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Market Commentary: Week of April 13, 2020


market-commentary-week-of-april-13-bodyWhat happened?

Equities had their best four-day rally since 1974. Yes, 1974, the good old days. Inflation skyrocketing, unemployment soaring, the President resigning, and negative GDP growth. It seemed that optimism over the drop in hospitalizations in the New York Metropolitan area, as well as hard-hit European countries like Italy and France, helped take equities and corporate debt up. However, we think we would be hard-pressed to find any investor that isn’t walking on eggshells. On Thursday, weekly jobless claims posted the second consecutive 6.6 million number, bringing the 3-week total to 17 million. Luckily, at the same time as the claims number posted, The Fed came out with their latest addition to their quantitative easing program, amounting to another $2.3 trillion. Most important to the risk markets was the Fed devoting balance sheet to “fallen angels”—bonds that have been downgraded from investment-grade to junk (nothing lower than BB-/BAA3) on or after March 22, 2020. The Fed will also be buying an unspecified amount of high yield bond ETFs. Additionally, some Fed love was given to AAA-rated CLO tranches and AAA-rated CMBS, as well as municipal financing. The Fed also increased assistance (and scope) to the Main Street Lending and Paycheck Protection Programs.

  • The S&P 500 was up 12.1% for the week. The average daily move for the week was 3%.

  • The NASDAQ was up 10.5% for the week. The average daily move for the week was 2.8%.

  • The 2-year Treasury declined .5 basis points, closing at .226% Thursday, the lowest yield since 2013.

  • The 10-year Treasury increased 12 basis points, closing at .72% Thursday.

  • The VIX Index decreased by 11% closing at 41.67 on Thursday.

  • The MOVE Index increased 14%, closing at 74.4 on Thursday.

  • 5-year Investment Grade Corporates (as measured by Markit CDX) tightened 46 basis points, closing at 81.85 basis points on Thursday. High-yield corporate debt (as measured by Markit CDX) tightened 241 basis points, closing at 533 basis points. The corporate credit sector received a huge boost from the Fed’s expansion of Quantitative Easing, now including what will be the tremendous supply of “fallen angels” (bonds downgraded to junk after March 22, 2020), as well as purchases of high-yield ETFs.

  • S. Dollar Index decreased 1%, closing at 99.48 on Thursday.

  • WTI Crude was up 32%, closing at 28.34 on Thursday.

What’s going to happen?

It appears the markets will be battling the forces of “good” (Federal Reserve and U.S. Treasury lending and investment) and “evil” (COVID-19 casualties, business failure, and unemployment) for the foreseeable future as the economy remains closed. There has been talk about slowly restoring parts of the economy in May, but without robust testing and the lack of supplies for our medical infrastructure, we think that is more hope than reality. The only economic number that really matters is Thursday’s weekly jobless claims, which will be another sobering event. The Fed has now essentially opened its balance sheet to all financial sectors. As long as they can partner with Treasury’s capital, they can pretty much do anything, and they will. Hopefully, desperately needed cash begins to flow to citizens and small businesses facing ruin. The Fed can buy all the fallen angels in the world, but if the help doesn’t get into the right hands very soon; it may be for naught.

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

  • The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.

  • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

  • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

  • The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.

  • The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.

  • The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.

  • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.

  • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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