Rates Stabilize Due To Stimulus – Fixed Income Update

The Federal Reserve pledged its continued support for the economy in the form of fixed income purchases including government bonds, mortgages, and various fixed income funds. The Fed also resorted to buying junk bonds in the open market, as well as continuing to buy unlimited amounts of U.S. government bonds and mortgage-backed securities. Lending facilities were also extended to corporations and municipalities helping to support the corporate and municipal bond markets. An increase in the money supply, as measured by M2, rose to over $17.2 trillion as of April 20th, up from $15.5 trillion on February 24, 2020. The rapid increase is a result of the massive fiscal and monetary stimulus infused in order to stem the recessionary effects of the pandemic.

Both short-term and long-term yields fell as massive stimulus efforts buoyed the bond markets. The yield on the 10-year Treasury bond ended April at 0.64%, with the yield on the 2-year Treasury ending the month at 0.20%. All bond sectors are positive for the year, outperforming all equites indices since the beginning of 2020. (Sources: Federal Reserve, U.S. Treasury)

Earnings Are Focus For Equities – Stock Market Review

Equities rebounded in April, recapturing some of the losses suffered in March. Stock prices were supported by prospects of economic reopening and stimulus efforts targeting businesses. All eleven sectors composing the S&P 500 Index were positive in April, a strong reversal from March. Healthcare, technology, and consumer staples were among the top performing sectors for the month. The collapse in U.S. oil prices, as measured by West Texas Intermediate (WTI), drove energy-related stocks lower due to dismal revenue and profit expectations.

Earnings dominated equity markets as corporate earnings have become a barometer for the impact that the pandemic is having on the economy. Some analysts have difficulty explaining the discrepancy between the economy and the stock market, with equites propelling higher in April as dismal economic data points to subdued growth. (Sources: S&P, Bloomberg)

Oil Prices Drop Below $0 In April – Oil Industry Update

Oil’s plunge in April was of historic proportion, falling below $0 per barrel for the first time in history. The collapse in U.S. oil prices, as tracked by WTI, fell as storage for crude oil became almost completely unavailable worldwide. The economy may experience an indirect boost with the price of gasoline expected to subsequently drop to new lows. Lower crude oil prices have historically led to lower gasoline prices nationwide as product costs have dropped exponentially. Some states like California and Hawaii may not experience the full benefits of lower oil prices due to additional excise state taxes, refining costs, and distribution expenses.

Storage for crude oil became increasingly scarce as the virus outbreak led to falling global demand and major oil producers failed to limit supply, creating a glut of oil with few potential buyers. (Source: Department of Energy)

How The Housing Market Is Affected – Housing Update

A drop in mortgage rates to near historic lows has not been enough to offset a decline in demand for home buyers. The ongoing travel and social distancing restrictions are inhibiting would-be home shoppers from viewing and buying properties. Of the various factors influencing the housing market, employment is the most significant. No matter how low mortgage rates are, if someone is unemployed they face difficulty making a mortgage payment at all. Historically, rising unemployment rates have been detrimental to the housing market. The last housing contraction, as measured by the Federal Reserve’s House Price Index, occurred in 2008 and 2009, when unemployment peaked at 10% in October 2009. Some economists believe that an extended period of elevated unemployment will negatively impact the housing market.

In addition, the onset of forbearance allowance for homeowners as enacted by the CARES Act has put lenders in precarious positions. The Federal Housing Finance Agency estimates that roughly one million mortgages were in forbearance at the end of April, representing 7% of government-held agency mortgages. Lenders are highly sensitive to a deteriorating economic environment that may lead to additional foreclosures and bankruptcies. (Sources: Federal Housing Agency, Fannie Mae, Federal Reserve)

How Inflation May Eventually Return – Consumer Sentiment

The International Monetary Fund (IMF) estimates inflation for countries worldwide based on various factors. The IMF projects that inflation in the United States will increase through the remainder of the year and reach 2.4% in 2021. The enormous monetary and fiscal stimulus actions launched by the Federal Reserve and Congress entail billions of dollars in newly-issued government debt, potentially driving down the value of the U.S. dollar. When countries issue and carry significant debt, the value of their currency tends to devalue relative to other currencies, making imports more expensive. A weaker U.S. dollar makes U.S.-based companies more competitive as U.S. exports become less expensive worldwide.

Two macroeconomic occurrences currently signal a probable rise in inflation. The first is the rapid increase in the U.S. money supply, also known as M2, which includes money market funds, checking deposits, and actual cash. Historically, an increase in the M2 has often led to inflationary pressures. The second occurrence is the potential unwinding of globalization with a renewed focus on domestic production. Globalization is now in danger of retracting, as trade fears among countries are mounting due to the extensive spread of the COVID-19 virus worldwide. Heightened tensions between the United States and China have created the possibility that U.S. imports of low-cost Chinese imports may decrease. (Sources: FDA, U.S. Dept. of Agriculture, International Monetary Fund)