Market Commentary: Ides of March and April and May

Among the many magnificent sights in this beautiful country of ours are the blooming pink and white Japanese cherry trees that circle the Tidal Basin and the Jefferson Memorial on the National Mall in Washington, D.C. The blossoms, enduring gifts from the people of Tokyo in 1912, typically peak once a year in April but they came early this year. It was most unfortunate timing for one of two million people whose plans to attend the national cherry blossom festival were nixed by travel restrictions and National Park Service measures discouraging visitation. In the global picture, this is one of the least significant impacts that the vicious novel coronavirus has had. But to airlines, as well as local restaurants, hotels, museums, souvenir vendors, and many other small businesses, the loss has been devastating. Closures of businesses, schools, means of transportation and shops across the country and around the world have now impacted nearly everyone on the planet. In the U.S., 16 states have issued stay-at-home orders affecting more than forty percent of our population, and 8 other states have imposed significant restrictions. More than 47,000 chain stores have closed in the past ten days. Grocery and pharmacy delivery services have become as essential as water, sewer, and power. Americans have not experienced such dramatic changes in our day-to-day lives since World War II. And there is a growing realization that, once this malicious health and economic crises abate, we will see some of these changes become permanent.

Students of world history will recall the soothsayer back in 44 B.C. who warned Roman leader Julius Caesar that his life was in danger and that he should stay home and be careful around the Ides of March. This year, the days around March 15 signaled danger for many in the slow path of COVID-19, and the start of home stays for millions on Main Street and Wall Street. The extraordinary speed by which cases began doubling has led to extraordinary volatility in the financial markets. Treasury futures volatility has almost doubled this month from 7.58 to 13.16 while the average for the past 20 years is 6.20%. S&P futures volatility, often referred to as the Fear Index, which on an average day would be 19.58, is at 55.54 after hitting a 20-year high last week at 82.69 – beyond the worst days of November of 2008. Interest in the November elections and in virtually every issue that dominated the headlines in January, from impeachment to climate change, has evaporated. Social distancing became the talk of the town and cyberspace. But we learned that even six feet of distance was not enough. So now, since the Ides, with the noteworthy exception of our health care providers and public safety officials, we are all hunkered down, working or studying from home, engrossed in cable news and social media.

The Federal Reserve has taken a series of dramatic actions to provide liquidity and tamp down volatility as banks face unprecedented demands and businesses draw down on maximum credit lines. The situation in our largest cities is such that we are told that we should expect things to grow even worse in the next two months. But thousands of researchers are hard at work on a vaccine and hundreds of federal legislators are hard at work on a spending measure to aid individuals, households, and entire swaths of our economy lest the impact of shutdowns lead to unacceptable human tolls and widespread business failures that leave millions of us without jobs. There are plenty of cherry blossoms visible in this otherwise bleak landscape, many kind and generous acts observable on small and large scales, and these are the things that bring us cheer and hope, and inspire us to participate as best we can.

A number of sudden developments has produced major selloffs and substantial illiquidity in the financial markets and left U.S. Treasuries as the only place to go in moments of great uncertainty. Within three weeks, demand for governments caused the 2-year Treasury yield to fall 60 basis points to 0.31%. The 10-year has dropped 36 basis points to 0.78%, and the 30-year is down 32 basis points to 1.35%. Quite to the contrary, since the beginning of March, evaluations on U.S. corporate and municipal bonds have declined dramatically. Margin calls on tanking equities, institutional deleveraging, and decisions to cash out have led to dramatic fire sales by money market and mutual bond funds holding among the most liquid instruments to sell after Treasuries. Traditional buyers fled to the sidelines and crossover buyers such as life insurance companies and banks have not stepped in despite the rising yields. Pricing services have been challenged to place evaluations on bonds with no recent trading history or bids, and so portfolio valuations have seen major day-to-day swings. The 2-year AAA tax-exempt general obligation municipal bond yield has risen a staggering 179 basis points to 2.52%, a rate higher than comparable taxable municipal and corporate bonds. The 10-year and 30-year muni yields are up 185 basis points to 2.79% and 3.37%, respectively. In this environment, there are a few small, highly rated municipal issues being sold on a competitive or negotiated basis and several deals being private placed, but the primary calendar is mostly inactive, waiting for conditions to stabilize and familiar ratios and benchmarks to return.

This week, we await an agreement from Washington on a major spending package, housing and other economic data from February, Treasury auction results, and good news of any kind from the daily coronavirus briefings. We truly have new appreciation for healthy families, truckers bringing food and supplies to our grocery stores and pharmacies, doctors and nurses working extra shifts in our hospitals, personal care aides protecting our frail seniors, national guardsmen building mobile medical facilities, army engineers converting dorm and hotel beds for intensive care. As the President said, the U.S. is not built to be shut down. So we share our readers’ hopes for a rapid pace of recovery and return to some semblance of normalcy. In the meantime, we encourage you to contact your HJ Sims representative with any questions or needs that you have as well as for insight based on the opportunities we are seeing in market conditions that are evolving.

Do you receive our

Private Client Newsletter?

HJ Sims Video Series

HJ Sims Culture