Market Commentary: October Surprises

Ward 71 is the nickname for The Medical Evaluation and Treatment Unit at Walter Reed National Military Medical Center. It is called the Presidential Suite, but other high-ranking administration officials and military officers, First Ladies, Members of Congress, and Supreme Court Justices also receive medical care there. Not much descriptive information is published, but it is said to be a 3,000 square foot space taking up a full floor in one of 88 buildings on the 243-acre campus located about nine miles from the White House. The Department of Defense runs the facility, but this specific area is under the direct control of the White House. It has a private entrance and rooms said to include an intensive-care unit, a kitchen, a living room to receive visitors, bedrooms, a secure conference room, and space for the President, Chief of Staff and White House physician to work.

Walter Reed is known as the President’s Hospital and the Nation’s Medical Center. It was named for an Army surgeon who was the leading researcher to discover that yellow fever was transmitted by mosquitoes. The facility’s history of service to soldiers dates back to 1909, and to sailors and marines since 1942. In 2011 it was transformed by the joining and relocating of the Walter Reed Army Medical Center in Washington, D.C. to the National Naval Medical Center in Bethesda, Maryland, on a site opposite the National Institutes of Health. It is now the world’s largest joint military medical center with 2.4 million square feet of clinical space that includes a total of 244 patient beds, staffed by more than 7,000 Army, Navy and Air Force medical personnel.

This is where President Trump was admitted last Friday evening after the surprising announcement that he tested positive for the coronavirus. It was the first time in 39 years that a sitting U.S. President was hospitalized, and the first time this close to an election, hence the news caused quite a stir around the world. The diagnosis suddenly presented the first serious health threat to a President in office since the attempted assassination of President Ronald Reagan. On Monday night, however, President Trump was released after being treated for three days with an experimental antiviral drug and a combination antibody. It is not known how his condition and recovery will impact his schedule, if his quarantine or illness will prohibit him from traveling and participating in person at the October 15 debate in Miami, for example. At this writing there are only 28 days to Election Day and health issues surround both septuagenarian candidates for the nation’s highest office. In addition, three Republican senators have tested positive, raising new questions about proceedings on the nominee to the Supreme Court, votes, and the odds of maintaining a majority in the upper house.

We are more than nine months into a year that has been full of what political groupies call “October surprises” upending the country. No doubt there will be more in the days, weeks and months ahead, as 2020 continues its stampede into the record books. The Federal Reserve and U.S. Treasury are using all their powers and tools to stabilize the economy, but some sectors have been crushed. It is difficult to imagine how much more can be done for the economy, and how and when we will manage to undo any setbacks. Some investors are wary, others see us as leading the world out of the recession, and many are just trying to stick to our long-term strategy and cope with all the day’s news as best way possible.

Last week, the third quarter came to an end as did the federal fiscal year. The President signed into law a continuing resolution to fund the government at current levels through December 11, removing the threat of a shutdown and at least one volatility trigger ahead of the elections. The Dow fell 2.3% in September but gained 7.6% during the quarter. The S&P 500 Index lost 3.9% last month, but was up 8.5% in the third quarter. The NASDAQ dropped 5.2% in a September tech selloff but rose 11% during the third quarter. The U.S. Treasury issued more than $1.7 trillion of bonds, notes and bills last month, bringing the total for the year to an astonishing $15.5 trillion, 28% more than was issued in all of 2019. Corporate high yield bond issuance in September was the third busiest month on record with more than $47 billion of volume according to Bloomberg; yields jumped 43 basis points during the month. Corporate investment grade volume was the seventh highest on record at $164.4 billion, bringing year-to-date issuance to $1.54 trillion. Corporate bond returns, as measured by the ICE BoAML Index, were negative 0.26% but gains so far this year are +6.61%.

Municipal bond volume increased 26.3% to $47.28 billion, the highest issuance in the month on records dating back to 1986. Year-to-date volume stands at $341.8 billion with $102.58 billion coming as taxable. Muni returns, as measured by the ICE BoAML Index, were negative 0.07% in September but total +3.18% after nine months. High yield munis returned +0.22% last month and are up 0.93% this year. Taxable munis lost 0.34% in September but are up 10.08% in 2020. In the final trading week of the quarter, muni bond funds saw outflows for the first time in 20 weeks. The $611 million of net withdrawals slightly reduced total fund assets to $830 billion.

At the end of September, the 2-year Treasury yield stood at 0.12%, basically flat on the month and on the quarter. The 10-year yield at 0.68% dropped 2 basis points in September but rose 3 basis points on the quarter. The 30-year yield at 1.45% also gained 2 basis points on the month and 4 basis points in the third quarter. The 10-year BAA corporate bond yield at 3.02% was flat on the month but plummeted 37 basis points on the quarter. High grade municipal bonds, as measured by the AAA MMD benchmark fell 3 basis points in September and 14 basis points during the quarter. The 10-year muni finished at 0.87%, up 6 basis points in September but down 3 basis points for the quarter. The 30-year at 1.62% also rose 6 basis points last month but was basically flat in the third quarter.

September brought several unwelcome surprises in the form of wildfires, hurricanes, a spike in COVID-19 cases, and an unusual debate. Markets moved on any news of incremental progress with a vaccine, Fed Chair Powell’s warning that the recovery remains highly uncertain, a dot plot signaling low rates through 2023, and the explosive partisan divide over the Supreme Court vacancy occurring with the passing of Ruth Bader Ginsburg. Investors waited in vain all month for passage of a fourth federal stimulus bill. Stress on the nation’s largest public transportation system led to a single notch rating downgrade; it was seen by many as the beginning of a long series of inevitable cuts reflecting the extent of damage wrought by six months of shutdowns on U.S. infrastructure.

The combination of extremely low rates and strong investor appetite for U.S. government, municipal, corporate and asset-backed bonds is attracting new as well as frequent and distressed borrowers. A+ rated Coca Cola had a $1.9 billion tender of notes with coupons ranging from 1.55% to 4.20%. Baa3/B+ rated Delta Air Lines raised $9 billion in the industry’s largest debt sale ever; its senior secured notes due in 2028 had a coupon of 4.75%. Uber Technologies placed a $500 million of CCC+ rated debt due in 2028 at 6.25%. A defaulted California project planning to convert rice cultivation debris into fiberboard sold $53 million of non-rated bonds due in 2032 at a yield of 8.169%. Credit analysis and surveillance is critical at this point in the political-economic cycle. We encourage you to consult with your HJ Sims representative to do a wellness check on your portfolios to reduce the risk of unwelcome surprises.

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