Monthly Update
The reopening rally continued in June as the S&P 500 gained 1.8% after the 4.5% rally in May and 12.7% rebound in April, after the sharp declines seen in February and March[1]. Technology stocks, particularly the big ones, like Amazon, Apple, and Microsoft, have led the way, but small cap stocks also rallied in the month[2]. Treasury yields have been little changed over the past four months and it’s not clear whether they are just being suppressed by the Fed, both on the short end with rates at zero and the longer end with QE[3]. On the other hand, if it’s a more modest expectations of economic growth, it is something that will have to be reconciled at some point with the ebullient stock market.
More of the global economy reopened week to week and economic activity continued to increase as a result which was reflected in the data seen for June. Here are some of the key figures that confirm the economic recovery: Net payrolls rose by 4.8mm people after adding 2.7mm in May[4]. The ISM manufacturing index bounced to 52.6 from 43.1[5]. The Conference Board consumer confidence index rose to 98.1 from 85.9[6]. Keep in mind though, these figures still have a ways to go to get back to levels seen in January and February, so there remains a lot of wood to chop.
The caveat here is as the economy has reopened, Covid counts have increased dramatically to up to 40,000 per day[7]. The Center for Disease Control estimates that only 1 in 10 are actually getting captured which would imply a new virus count figure of 400,000 per day[8]. The only positive spin is that most are younger people who will recover quickly as those most vulnerable, whether due to health or age, have been much more careful in their daily routines. Wearing a mask is the key to powering through Covid, and hopefully, people are learning from these lessons.
The Stock and Credit Market
Also helping stocks, outside of the economic reopening, has been the outsized impact the Federal Reserve has had in credit markets. They’ve created another massive Fed put where investors feel ‘protected’ by Fed actions that just like Superman, they swoop in and save the day. It’s a dangerous reliance but one that has existed for a while. Many times it works, but sometimes it doesn’t.
Of the many programs the Fed has announced since March, what began in June was the outright purchases of individual investment grade corporate bonds. In May, they bought investment grade corporate bond ETF’s but in June bought the bonds of Apple, McDonald’s, Walmart, and Coca Cola[9]. It’s not clear at all what the economic stimulant of this action is other than another attempt on the part of the Fed to suppress interest rates. Either way, corporate bonds have gotten a lift in price but only investment grade[10]. High yield bonds instead, that are right now not a target of the Fed and as measured by the HYG ETF, traded lower in June[11].
While not agreeing with where monetary policy has gone to in the realm of corporate bond buying, I hope they at least limit their purchases to keep more of these bonds in private hands.
The Economy
As said in the beginning of the letter, the US economy has begun its recovery, as has the rest of the world as businesses reopen and people venture outside again. A key to the pace and consistency of the reopening around the world has and will continue to depend on the diligence in wearing masks. Those countries that have had the most success in encouraging mask wearing have been able to reopen with little impact on the virus spread. As we’ve seen over the past month, the states of Texas and Florida, to name a few, have seen large flare ups which has resulted in the closing of some businesses that were already reopened. This has also paused the reopening of some businesses in other states.
Thus, how the economy continues on its expansion path from here will depend on to what extent people wear masks and when we will have more effective therapeutics for Covid, as well as a vaccine.
The uncertainty here is how long will it take for the US economy to get back to where it was pre-Covid. Potentially, it could take a few years and the same can be said for corporate earnings.
The Government
A key to this economic improvement will also depend on the actions of the US government. As of July 31st, the extended and generous unemployment benefits that were passed back in March, will expire. That has been an additional $600 per week on top of existing state benefits. In addition, certain households were issued checks. These transfer payments have helped consumer spending. The Paycheck Protection Program has also been in place and has subsequently been extended. The question from here is to what extent the consumer related benefits will be extended, if at all, and will the extension of PPP give businesses enough time to recover.
Conclusion
Until Covid is fully contained or eradicated, life will remain in an uncertain place but I firmly believe we can power through with mask wearing and responsible distancing. With respect to the medicine side of this, I also believe that with the entire world’s medical community focused on a vaccine, we will get one by year end or in early 2021. In the meantime, businesses will continue to reopen and hopefully kids will be able to go back to school in the fall. There will be bumps in the road and some things might need to be closed again, but we’ll get through this.
Most importantly for clients is making sure they have their short term liquidity needs met over the coming 24-36 month period, which can make market volatility less relevant during this time frame. Please do not hesitate to reach out at any time with questions or for any discussion on the economy and markets.
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