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Market Commentary: Week of June 15, 2020


Market commentary week of june 15 2020_bodyWhat happened:

It was another turbulent week; stocks continued their strong and somewhat puzzling run toward erasing the sharp losses suffered in February and March. The main event of the week was the Fed’s FOMC meeting sobering pronouncement that FOMC members saw a very slow recovery filled with chronic unemployment until 2022. Not exactly a “V-shaped” recovery. Chairman Powell stated at the Wednesday press conference, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.” In response, the yield curve sharply reversed last week’s steepening, with the spread between 2-year and 30-year Treasury yields declining by 20 basis points. We also think that last week it became apparent that we are seeing the Dot-Com investment strategy “Part Deux!”

Who’s been buying bankrupt company stock like Hertz (which, in a bizarre turn of events, was given permission to issue a fresh $1 billion worth of new stock to meet frenzied demand with the disclaimer that it might very soon be worthless)? Who’s been buying COVID-destroyed sectors like gaming, cruise lines, hospitality chains, and airlines? It appears it is your bored 20-something son with his Robinhood Financial app listening to and investing alongside Dave Portnoy from Barstool Sports! Additionally, the market seems to have discovered that COVID wasn’t a storm that has passed and gone out to sea. Rather, we are seeing new hotspots for positive cases and hospitalizations rising sharply in states that were spared the devastation suffered by the Northeast states back in April and May.

  • The S&P 500 decreased 4.7% for the week. The average daily move was 1.9%

  • The NASDAQ decreased 2.3% for the week. The average daily move 1.5%. Before Thursday’s big selloff, the index actually hit an all-time high Wednesday.

  • The 2-year Treasury yield decreased 1 basis point for the week, closing at .194% Friday.

  • The 10-year Treasury yield decreased 19 basis points for the week, closing at .71% Friday.

  • The VIX Index increased 48%, closing at 36.09 Friday. The 47% increase Thursday was the second biggest percentage daily increase since the index has been recorded.

  • The MOVE Index decreased 10% for the week, closing at 55.81 Friday.

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) widened 14 basis points for the week, closing at 79 basis points Friday (from March 1st; high 152 bps, low 65 bps). High-yield corporate debt (as measured by Markit CDX) widened 72 basis points, closing at 486 basis points (from March 1st; high 871, low 364).

  • US Dollar Index was up .4%, closing at 97.32 on Friday.

  • WTI Crude was down 8% using the July WTI Futures contract, closing at 36.26.

What’s going to happen?

It appears that fresh global and domestic COVID case increases could dominate this week with regard to risk assets. This morning S&P futures are off nearly 2% and haven assets are rallying. It will not be a heavy data week, with Retail Sales for May and Initial and Continuing jobless claims the main numbers, coming out Tuesday and Thursday, respectively. We think that we could have seen the last of V-shape recovery optimism for a while. Markets have been trading to extremes—as they often do in times of crisis. Before last week, we had reopening and quick-recovery euphoria; it looks like we are now going to be dominated by the fear. One thing to be mindful of is a good amount of equity recovery was driven by retail, short-term trading (Robinhood, as an example). Those positions represent a lot of weak and potentially highly-levered hands. A few days of consecutive bad COVID news could result in sharp reversals. Additionally, while corporate credit is not a day-trader phenomenon, the Fed did drive a feeding frenzy that lifted all credits, the bad with the good; a few days of bad COVID news could cause a serious reassessment of many of those positions.

 

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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Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.

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Market commentary week of june 15 2020_listing

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