Rational Optimism
Market Update
(all values as of 06.28.2024)

Stock Indices:

Dow Jones 39,118
S&P 500 5,460
Nasdaq 17,732

Bond Sector Yields:

2 Yr Treasury 4.71%
10 Yr Treasury 4.36%
10 Yr Municipal 2.86%
High Yield 7.58%

YTD Market Returns:

Dow Jones 3.79%
S&P 500 14.48%
Nasdaq 18.13%
MSCI-Europe 3.72%
MSCI-Pacific 3.05%
MSCI-Emg Mkt 6.11%
US Agg Bond -0.71%
US Corp Bond -0.49%
US Gov’t Bond -0.68%

Commodity Prices:

Gold 2,336
Silver 29.43
Oil (WTI) 81.46


Dollar / Euro 1.06
Dollar / Pound 1.26
Yen / Dollar 160.56
Canadian /Dollar 0.73

Where do I begin?!  In the pages following, you will read about the series of events that have led us to this point:  What economists, market analysts, Fed Presidents past and present, and the administration (including all branches of this government) think about what happens next.  What should we expect from the Coronavirus?  How will that affect the economy?  Uncertainty and our emotions are the driving force on the market and the economy. Rational optimism could be a great tool for, not just living through this crisis, but doing it well.
KCG manages assets and offers advice, not based upon geopolitical events, but with a long-term perspective.
It has been the case in all of our financial crises, that no one (and no government) wants to feel the painful consequences of the actions that led us here.  Our first instinct is to do whatever is necessary to eliminate the pain.  In this case, the Fed reduces its key lending rate to 0% – 0.25% and re-instates new versions of Quantitative Easing; The Administration gives us The Cares Act.  And it works….for now.  While these actions provide the economy with some immediate stimulus, mostly a result of society’s emotional responses, even the Fed and the Administration are busy putting the next relief package together because everyone realizes these are not permanent solutions.
It certainly seems that this is the beginning of the bear market.  Bull and bear markets are normal.  What was not normal was the unprecedented 11 year bull run.  Covid-19 was just the impetus for this bear.  Richard Bernstein recently said in an interview, “Bear markets have 3 phases.  1)  Investors view it as temporary; 2) It’s worse that expected; 3) Investors feel as if it will never end.”  This is just the beginning.  This could be the bottom of the “Coronavirus-19 event” market, assuming the health news over the past couple of days continues to improve.  There seems to be a light at the end of the tunnel.  However, the impact on the economy is yet unknown, and could be far worse than we expect.  Not only will we have the consequences of shutting down a third of our economy, and a supply chain that will have to be re-designed, the long-term result of government intervention is yet to come. There is no way of knowing how long we will be able to kick this can down the road but there is getting to be a mountain of cans and sooner or later we won’t be able to kick them all.

Now for the rational optimism…Let’s shift the question from “How long is this going to continue?”, to “What opportunities are there?”

With the re-pricing of securities, KCG has been able to develop three very attractive new model/target portfolios: a traditional Individual Stock Portfolio and ETF Sector Model based upon new fundamentals, and an ESG ETF Model.  (For non-millenials, ESG means Environmentally-, Socially-, and Governance- friendly investing.)
For income-oriented portfolios and bond-holders, new opportunities have presented themselves to buy a quarter-liquidity bond fund, FS Credit Income Fund (FCRIX) at the bottom of the market.  KCG Clients know that bonds are to be held to maturity, sometimes as long as ten years, in order to generate the assured yield.  A somewhat illiquid fund can be viewed in the same way.  The upside of that illiquidity is that while great bond funds like PIMCO and Eaton Vance are having to sell good bonds to generate funds for investors to withdraw,  interval funds like FS, are able to buy those bonds.  They are not having to raise money and rather, can purchase great assets at great prices.




