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BMT Monday Market Insights – June 22, 2020

Market Insights

Top Weekly Themes

  • Consumer spending bounces back in May – retail sales increased nearly 18% last month as easing lockdown restrictions and store re-openings contributed to a turnaround in consumer spending following consecutive months of plummeting sales. Fiscal stimulus checks and increased unemployment benefits also provided some additional spending power.   Just about all the major retail categories including clothing, restaurants, automobiles, etc., benefitted from a pick-up in consumer demand.  The positive monthly turnaround is certainly welcomed news, but not nearly enough to offset the substantial drop in spending experienced in March and April.  In fact, when looking at annual sales figures over the past year, consumer spending is down over 6.0%.  And, consumers extra spending power from fiscal checks and increased unemployment benefits will eventually fade as both were designed to provide a short-term boost.  We believe pent-up demand will continue to support consumer spending in the short-term.  In the medium to longer-term, we will be closely monitoring changes in the labor market to determine the extent to which the consumer can lead the U.S. economy back to previous levels of activity.
  • Chairman Jerome Powell delivers semiannual testimony to Congress – Chairman Powell reiterated his economic concerns when presenting the Federal Reserve’s semiannual Monetary Policy Report to members of the Senate Banking Committee and the House Financial Services Committee on June 16 and 17.   After entering a recession in February, it appears likely that the U.S. economy has stabilized and began modestly rebounding when looking at the labor market as well as consumer spending behavior.  However, the Chairman expressed his long-term economic concerns when stating “the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”  Earlier in the month, the Federal Reserve (Fed) projected the federal funds target range will remain near 0.0% until the end of 2022 while the unemployment rate is expected to stay above 5.0% during this time period.  The Chairman’s remarks along with the Fed’s projections are consistent with our thinking that it will take some time for the U.S. economy to fully recover from the current recession, potentially leading to lower interest rates for a longer period of time.  Within this environment, across our fixed income strategies, we do not believe in yield curve extension simply for the sake of adding additional yield to the portfolio.  Instead, thoughtful consideration regarding the risk/return characteristics of each holding and within the context of the entire portfolio is the primary driver prior to any purchase.
  • Individual jobless claims drop again – for the eleventh consecutive week, the number of individuals applying for unemployment benefits fell. For the week ending June 12, there were roughly 1.5 million applications for unemployment benefits compared to roughly 6.9 million on March 27.  The number remains elevated, but the consistent weekly improvement is a positive sign that the worst for the labor market contraction may be behind us.  We expect to see ongoing improvement within the labor market as lockdown measures ease and the need for more workers increases as stores reopen around the country.  The question remains how long it will take to return to previous levels of employment, and how that trajectory will impact overall economic activity.  In truth, given the circumstances, it is very hard to forecast.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 3.8 (2.7) 8.9 35.9 62.7 1.86
Russell 1000 Value 3.2 (14.5) (5.6) 7.5 24.6 2.91
Russell 1000 Growth 4.5 9.0 22.8 66.6 102.0 1.04
Russell 2000 5.3 (13.9) (6.6) 5.8 19.2 1.55
MSCI EAFE 0.7 (10.1) (1.6) 4.6 12.3 2.85*
MSCI EM (Emerging Markets) 0.2 (9.8) 0.0 8.0 16.9 2.84*
Week YTD 1-Year 3-Year 5-Year Yield
Fixed Income
Bloomberg Barclays US Aggregate 0.0 5.9 9.2 16.1 23.3 1.31
Bloomberg Barclays US High Yield – Corporate 1.1 (2.3) 2.3 12.0 27.7 6.42
Bloomberg Barclays Municipal Bond 0.0 1.8 4.4 12.4 21.2 1.54
Bloomberg Barclays Global Aggregate x US (Country) (0.7) 1.1 3.1 8.7 15.3 0.80
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil WTI (NYM $/bbl) Continuous 6.9 (36.4) (27.9) (13.2) (35.7) 38.8
Natural Gas (NYM $/mmbtu) Continuous (9.7) (25.2) (29.6) (46.1) (41.0) 1.6
Gold NYMEX Near Term ($/ozt) (0.4) 13.5 28.1 37.5 43.6 1,724.8
Copper Cash Official LME ($/mt) (0.0) (5.8) (0.8) 2.5 0.7 5,799.0
1 Week Ago YTD 1-Year Ago 3-Years Ago 5-Years Ago Current Level
Currencies
U.S. Dollar per Euro 1.14 1.12 1.12 1.12 1.14 1.12
Japanese Yen per U.S. Dollar 106.65 108.68 108.51 110.68 122.99 106.77
U.S. Dollar per British Pounds 1.26 1.32 1.25 1.28 1.59 1.24

As of June 18, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 5/29/2020.

Chart of the Week

Click the chart to enlarge it.

S&P 500 Index (12-31-19 –6-17-20)
Source: Bloomberg, Inc

Key Takeaways

  • After nearly three months since announcing the Secondary Market Corporate Credit Facility, last week the Fed began purchasing eligible corporate debt of individual issuers based on specific criteria such as minimum credit rating and maturity limits.
  • The program has already contributed to a significant drop in credit spreads as risk aversion declined across both investment grade and high yield bond markets. The timing of such purchases is noteworthy given the recent performance of credit spreads.
  • The Fed’s initial round of individual bond purchases began after a week when credit spreads turned higher following four consecutive weeks of declines. When the Fed is buying bonds, it is directly supporting bond demand – a positive for market stability.  Last week, credit spreads dropped 15 basis points (0.15%) through Wednesday, June 17, to 1.16%, its lowest level since March 5, 2020.
  • At BMT, we continue to increase our investment grade corporate bond exposure across our taxable bond strategies.  We believe investor demand for corporate bonds will continue for the remainder of the year as corporate fundamentals improve coinciding with a pick-up in U.S. economic growth.

Commentary

S&P 500 Index (12-31-19 –6-17-20)
Source: Bloomberg, Inc.
  • The equity markets have been volatile as investors continue to speculate on the likely path of the pandemic and its impact on U.S. economic growth. Everyday, U.S. economic data and virus-related news are reported that potentially provide new insights investors may incorporate into their decision-making process.
  • For example, this past week, positive pandemic related news such as a generic steroid and its positive impact on some COVID-19 patients coincided with more pessimistic headlines that new cases are surging in Texas; while China is taking action to control a new spike of COVID-19 cases. Regarding the U.S. economy, the jump in retail sales recorded in May provided evidence that the U.S. economy has at the very least stabilized, while Chairman Powell’s remarks provided a more downbeat economic assessment.  Other headlines related to potential infrastructure spending, North Korea and geopolitical tensions, additional monetary stimulus, and of course, U.S. election forecasts are being calculated and recalculated on a daily basis by equity investors.
  • The quick takeaway is that it’s very important to look beyond the “story of the day” given how quickly new, and often times conflicting, information is presented. Instead, remain focused on the horizon, as the short-term waves are unpredictable, and in almost all cases, not worth significant portfolio changes.
  • Positioning in this environment is complex. On one hand, we believe the economy is in the early stages of healing, with the support of both monetary and fiscal policy makers.  On the other hand, we also think the healing will be quite slow, with numerous risks and potential pitfalls as we move through the rest of the year.  Our positioning reflects this tug of war – within equities we have a tilt toward cyclical oriented asset classes that should benefit from an economic recovery (and that are in many cases unusually cheap).  However, to manage the heightened level of risk, we have recommended reducing overall equity exposure relative to one’s stated target.  Should fundamentals again begin to deteriorate, this will serve as a hedge against our other more cyclically oriented equity exposures.

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