Top Weekly Themes
- Like the Pandemic Never Even Happened. Last week we witnessed two monumental events – the S&P 500 surpassed its previous high set back in February and Apple Inc. (AAPL) became the first U.S. company to achieve a $2 trillion market capitalization. The remarkable S&P 500 recovery, during an ongoing pandemic, marked the quickest recovery of a 30% decline or worse in history. It took just 103 trading days to erase the S&P’s 35.41% decline, supported by substantial monetary and fiscal policy stimulus. Apple’s rise to the $2 trillion club comes just two years after breaking the $1 trillion level in August 2018. The company’s swift rise has largely been driven by an expansion of the company’s valuation and less from earnings growth, as trailing twelve months EPS has only increased 27% compared to a doubling in the stock’s value. However, while this interpretation appears negative given the swift multiple expansion, there are reasons that could explain the increase in valuation. First, Apple is likely viewed as a safe bet during this time of great uncertainty. Further, continued growth of its Services business provides high margins and often recurring revenues. Lastly, anticipation of a 5G iPhone launch later this year should provide those still holding onto older iPhones an incentive to upgrade.
- The MTA Stops at the Fed. Thus far, few state and local governments have tapped the $500 billion Municipal Liquidity Facility (MLF) offered by the Fed since its implementation in April. Illinois, the lowest rated state, and now New York’s Metropolitan Transportation Authority (MTA) have been the only borrowers to seek the Fed’s help. After the Fed eased credit terms and opened the facility to mass transit agencies, the MTA jumped at the opportunity to secure $450 million at a lower interest rate than it was offered in the public market. The COVID-19 virus pandemic has pressured the MTA as ridership declined and residents have fled New York City at record rates. According to several news reports there are more than 13,000 empty apartment units and decade-high vacancies1. We continue to believe there are opportunities within the municipal bond market, however due diligence remains very important. Broadly speaking, given expected declining revenues and rising expenses, some issuers are financially better positioned relative to others in navigating the current environment. That said, we do not anticipate mass credit problems, as evidenced by the minimal use of the Fed’s emergency municipal credit facility to date.
- The FOMC Is Here to Help. The Federal Open Market Committee (FOMC) released its July minutes last week with two key themes: The Fed will remain supportive and there was agreement among members to update its policy framework. The Fed’s continued backstop is firmly in place as several at the meeting view the ongoing pandemic as weighing on the economic outlook in both the short- and medium-term. The minutes reiterated the call for Congress to act on another round of fiscal stimulus as the initial economic bounce seems to have turned wavy. The agreement among members for policy framework updates may lead to average inflation targeting, a concept likely to result in monetary policy being easier for even longer.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||(1.3)||(11.0)||(0.1)||13.5||36.9||2.62|
|Russell 1000 Growth||2.3||24.2||38.6||87.5||136.4||0.81|
|MSCI EM (Emerging Markets)||(1.4)||(1.3)||13.2||10.8||49.2||2.36*|
|Bloomberg Barclays US Aggregate||0.2||7.1||7.1||16.8||23.2||1.13|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||0.8||4.7||15.2||35.7||5.63|
|Bloomberg Barclays Municipal Bond||(0.4)||3.7||3.6||13.5||21.9||1.24|
|Bloomberg Barclays Global Aggregate x US (Country)||0.5||5.1||4.5||9.9||20.5||0.73|
|Crude Oil WTI (NYM $/bbl) Continuous||1.4||(29.9)||(23.7)||(11.7)||3.6||42.8|
|Natural Gas (NYM $/mmbtu) Continuous||7.8||7.4||6.0||(18.7)||(14.6)||2.4|
|Gold NYMEX Near Term ($/ozt)||(1.2)||27.3||28.5||50.4||67.7||1,933.8|
|Copper Cash Official LME ($/mt)||3.4||7.1||15.7||2.2||30.3||6,594.5|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.18||1.12||1.11||1.18||1.12||1.18|
|Japanese Yen per U.S. Dollar||106.89||108.68||106.32||108.81||123.63||105.95|
|U.S. Dollar per British Pounds||1.31||1.32||1.21||1.29||1.57||1.31|
Chart of the Week
Cash in While You Can
- Investment-grade corporate issuance has already hit a new annual record of $1.342 trillion in 2020, even with over 4 months left in the year. Record levels of debt issuance has been driven by companies looking to fortify their balance sheets with extra liquidity given the uncertain economic outlook. Issuers from all corners of the economy have been tapping credit markets – some raising capital multiple times.
- The Federal Reserve’s (Fed) corporate bond buying facilities announced in March have been credited with setting the stage for corporate borrowers to source liquidity in the market. Although the programs were designed to provide support via bond purchases, the announcement of support was enough to bring investors comfort after demand for corporate paper evaporated and corporate borrowing costs spiked in March. Since the Fed’s announcements, credit spreads have continued to contract, and overall investment-grade borrowing costs have dropped precipitously this year.
- Where do we go from here? While the economic path forward, especially in the short-term, remains cloudy, we continue to favor corporate bonds over U.S. governments for a few reasons: 1. Issuance is expected to taper off after the massive credit binge already seen year-to-date. 2. Absolute yields remain relatively attractive. Intermediate investment grade corporate bonds were yielding about 1.3% at the end of the month compared to intermediate U.S. government yields of 0.22%. Credit spreads don’t necessarily have to grind tighter for corporate bonds to outperform. Corporate bonds are starting with a more than 100 basis point edge. 3. The Fed has ample room to intervene if necessary. If credit conditions tighten again, the Fed facilities have barely been touched. In fact, the Primary Corporate Bond Facility has yet to be used at all.
No Place Like Home
We have discussed the strength in the housing market in previous Market Insights, but support has continued and remains an economic bright spot. Last week’s National Association of Homebuilders (NAHB) housing market index, a survey of builder confidence, climbed 6 points to 78, matching its all-time high set in 1998. As seen in the chart below, growth in overall building materials continues to expand at a double-digit year-over-year pace and is consistent with earnings reported last week at the two biggest home improvement retailers, Home Depot (HD) and Lowe’s Companies (LOW). Both retailers reported impressive year-over-year sales growth of 23.4% and 30%, respectively, for the second quarter. Importantly, both retailers have seen August performance month-to-date continue July’s strong pace, as work and learn-from-home has made them even more essential to daily life given the increasing wear and tear on homes. Construction and remodeling aren’t the only positive areas, some home-related furnishing retailers have also seen positive demand trends in spite of COVID-19 virus hotspots and physical store closures. The TJX Companies (TJX), parent company of Home Goods and Home Sense store brands, reported positive store comparisons and has observed home-related traffic and volume nearly recover to pre-COVID-19 virus trends. To be sure, it will be difficult to maintain these strong housing-related trends, but the potential new reality post-pandemic could drive a positive structural change in the housing landscape and likely add support to the U.S. economy.