Top Weekly Themes
- Fed takes Quantitative Easing (QE) to Infinity: Last Monday before the markets opened the Federal Reserve issued a press release that read, “While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.” The actions which the Fed announced are designed to increase liquidity in the bond market and to support credit to investment grade companies. Specifically, the Fed will now be purchasing unlimited (QE with no bound) amounts of Treasury and agency mortgage-backed securities. The Fed also announced the Term Asset-Backed Securities Loan Facility (TALF) which will lend money to investors to be used to buy securities backed by credit card receivables and other consumer debt. Financing to investment grade companies will come via two programs, the first, the Primary Market Corporate Credit Facility (PMCCF) will support funding to corporate borrowers for up to four years. The second, the Secondary Market Corporate Credit Facility (SMCCF) program allows the Fed to purchase existing corporate debt and eligible (fixed-income) exchange traded funds. All of these programs will use special purpose vehicles to facilitate transactions. Finally, the Fed said it would soon roll out a Main Street Business Lending Program that will support lending to small and midsize businesses. Aggressive efforts indeed, but needed as the credit markets, like the equity markets, have been under great stress.
- Fiscal Stimulus, while not Quite Infinity, still $2.0 trillion: Late Wednesday evening the Senate passed a roughly $2 trillion rescue package (CARES Act) by a vote of 96-0. To put that dollar figure in perspective, the outstanding debt amassed by the country to-date is $23.4 trillion, so this single package will bump that higher by just under 10%. While the scope of the Act is massive, several of the more noteworthy aspects include rebates of $1,200 per adult and $500 per child for those with an adjusted gross income below certain levels. Unemployment insurance will also be enhanced through the end of the year. Further, the Act has numerous elements to support corporations, including $376 billion for small businesses, $232 billion for corporate tax relief, and roughly $500 billion for Exchange Stabilization Fund (ESF) loans, loan guarantees and investments. The Act was expected to be approved by the House of Representatives on Friday and signed into law by President Trump shortly thereafter.
- Unemployment Claims Spike: The monetary and fiscal actions detailed immediately above are huge and unprecedented in their magnitude. The need for these actions was evidenced in stark terms when initial unemployment claims were announced last Thursday, March 26. This figure, which had averaged just under 220,000 per week over the past two years, moved up to 281,000 two weeks ago. Investors were bracing for a bad number. The actual result came in at a staggering 3.28 million claims. This figure dwarfed the prior high of 695,000 registered in 1982, and with an ever-increasing amount of the country on some form of shelter at home, may well trend higher over the coming weeks.
Returns Table
| Equities | Week (%) | YTD (%) | 1-Year (%) | 3-Year (%) | 5-Year (%) | Div Yield (%) |
|---|---|---|---|---|---|---|
| S&P 500 | 9.2 | (18.2) | (4.8) | 19.1 | 41.7 | 2.32 |
| Russell 1000 Value | 9.7 | (25.2) | (15.1) | (3.6) | 13.1 | 3.48 |
| Russell 1000 Growth | 9.6 | (12.7) | 3.4 | 41.4 | 67.3 | 1.34 |
| Russell 2000 | 11.5 | (29.0) | (21.6) | (9.2) | 2.8 | 2.01 |
| MSCI EAFE | 13.0 | (22.9) | (14.1) | (4.1) | (2.0) | 3.19* |
| MSCI Emerging | 11.1 | (23.4) | (16.5) | (4.5) | (1.6) | 2.64* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Yield |
| Bloomberg/Barc US Aggregate | 2.9 | 2.2 | 8.0 | 14.2 | 17.4 | 1.71 |
| Bloomberg/Barc US High Yield | 2.8 | (15.3) | (9.5) | 0.1 | 11.5 | 10.33 |
| Bloomberg/Barc Muni Bond | 4.7 | (0.8) | 3.9 | 12.4 | 16.8 | 2.07 |
| Bloomberg/Barc Global Agg. Ex U.S. | 3.3 | (3.0) | 0.6 | 7.6 | 9.9 | 1.05 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil (WTI) ($/bbl) | (5.5) | (59.9) | (59.1) | (48.9) | (52.4) | 24.5 |
| Natural Gas ($/mmbtu) | 3.6 | (21.7) | (37.7) | (44.3) | (36.2) | 1.7 |
| Gold ($/ozt) | 11.6 | 8.6 | 25.5 | 32.2 | 36.9 | 1,650.1 |
| Copper ($/mt) | 1.9 | (22.4) | (24.9) | (17.4) | (23.3) | 4,775.5 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| Euro/USD | 1.07 | 1.12 | 1.13 | 1.08 | 1.09 | 1.10 |
| USD/YEN | 110.06 | 108.68 | 110.50 | 111.05 | 119.03 | 119.48 |
| Pound/USD | 1.17 | 1.32 | 1.32 | 1.25 | 1.48 | 1.21 |
As of March 26, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 12/31/2019
Chart of the Week
Key Takeaways
- Last week, safety literally went to a premium. Treasury Bills are normally sold at a discount to face value, with the interest earned being the difference between that discount and the face value received at maturity. Last Wednesday, this dynamic flipped, with investors actually paying above face value for one and three-month Treasury Bills.
- While the move into negative territory was modest, it is just another data point supporting the extreme negative sentiment within the financial markets. With this move, investors are literally willing to lock in tiny losses for the ability to shelter monies in the safest U.S. Government obligations for a short period of time.
- In spite of these negative yields, the Fed Funds rate currently has a targeted range from 0 to 0.25%. Fed Chairman Powell went on record last year, and again earlier this year, to say that he does not plan to move to the negative rate regime that has been employed within certain other countries.
- We are believers that rates will stay lower for longer. However, with the massive issuance of debt that will be needed to fund the current rescue package we also believe the Treasury Bills trading with a negative yield are simply a short-term flight to safety – – – and not a harbinger of what lies ahead for longer dated obligations.
Commentary
With an ever-increasing portion of the United States in some form of shelter in place, the economy is contracting sharply by the day. At present the length and scope of this situation is to say the very least, indeterminant. What is known is that companies with no or little business, and employees with no paychecks, needed some form of assistance until a sense of normalcy returns. They got that last week from the U.S. Government.
While the National Bureau of Economic Research (NBER) clearly has not dated even the start of a recession, few would argue that the economy is currently contracting at a record pace. While the contraction end date is unknown, what we do know is that the actions being taken on both the fiscal and monetary side are designed to limit the damage over the near-term and allow the country to experience a swift recovery once the current disruptions abate.
As the chart above shows, we also know that the stock market tends to look forward, and with one lone exception over the past roughly 90 years, has bottomed months before the economic all clear was sounded.