The S&P 500 Index saw its most volatility since November 1929

Macro Overview

With the coronavirus continuing to wreak havoc on markets and economies worldwide, governments and businesses are confronting an unprecedented environment. In response, massive fiscal and monetary stimulus efforts put into motion by the administration and the Federal Reserve are expected to provide unparalleled economic stimulus.
The World Health Organization (WHO) declared the COVID-19 virus a pandemic on March 11th, sending global equities further down and ending the longest bull run in U.S. history. The 20% plus decline for all three major equity indices, from record highs set in mid-February, qualified the rapid descent as an end to the bull market that began in March 2009. The International Monetary Fund (IMF) determined that the global economy has fallen into a recession due to disrupted global supply chains and a drop in commerce induced by the virus outbreak. Economists believe that international markets may eventually rebound should governments around the world effectively mitigate contamination.
The $2.2 trillion stimulus plan passed by Congress, known as the Cares Act, was the largest in U.S. history, providing critical funds to small business owners and individuals nationwide. Massive federal borrowing will fund the program in the form of U.S. government debt issuance expected to exceed $2 trillion in short-term Treasury bills this year alone.
Many economists and market analysts view this pandemic as a health crisis at its core, not a financial crisis, which has preceded nearly all previous recessions. Atlanta Fed President Raphael Bostic said that “this is a public health crisis and different from a typical recession”. Dallas Fed President Robert Kaplan expressed some optimism by commenting “we’ve got a great chance to come out of this very strong”. Some view government restrictions and mandatory closures as the reason behind crippled businesses and the economic contraction, not the coronavirus itself.
It is too soon to determine as to what the overall impact will be to the multitude of industries and companies over the next few months. Globalization is in question as global commerce has dwindled due to supply chain constraints, along with varying rules and restrictions among countries involving cross-border transactions.
The Treasury Department and the IRS announced an extension of the tax filing deadline from April 15, 2020 to July 15, 2020. Taxpayers will be able to defer tax payments until July 15th, without any penalties and interest. The deferment applies to all taxpayers, including individuals, businesses, estates, and corporations.
An historical spike in unemployment claims of nearly 10 million was brought about by mass layoffs as governmental entities mandated business closures and restrictions across the country. The immense jump in unemployment claims over just two weeks may worsen, yet expected to be buffeted by funds targeted for the unemployed as a result of the $2.2 trillion stimulus plan. The plan also encourages small businesses to re-hire employees as conditions warrant. Personal and business bankruptcies are expected to rise dramatically as a result of government mandated shutdowns, which have halted incomes for employers and employees across the country.

The extent of the health impact of the Corona Virus on the U.S. can be put into perspective as related to influenza.

CDC Estimates for 2019 -20 U.S. Flu Season
Flu Illnesses     32-45,000,000     Corona Virus Illnesses as of 4/7     386,000
Flu Deaths        18-46,000              Corona Virus Deaths as of 4/7           12,200

(Sources: IMF, WHO, Fed, Treasury, IRS, Dept. of Labor, CDC)

the $2.2 trillion stimulus plan equates to 9% of GDP, which is roughly $21 trillion

$2.2 Trillion Stimulus Plan Highlights For Individuals & Small Businesses

The passage of the $2.2 trillion stimulus plan, known as the Coronavirus Aid, Relief and Economic Security Act (Cares Act), provides critical funds to various sectors of the economy in the form of payments, tax breaks, loans, and subsidies to individuals and small businesses nationwide.

As the largest economic relief package in U.S. history, the $2.2 trillion stimulus plan equates to 9% of GDP, which is roughly $21 trillion. The primary goal of the stimulus program is to alleviate personal and business bankruptcies brought about by government mandated shutdowns and restrictions.

Stimulus Payments

$1,200 for each eligible taxpayer earning up $75,000. Joint filers will receive $2,400 earning up to $150,000, based on 2019 tax returns or 2018 if not already filed. Stimulus payment amounts decline as income levels rise. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible. Social Security recipients who are otherwise not required to file a tax return are also eligible and will not be required to file a return.

Unemployment; An additional $600 per week for four months for unemployment, in addition to any state unemployment benefit.

Retirement Plan Withdrawals

Withdrawals from IRAs and company sponsored retirement plans such as 401k plans will not be imposed the 10% penalty up to $100,000 in distributions. The waiver applies to those who have been diagnosed with COVID-19 or have experienced financial hardship related to the virus through December 31, 2020. Distributions will still be taxable as income, but be spread out over three years.

