Market Commentary: Paradise

In twenty U.S. states there is a town or city called Paradise. In Michigan, there are two. At one point there were 36 different communities with that name. In Indiana, it was believed to be the ideal location for mining; in Montana, fishing. In California, it was the perfect spot for filming scenes from Gone With the Wind. The one in Nevada was created in 1950 so that its five casinos could avoid paying taxes to the city of Las Vegas. Because gambling produced so much revenue, mob-run businesses once paid for all the services they needed out of pocket, using their own private security instead of relying on local or county law enforcement. Paradise, Nevada is still an unincorporated section of Clark County, home to most of the Las Vegas Strip although The Pair-O-Dice is no longer open; its citizens are now served by the Las Vegas Metropolitan Police Department.

There is some talk of late that having a police-free society would be paradise, or at least an improvement over some of conditions that exist in several parts of the country. Since 1751, when the first city police services began in Philadelphia and the first police department was created in New York in 1854, we have come to expect nearly the impossible of our men and women in blue. We cannot overlook evidence of brutality, nor can we discount the sacrifices or forget that more than 22,217 law enforcement officers have been killed in the line of duty. Right now, we have 17,985 police agencies based as far north as Point Barrow, Alaska and as far south as Ka Lae, Hawaii with more than 1.1 million full-time employees. In the wake of dozens of senseless deaths roiling American cities these past two weeks, we welcome civil debate over how some of the $100 billion of our tax dollars spent every year on crime prevention and protection of the citizenry should be redirected or supplemented with training programs, employment screening, and broader initiatives tackling poverty, homelessness, mental health, drug addiction and troubled youth.

With the exception of the 8 minutes and 46 seconds of silence on the floor of the New York Stock Exchange on Tuesday, the financial markets have not paused for a second in recent weeks over headline news of protests, riots, looting, COVID-19 case counts, corporate bankruptcies, widespread continuing unemployment, coming elections, or anything else going on here or abroad. There is simply very little if any correlation between our actual economy and the performance of Dow, the S&P 500 and Nasdaq. To Main Street, where going out for a mere cheeseburger seems like paradise, the endless rally is surreal. We know that Wall Street tends to discount background noise and look for blue skies. We also know that the indices reflecting gains are driven by a shrinking number of firms, heavily weighted by a technology sector that in many ways has benefited from lockdowns and efforts to organize. Most of all, we cannot ignore the Federal Reserve’s massive presence and the market’s near total reliance on its perpetual interventions. The $3 trillion of liquidity support happens to be right in line with the gain in the S&P market capitalization dollar for dollar: from $21.42 trillion in March to $25.24 trillion at the end of May.

The securities industry employs approximately 442,400 and has certainly featured its share of textbook bad actors and felons over the years. Working conditions could not have been more favorable in recent years. Perhaps with the assurance of Fed injections at the first sign of any sniffle, and Congress poised to deliver additional stimulus, the capital markets perceive open-ended tickets to paradise. Conditions for borrowers certainly remain heavenly. But we are now formally in recession after 128 straight months of expansion. On Monday, the National Bureau of Economic Research declared that the record-long recovery from the Great Recession ended in February. In the past, the declaration has required consecutive quarters of negative growth. This time, since our economic collapse was rapid, with an unprecedented decline in employment and production driven by pandemic containment policies. The good news is that economists predict that GDP will turn sharply positive in the third quarter as businesses continue to reopen and Americans get back to work. On Wednesday, we will get more color from the Federal Open Market Committee, which meets for the first time since April 29.

During the first trading week of June, the Dow gained nearly 7%, the S&P 500 was up 5%, the Nasdaq rose by 3.5% and the Russell 2000 increased by more than 8%. Oil prices climbed 11% to $39.55 while gold fell by $45 an ounce to $1,685. The rally in corporate bonds continued as well. The yield on 10-year Baa rated corporate securities fell 12 basis points to 3.75%. U.S. Treasury yields rose over the course of a week capped by the unexpected jump in payrolls and drop in unemployment. The 2-year increased by 4 basis points to 0.20% while the 10-year gained 24 basis points to 0.89% and the 30-year added 26 basis points to 1.66%. Municipal bond yields rose as well after seven days of no change, but to a lesser degree than governments. Flows into municipal bond mutual funds totaled $1.2 billion, marking a third consecutive week of net investment, and reception for new issues was solid. The Fed expanded the eligibility for its liquidity fund to smaller municipalities after the State of Illinois became the first to take advantage of the program with a $1.2 billion, one year loan. The 2-year AAA general obligation benchmark finished the week at 0.19%, up three basis points in yield. The 10-year and 30-year yields rose 5 basis points to close at 0.89% and 1.70%, respectively. This week, we encourage you to contact your HJ Sims advisor for opportunities. The muni calendar is expected to exceed $7 billion with a wide range of tax-exempt, taxable and corporate issues.