kitchen table and in state legislatures; and two amendments were adopted. The American workplace was changing dramatically and media began to impact our day-to-day lives. Station KDKA in Pittsburgh became the first commercially licensed radio broadcaster. For the first time, families who purchased radios heard the results of the presidential election as they were read off the telegraph ticker.

In 1920, Babe Ruth began playing for the New York Yankees, the National Football League was founded, and U.S. athletes won 95 medals at the Summer Olympics in Antwerp, Begium. A century later, the baseball season did not begin until July 23, many football teams are playing with no spectators allowed, and the Olympic games were postponed for the first time in history. At the start of the Roaring Twenties, many Americans were able to own a telephone and a car for the first time, the Holland Tunnel was funded, the Constitution was twice amended by the states to prohibit alcohol and grant women the right to vote, and the presidential election resulted in a landslide victory. In 2020, we have had a landslide of crises. Cars have been garaged and streets have been empty, the largest stimulus packages in U.S. history have been enacted to support a pandemic-stricken economy, constitutional provisions relating to the Electoral College, Supreme Court appointments, and impeachment have been hotly debated. Alcohol consumption has risen sharply as a result of coronavirus lockdowns, the 24/7 media have a dramatic impact on our lives, and voter-eligible turnout has been four percentage points higher for women since the 1990s.

As has been the norm this year, the financial markets are closely monitoring polls, early voting, pandemic statistics, vaccine progress, and stimulus negotiations. Discussions with colleagues and clients are dominated by talk of swing states, sweeps, mail-in ballots, turnout, ties and upsets. Investors are hoping for swift and clear results without post-election disturbances but, in a year full of the unexpected, that seems unlikely. So, some are shorting commodities or emerging market currencies, others are hedging with S&P 500 index puts or governments. With less than one week to go to Election Day, markets have quieted as many individuals as well as institutions sit back and wait for more clarity. We have had plenty of time to implement strategies limiting downside risk or position so as to pounce on opportunities in a post-election rally, vacuum, or selloff.

We expect to see volatility in any period of uncertainty. By one measure, the Chicago Board Options Exchange Volatility Index (VIX), the level has risen 23% this month and 136% since the start of the year. In many respects, we are surprised that the jumps have not been substantially higher. But the Federal Reserve has been, and remains, more than just a stabilizing influence in all markets. We have seen rallies of landslide proportions in the stock and bond markets. Even at this point in the recession, the Dow is only off by 96 points month-to-date while the S&P 500 is up 38 points and the Nasdaq is up 191 points. Oil prices have fallen 4% to $38.56 a barrel. Gold prices have gained $4.70 an ounce to $1,902. On the bond side, U.S. Treasuries have weakened in October: the 2-year at 0.15% is up 3 basis points, the 10-year at 0.80% has increased 12 basis points, and the 30-year at 1.59% is up 14 basis points. The BAA corporate benchmark yield has actually fallen 6 basis points to 2.96%. Tax-exempt municipal benchmark yields are up across the curve: the 2-year has risen 5 basis points to 0.18%, the 10-year is up 9 basis points to 0.96%, and the 30-year has increased 12 basis points to 1.74%.

This week marks the last trading week of October. The municipal calendar is expected to total $15 billion and HJ Sims is in the market with two new bond issues to finance expansion projects: an $86.4 million BBB rated transaction for Jefferson’s Ferry in South Setauket, New York and a $44.9 million BBB-minus rated at Blakeford at Green Hills in Nashville, Tennessee. Last week, we brought a $77.6 million non-rated revenue and refunding deal for John Knox Village in Pompano Beach, structuring the final maturity with a 4.00% coupon priced to yield 3.92% in 2050. On the equity side, the market is being rocked this week by the world’s largest IPO, a $34.4 billion share sale by Ant Group. Investors are also digesting U.S. corporate earnings reports; by the time the week is out, one third of the S&P 500 index components, or 186 companies will have reported third quarter results. More than $28 billion of high yield corporate bond issues have come to market so far this month as have $60 billion of investment grade deals.

Next week, as November begins and the world awaits our election tallies, our trading and investment professionals will be hard at work to advise and execute for our clients as always. We do not know if the 59th quadrennial presidential election will result in a landslide, a squeaker, or a victory eventually determined by the Congress or Supreme Court. We do know that this election will not turn out as did the first one in 1789 — with a unanimous vote by electors – or the one in 1920, when Alaska and Hawaii were not yet admitted to the Union. But our votes do count, our system will work as designed and, no matter the outcome, we will remain proud to work in the best financial markets and greatest country in the world.

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