401k Loans; The maximum 401k loan amount of $50,000 has been raised to $100,000 to accommodate larger loan needs. Loan limitations are based on 50% of a 401k account balance.

RMDs; Required Minimum Distributions (RMDs) on retirement accounts including IRAs have been waived for tax year 2020.

Mortgage Forbearance; Federally backed mortgage holders can forgo payments for six months under a forbearance program with no penalties or fees. A mortgage holder must be affected by COVID-19 and have approval from the lender.

Forecloses; All foreclosure proceedings are halted until May 18, 2020.

Student Loans; All federally-owned student loans will impose a 0% interest rate until September 30, 2020. Borrowers may also delay payments until September 30, 2020 via forbearance.

Paycheck Protection Program For Small Businesses

Lends up to $10 million to small businesses with fewer than 500 employees through the SBA. The allowable loan amount is calculated based on a company’s average monthly payroll. The loan may be considered a grant since loans are expected to be forgiven if the funds are used for expenses such as payroll, mortgage interest payments, rent, and utilities. (Sources: IRS; irs.gov/newsroom/economic-impact-payments, TaxPolicyCenter)

tax filing and payment deadline moved from April 15, 2020 to July 15, 2020

Equities Technically End Eleven Year Bull Market Run – Domestic Stock Market Overview

Equity markets experienced volatility in March not seen since the 1930s, with daily declines so sharp that rarely-used mechanisms to halt trading were activated by the exchanges on multiple occasions. The S&P 500 Index saw an average daily change of 5.2% in March, the most extreme volatility since November 1929.

Stocks fell into bear market territory and then out of it in technically the shortest bear market in history. The last time the Dow Jones Index went from its bear market low to a bull market in only three days was in October 1931. Stocks had their worst quarter in years, with the S&P 500 Index losing 20% for the quarter ending March 31st, and the Dow Jones Industrial Index surrendering 23%. The bull market that began in March 2009 officially came to an end in March, after an 11-year run. The Dow Jones Industrial Index went from its high on Feb 12th to bear market territory in only 19 trading sessions.

With massive stimulus plans now in place, the market’s recovery has become contingent on the virus timeline for containment and effective testing. Analysts expect that once the virus outbreak has abated, any remaining stimulus efforts by the administration and the Federal Reserve will continue to act as a stimulus for the markets.

Signs of resilience at the end of March suggest that equities may regain their footing sometime soon. Overall valuations on stocks have fallen to levels that warrant accumulation of certain companies and industries. Eyes will be on earnings and quarterly performance releases over the next few weeks, as analysts determine how much of an impact the pandemic has thus had. (Sources: S&P, Dow Jones, Bloomberg)

Massive Stimulus Efforts Bring Yields To Historic Lows – Fixed Income Update

The Federal Reserve announced a reintroduction of its Quantitative Easing (QE) program to now include corporate bonds in addition to government agency and Treasury bonds. The program essentially entails the buying of an unlimited amount of bonds in the open market, thus stabilizing prices and volatile trading caused by a dislocation in the market. Intervention in the corporate bond market is an unprecedented action for the Federal Reserve, in addition to initiating programs to ensure sufficient access to credit for public and private entities such as cities, counties, municipalities, as well as corporations.

The incredible demand for short-term government bonds outstripped the supply of Treasury bills issued by the U.S. Treasury in mid-March. When demand exceeds supply by such an extent, short-term rates drop, in turn sending money market rates lower. Assets have been pouring into money market funds as market conditions created a rush away from volatility.

The Fed reduced its key lending rate to 0%-0.25% in March and announced that it would begin buying $700 billion in Treasury and mortgage bonds immediately. The Federal Reserve announced that it would also be buying selected corporate bonds and municipal securities in the open market in order to help stabilize broad fixed income sectors. Buying corporate and municipal bonds deviates from traditional Fed policies as a result of the current extraordinary conditions. (Sources: Federal Reserve, Treasury, Fitch)