Market Commentary: Space Tours and Race Wars: A Critical Time

Doug Hurley, 53, of League City, Texas, was a Marine Corps fighter pilot before becoming an astronaut twenty years ago. A graduate of Tulane, known for his call sign “Chunks,” he is married to a fellow astronaut. In July of 2011, his last mission was aboard Atlantis on the final flight of NASA’s space shuttle program. Bob Behnken, 49, a native of St. Ann, Missouri with a doctorate in mechanical engineering from the California Institute of Technology, also joined the NASA astronaut corps in 2000 and married an astronaut from his class. Dubbed “Dr. Bob,” he previously served as a test pilot and flight test engineer in the U.S. Air Force, and is the former Chief of the Astronaut Office. The two retired colonels with numerous distinguished service medals have been close friends for two decades. Today both are aboard the international space station, orbiting 220 miles above Earth after having piloted SpaceX’s Crew Dragon spaceship in a spectacular Falcon 9 rocket launch from Cape Canaveral on Saturday, May 30th. They had worked for years to perfect the brand new “bird,” a brainchild of Elon Musk funded with $3.14 billion of federal tax dollars, becoming not only the first two humans on a commercial spaceflight, but providing a moment of much-needed human triumph for a world marred by pandemic and social unrest.

While much less stunning on the global scale, U.S. financial markets have celebrated some milestones. In May, municipal bonds posted their strongest May price performance in history with the ICE BoAML Index returns up 3.25%, reversing two months of losses and bringing year-to-date returns into positive territory at 0.98%. A total of $3.3 billion poured into municipal bond funds and $1.52 billion into municipal bond ETFs in a reversal of the panicked selling a mere two months ago. The coming June, July and coupons, calls and maturities will produce $20 billion of new cash looking for reinvestment opportunities. With few exceptions, the yields on the coupons cannot be replaced. Short investment grade bonds, when factored for inflation and transaction costs, are in fact negative. The 2-year AAA general obligation bond benchmark yield closed on May 29 at 0.16%, right on top of the U.S. Treasury yield and a full 75 basis points below where it began the month. The 10-year muni at 0.84% fell 62 basis points during the month. State and local issuers are now able to access the markets at rates so low that loans are effectively free, which explains why the June calendar could exceed $40 billion. In May, muni issuance totaled $27.9 billion, of which 42% was taxable, including $5.7 billion through the corporate bond market, and nearly all with investment grade ratings or bond insurance.

The last trading week of May closed with both the Treasury and municipal bond markets relatively range-bound with little change in yields or prices. High yield corporates strengthened by 10 basis points on the long end. The Treasury 5-year auction, one of the latest in a long string, was considered weak while the 7-year auction was described in the trade press as uninspired. This capped a month of larger than expected 10- and 30-year auctions as well as the first 20-year auction since 1986. The Beige Book, a report of the Federal Reserve Bank of St. Louis published eight times per year, reiterated the havoc being wreaked on the economy by the pandemic, lending no new insight or direction to markets clutching for reasons to continue their rallies. However, it started to lay the groundwork for the use of a policy tool with a new name, yield curve control, at a time when so much more than yields appear to be beyond control.

Stocks have cast aside concerns over ugly economic data, Hong Kong, China, and the protests, and riots that has escalated in more than 100 U.S. cities in the aftermath of the killing of George Floyd, a 46 year-old truck driver and furloughed security guard. The 220 miles around Minneapolis includes 193 counties in seven states but looting and violence quickly spread far beyond that radius. As if in a parallel galaxy, equities, as defined by the Dow, Nasdaq and S&P 500, all gained more than 4% in May on optimism for progress with treatments and vaccines as well as state and local business re-openings and signs of other major economy recoveries. The Dow finished up 1,037 points, the S&P 500 was 131 points higher, and the Nasdaq gained 6.75% or 600 points. High yield corporate bonds and preferreds have returned more than 9 percent during April and May combined. Oil prices surged $16.65 a barrel or 88% to $35.49 last month, and gold prices increased by 2.5% to $1,730 an ounce.

At this writing, more than 17,000 National Guard troops have been deployed to 23 states to support law enforcement. This is on top of the 45,000 already dedicated to pandemic-related duties in all 50 states. The Federal Reserve, the white knight on which Main Street and Wall Street have relied for solutions to many urgent problems for years, is powerless to quell the social turmoil. Officials are instead entering their traditional blackout period ahead of the June 10 meeting. The damage and destruction to municipal operations and private businesses may not have lasting economic impacts, but the conflicts have further inflamed political divisions likely to persist long after the November elections.