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Market Commentary: Week of May 4, 2020


market-commentary-week-of-may-4-bodyWhat happened

While stocks finished relatively unchanged for the week, and corporate bonds were steady, the market didn’t feel good at all as we went into the weekend. Corporate earnings have been as awful as most suspected, but the big-tech companies like Apple and Amazon reporting dismal outlooks seemed to surprise. These companies along with other tech giants like Microsoft, Facebook, and Google make up nearly 20% of the S&P 500 on a weighted basis. Poor earnings forecasts for these giants could bring stocks down to earth. Additionally, downgrades have been coming pretty fast and furious in high-yield bonds and loans. Structured products such as CLOs are most probably going to take losses for the first time ever. The one bright spot this week was some positive news from drug-maker Gilead and their COVID-19 treating drug, Remdesivir. There’s still a lot of testing to do to actually see if it makes a noticeable difference for patients suffering symptoms, but it provides some hope.

  • The S&P 500 was nearly flat for the week. The average daily move for the week was 1.6%.

  • The NASDAQ was also nearly flat for the week. The average daily move for the week was 1.8%.

  • The 2-year Treasury decreased 3 basis points, closing at .19% Friday, the lowest since 2011.

  • The 10-year Treasury increased 1 basis point, closing at .61% on Friday.

  • The VIX Index increased by 3.5% closing at 37.19 on Friday.

  • The MOVE Index decreased 27%, closing at 48.11 Friday. This is very close to the lowest level in a year (45.87).

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) tightened 4 basis points, closing at 90 basis points on Friday (from March 1st, high 151, low 66). High-yield corporate debt (as measured by Markit CDX) tightened 23 basis points, closing at 651 basis points (from March 1st, high 871, low 364).

  • S. Dollar Index was down 1%, closing at 99.08 on Friday.

  • WTI Crude was up 17% using the June WTI Futures contract, closing at 19.78.

What’s going to happen?

When the Fed and Treasury launched their unprecedented monetary and fiscal stimulus and liquidity programs last month, it seemed to many that the Fed and Treasury were offering their warm embrace to all asset classes. Subsequently, risk markets skyrocketed from the lows set in March. The fact is, the perception that the Fed and Treasury has your back in junk-rated assets is a big misunderstanding. While Fed governors and presidents seem happy enough not to correct this misconception, the Fed and Treasury are not going to buy the many billions of dollars of bonds and syndicated loans that are going to default in the coming weeks and months. Collateralized Loan Obligations (CLOs), a $600 billion market, was one of the few asset classes that actually got through the 2007-2009 financial crisis unscathed. That is not going to happen this time, and it will be a barometer of just how much worse this crisis is versus the last crisis. We are already seeing big losses from private equity—once the belle of the ball for institutional money. The loans that are going to go bust are the loans that enabled private equity to take over a good chunk of corporate America. Many -and most- of these loans and bonds looked vulnerable to even a mild recession. As we know, there’s nothing mild about our current situation. As the late, great John Prine wrote, “sweet songs never last too long on broken radios.” We think May is going to look a lot like March. Ugly.

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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