Market Commentary: Turning Point

At first, it seemed that the partisans were just looking for an opening to attack in an election year. As events unfolded overseas, we reminded ourselves that governments over there are liars, incompetents, or both. Advocates of harsh measures with wild talk abroad made us think of friends who always overreact to weather forecasts. When Washington politicians stumbled over themselves to come up with bigger domestic aid packages, we began to worry about what we were not being told. Then data started to burst from the seams. Unnerving maps appeared with real-time numbers ticking up like the national debt clock. For the first time since the CBS Evening News scrolls during the Vietnam War, we started to watch screens with daily casualty counts. We tuned into a rare Oval Office address and now follow press briefings by solemn doctors and a colorfully be-ribboned general who urges us to protect our nanas and granddaddies.

In the matter of a few short weeks we have gone from a nation boasting the strongest economy in the world to a people subjected to unprecedented molecular testing and confinements. We have pillaged our local groceries and pharmacies of Charmin, canned beans, Gallo wine, and Clorox wipes for the family stockpiles. 40 million students have been sent home until further notice. Stores, casinos, theaters have shuttered. McDonald’s and most other restaurants now offer takeout only. Bars closed on the eve of St. Patrick’s Day. Airlines, subways, buses have only handfuls of passengers. We are in a government-imposed limbo that will likely last more than 15 days, deprived of our beloved March Madness, Spring Training, The Masters, NBS and NHL playoffs, Major League Soccer, the Boston Marathon and Kentucky Derby.

Rasmussen polls indicate that Americans are growing more concerned about our personal safety, with 33% “very concerned”, as of last week as the global number of those affected by coronavirus increases, but we have become much less confident that our healthcare system can handle an escalation. We have all become much more educated about the lack of U.S. manufactured pharmaceuticals and medical equipment, the number and location of hospital and intensive care beds in our communities, the need for segregated facilities, trained healthcare workers and aides, respirators, testing kits, medicine and supplies like masks and sanitizers.

For medical reasons we are shutting down major parts of our economy and life as we know it will change forever in many ways. The roadways are being paved for very different levels of functionality: telecommuting, telehealth, on-line learning, social distancing, cocooning, and reliance upon the government as the solution for all that ails us, irrespective of the cost imposed on future generations. The federal spigots are being opened as wide as they ever have been in times of war. And, like so many of his predecessors, Donald Trump has become something he never planned to be: a wartime president facing a recession induced by a largely unexpected event.

The same panic and hysteria that we see in the aisles of our local box stores has been present in the financial markets. The volatility springing from uncertainty — not only about the pandemic but also about the mysterious goings on between Saudi Arabia and Russia affecting oil prices and production — triggered several halts in stock trading, sent Treasury prices skyrocketing, spurred households to withdraw significant sums from ETFs and mutual funds, and paused the calendar of low- and non-rated corporate and municipal bond issuance. These developments have been surprising and unsettling for investors and traders. Many were inclined to sell and go to cash, finding it hard to retain a long-term perspective in the face of historic price swings. Even those reliant on coupons from fixed income investments found it hard to remember that interest payments continue regardless of prices based on evaluations often set mechanically as a function of algorithmic trades and frequently divorced from fundamental factors.
Despite the fact that there is no systemic risk, the Federal Reserve has met twice in emergency session in the past two weeks and cut rates 150 basis points down to zero. The Congress and White House are been leaking details of various massive urgent aid proposals, but so far Wall Street has heard the numbers, nixed them, and informed appropriators that they need to “think MUCH bigger”. At this writing, cash payments to individuals, deferred tax payments, grants, loans, credit protection, and other aid are all on the table.

In the meantime, the markets have been dissatisfied with most every fiscal and monetary band-aid applied or offered, awaiting instead a medical miracle cure, or at least a massive drop in cases, to bring everything back to happy days and familiar rallies. The equity markets have suffered their worst weeks in history, plummeting 20% since the start of the month; the Russell 2000 is down by 30%. Oil prices have taken a skydive of 36%, and are now down below $29 a barrel. Even gold prices have been hit, falling 6% to $1,492 an ounce. The flight to safety has taken global investors down an extremely narrow path to U.S. Treasuries which now basically constitute the only haven. Yields have fallen to unheard of levels; at this writing, the 2-year yield has fallen by 56 basis points in the last two weeks from 0.91% to .035%. The 10-year has decreased by 43 basis points from 1.14% to 0.71%. And the 30-year is down 39 basis points from 1.67% to 1.28%.

Municipal bonds, long seen as a safe haven only second to U.S. Treasuries, have been battered as hard as any sector. The tax-exempt market suffered its biggest one-day loss in history last Thursday. Investors were shocked by the swift decline precipitated by massive withdrawals from ETFs and bond funds, reversing 61 straight weeks of net inflows. A sudden lack of liquidity was attributed to dealers unwilling to stock inventory, a limited base of interested buyers, record high levels of bids-wanted from institutions working to meet redemptions, sometimes at fire-sale prices, seasonal cash-outs to make tax payments, and panic over the impact of coronavirus on states and local governments, created a perfect storm that has crushed prices for hospital bonds, airport bonds, mass transit bonds, bonds issued to finance arenas and shopping malls, and even highly rated state general obligation bonds. Trading volume last week hit $100 billion for the first time in four years and conditions were as bad as — or worse than — they were after the Meredith Whitney predictions of hundreds of billions of muni defaults were made on 60 Minutes in December of 2010.

One of the greatest buying opportunities of all times may be upon us, ahead of the bounce back that many traders expect once The Wave passes, pandemic fears fade, lockdowns end, and America gets back to school and work. Our seasoned traders are finding pockets of value and screaming buys as bond bid lists fly. We encourage those who may be standing on the sidelines or concerned with their portfolios to speak with an HJ Sims financial professional to help you navigate amid the current uncertainty and benefit from our credit-driven approach to long-term income investing.

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